Page 181 - COSO Guidance Book

Analytical procedures

As noted previously, analytical procedures are a required risk assessment procedure, along with inquiries
of management and others as well as observation and inspection.

AU-C section 520, Analytical Procedures (AICPA, Professional Standards), defines analytical procedures as
evaluations of financial information through analysis of plausible relationships among both financial and
nonfinancial data. Analytical procedures also encompass such investigation, as is necessary, of identified
fluctuations or relationships that are inconsistent with other relevant information or that differ from
expected values by a significant amount.

Analytical procedures are addressed in the following sections of GAAS:

 AU-C section 315 addresses the use of analytical procedures as risk assessment procedures (which
may be referred to as analytical procedures used to plan the audit).
 AU-C section 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the
Audit Evidence Obtained (AICPA, Professional Standards), addresses the nature, timing, and extent of
audit procedures in response to assessed risks; these audit procedures may include substantive
analytical procedures.
 AU-C section 520, as discussed previously.

The AICPA Audit Guide Analytical Procedures makes it clear that the concepts that underlie analytical
procedures are applicable to all three stages of the audit (planning, substantive testing, and review).
Accordingly, the concepts contained in the discussion that follows about analytical procedures, though
derived from AU-C section 520 and presented in the context of substantive procedures, can also be
relevant in terms of considerations made during the planning phase of the audit.

Further, analytical procedures can be a useful control activity when performed by entity management.
Therefore, management personnel also may find this information useful.

Analytical procedures are addressed in depth because of their importance in identifying risks of material
misstatement of the financial statements. Key terms related to analytical procedures include the
following:

 Expectations — The predictions of recorded accounts or ratios: These are developed by identifying
plausible relationships (such as soap usage at a car wash and car wash revenue) that are reasonably
expected to exist based on the auditor’s understanding of the client and of the client’s industry.
 Precision — A measure of the closeness of the expectation to the actual amount: Factors that affect
the precision of an analytical procedure include the type of expectation developed, characteristics of
the data used to form the expectation, and the nature of the account. In the case of substantive tests,
the precision of the expectation is the primary determinant of the level of assurance obtained for the
analytical procedure.
 Level of assurance — The degree to which substantive tests provide evidence in testing an assertion.

The four phases of the analytical review process include (1) expectation formulation, (2) identification,
(3) investigation, and (4) evaluation of the difference between the auditor’s expected value and the
client’s recorded amount. These phases are discussed in the material that follows.

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