The auditor performs analytical review procedures during audit execution. As the name suggests, it’s analytical. It means numbers are compared with other numbers by considering factual information. If factual information and numbers are in line, the auditor should be confident to rely on the figures. Further, factual information to be compared can be taken from the internal/external business environment.
Likewise, factual information can be industry average/competition average as well.
An increase in marketing expense is logical with the increase in sales. Similarly, the following examples can be helpful to understand the concept.
- Increase of finance expense is logical with the increase of loan.
- An increase in depreciation expense is logical with an increase in production machinery.
- An increase in salary expense is logical with an increase in employees.
The list can be continued to include thousands of items. Each and every relationship cannot be taught. However, it’s more about common sense.
There can be different purposes of using analytical procedures depending on the audit stage. These analytical procedures can be used at the following three audit stages.
Audit planning level
At the planning level, these procedures are called preliminary analytical procedures/PAR. The purpose of performing these procedures is to obtain business understanding in terms of business environment, operations and to identify the risk of material misstatement.
For instance, if marketing expense is higher in comparison to last year. However, sales have decreased, which means there may be some problem with the marketing expenses. In simple words, marketing expense may be overstated. Hence, the auditor has identified the risk of material misstatement and needs to collect sufficient and appropriate audit evidence for the identified marketing risk.
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It’s important to note that ratio analysis can be used at this stage to identify logical relations.
Conclusive chart for preliminary analytical review – PAR.
|What is the purpose of preliminary audit procedure?||Assessing risk of material misstatement|
|What’s a benefit of PAR?||Helps to set the extent of audit procedures, audit strategy, and audit program.|
|When it’s done ?||At the time of planning for the audit.|
Audit execution level
Analytical review procedures are equally effective to be used in collecting audit evidence. It’s based on the idea that if the account balance is in line with other balance/factual information, it’s reliable. However, it’s important to note that only limited assurance can be obtained from analytical review procedures, and it does not replace the need for the test of details. Further, analytical procedures performed at this level are substantive analytical review procedures.
Final analytical review procedures-FAR
The auditor performs the final analytical review at the end of an audit finalization. These procedures help the auditor assess if their understanding is consistent with the conclusion drawn and they have collected sufficient and appropriate audit evidence. However, if there is some inconsistency, the auditors need to revise the audit program and additional procedures need to be performed on specific account balance/balance.
Conclusion for analytical review procedures
Analytical procedures refer to logical/plausible interpretation of account balance. This interpretation is carried in relation to factual information; this information can be obtained from internal/external sources.
These procedures are performed at three different stages of the audit. These stages include planning, execution, and reporting. The purpose of performing these auditing procedures is different at different stages, summarized as follows.
|Stage of audit||Purpose of the analytical review procedure|
|Audit planning||To assess the risk of material misstatement.|
|Audit execution||To obtain audit evidence.|
|Audit finalization||To ensure auditor understanding is consistent with the conclusion drawn.|