SA-520: Analytical Procedures in Auditing

Objective of Analytical Procedures in Auditing

The primary objective of analytical procedures in auditing is to assist auditors in identifying risks, planning the audit, and forming overall conclusions efficiently. These procedures support audit risk assessment and enhance audit effectiveness.

Meaning of Analytical Procedures in Auditing

The term “analytical procedures” means evaluations of financial information through analysis of plausible relationships among both financial and non-financial data.

Phases of Analytical Procedures:

• Risk Assessment Procedures: It involves comparison financial data (e.g., trends, ratios) with expectations based on previous periods, industry benchmarks, or forecasts.
• Substantive Analytical Procedures: It involves use of more detailed and precise data analysis to confirm that recorded amounts are reasonable.
• Overall Review at the End of the Audit: It involves high-level analysis of the financial statements to ensure they align with the auditor’s expectations.

Techniques to be used

Auditors commonly use the following audit techniques and methods:

• Trend analysis
• Ratio analysis
• Reasonableness tests
• Structural modelling

Using ratio and trend analysis in audit enhances the auditor’s ability to detect irregularities and supports robust financial statement review.

Key Components of Analytical Procedures

• Expectations: Auditors must develop expectations about relationships and trends they expect to see. Discrepancies between actual results and these expectations might indicate potential misstatements.
• Data Reliability: The reliability of data used in analytical procedures is crucial. The source, nature, and controls over the data should be considered.
• Investigation of Differences: Any significant variations from expected results must be investigated and corroborated with additional audit evidence.
• Documentation: Auditors must document the analytical procedures applied, the results obtained, and any significant variations or conclusions drawn.

By applying SA 520 effectively, auditors can enhance the accuracy and efficiency of the audit process, making it easier to identify potential misstatements and ensure the financial statements are free from material errors.