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Analytical procedures are of extreme importance to an auditor. Firstly, they are required procedures under Canadian Auditing Standards (CAS). Secondly, they can help an audit be both more efficient and effective when compared to test of details such as sampling. The principal CAS standard that provides guidance on the nature and use of analytical procedures is CAS 520 Analytical Procedures. CAS 520.4 defines analytical procedures as: Evaluations of financial information through analysis of plausible relationships among both financial and non-financial 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. There are various methods that may be used to perform analytical procedures. The methods range from performing simple year over year comparisons of balances, transaction streams or ratios to performing complex analyses using advanced statistical techniques. The level of audit evidence obtained from analytical procedures is directly tied to their sophistication. In other words, the more complete the analysis the more persuasive the audit evidence. Under CAS there are three general categories of analytical procedures, those used as a risk assessment procedure, substantive analytical procedures, and those that assist when forming an overall conclusion. Risk Assessment ProceduresAs the CAS are a fundamentally a risk based approach to auditing CAS 315 Identifying and Assessing the Risks of Material Misstatement is in many ways the cornerstone standard within the CAS. CAS 315. 14 requires the auditor to include analytical procedures as part of their risk assessment procedures. The guidance for this type of analysis is included in CAS 315. A27- A31:
Substantive Analytical ProceduresThe substantive procedures used by an auditor may include tests of details, substantive analytical procedures, or a combination of both. Ultimately, the determination of which procedures to perform, including whether to use substantive analytical procedures, is based on the expected effectiveness and efficiency of the available audit procedures to reduce audit risk at the assertion level to an acceptably low level. In other words, there is no specific requirement under the CAS for the auditor to use substantive analytical procedures. However, when applied appropriately they will often provide better audit evidence then do tests of detail and in many instances are also more efficient than tests of detail. In general, there are four factors to consider when choosing to use an analytical procedure over another form of audit evidence. Those factors are:
CAS 520.5 provides guidance for when the auditor decides to use substantive analytical procedures:
Analytical Procedures that Assist When Forming an Overall ConclusionThe third category of analytical procedures are used near the end of the audit that assist the auditor when forming an overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of the entity. These procedures are a required by CAS 520 paragraph 6 as part of the audit and are often similar to the procedures used at the risk assessment stage. CAS 520.A17-19 provides guidance on these final analytics:
Rate this EntryCurrent rating: 8 yes votes, 0 no votes What is the purpose of analytical procedures and when are they performed?Purposes of analytical procedures
Analytical procedures are performed as an overall review of the financial statements at the end of the audit to assess whether they are consistent with the auditor's understanding of the entity. Final analytical procedures are not conducted to obtain additional substantive assurance.
What are risk assessment analytical procedures?Risk assessment procedures are performed to validate information obtained during the risk assessment process. identifying the existence of unusual transactions or events, and amounts, ratios, and trends that might indicate matters that have financial statement and audit planning implications.
What is the purpose of analytical review?What is an Analytical Review? An analytical review is used by auditors to assess the reasonableness of account balances. A CPA does this by comparing changes in account balances over time, as well as by comparing related accounts.
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