Analytical Procedures (SIA-6)

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Analytical Procedures (SIA-6)
  • Analytical procedures: analysis of significant ratios and trends, including the resulting investigation of fluctuations and relationships in both financial and non-financial data that are inconsistent with other relevant information or which deviate significantly from predicted amounts.
  • Nature and Purpose of Analytical Procedures:
    • Analytical procedures include comparisons of financial and non-financial data such as
      • Comparable information for prior periods.
      • Anticipated results of the entity, such as budgets or forecasts or expectations
      • Predictive estimates such as an estimation of depreciation charge for the year
      • Industry ratio comparison’s such as ratio of sales to trade debtors etc.
    • Factors determining extent of analytical procedures
      • The significance of the area being examined.
      • The adequacy of the system of internal control.
      • The availability and reliability of financial and non-financial information.
      • The precision with which the results of analytical procedures can be predicted.
      • The availability and comparability of information regarding the industry in which the organization operates.
      • The extent to which other auditing procedures provide support for audit results.
    • Analytical Procedures as Risk Assessment Procedures and in Planning the Internal Audit
      • The internal auditor should apply analytical procedures as risk assessment procedures to obtain an understanding of the business, the entity and its environment and in identifying areas of potential risk.
      • Application of analytical procedures may indicate aspects of the business of which the internal auditor was unaware and will assist in determining the nature, timing and extent of other internal audit procedures.
    • Analytical Procedures as Substantive Procedures
      • The internal auditor’s reliance on substantive procedures to reduce detection risk relating to specific financial statement assertions and assertions relating to process, systems and controls may be derived from tests of details, from analytical procedures, or from a combination of both.
    • Analytical Procedures in the Overall Review at the End of the Internal Audit: The internal auditor should apply analytical procedures at or near the end of the internal audit when forming an overall conclusion as to whether the systems, processes and controls as a whole are robust, operating effectively and are consistent with the internal auditor’s knowledge of the business.
    • Extent of Reliance on Analytical Procedures: The presence of these relationships provides the internal auditor evidence as to the completeness, efficiency and effectiveness of systems, processes and controls. However, reliance on the results of analytical procedures will depend on the internal auditor’s assessment of the risk that the analytical procedures may identify relationships as expected when, in fact, a material misstatement exists.
    • Investigating Unusual Items or Trends:
      • When analytical procedures identify significant fluctuations or relationships that are inconsistent with other relevant information or that deviate from predicted amounts, the internal auditor should investigate and obtain adequate explanations and appropriate corroborative evidence.
      • The examination and evaluation should include inquiries of management and the application of other auditing procedures until the internal auditor is satisfied that the results or relationships are sufficiently explained. Unexplained results or relationships may be indicative of a significant condition such as a potential error, irregularity, or illegal act. Results or relationships that are not sufficiently explained should be communicated to the appropriate levels of management. The internal auditor may recommend appropriate courses of action, depending on the circumstances
    • General points
      • Analytical procedures are performed at three stages of audit: at start, in middle and at end of audit. These three stages are risk assessment procedures, substantive analytical procedures, and final analytical procedures.
      • Risk assessment procedures are used to assist the auditor to better understand the business and to plan the nature, timing and extent of audit procedures.
      • Substantive analytical procedures are used to obtain evidential matter about particular assertions related to account balances or classes of transactions.
        • Test of control
        • Test of details/balances
      • Final analytical procedures are used as an overall review of the financial information in the final review stage of the audit.

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