Analytical Procedures: Notes | Auditing and Ethics for CA Intermediate PDF Download

 Page 1


 
 
LEARNING OUTCOMES 
  
 
  
 
 
ANALYTICAL 
PROCEDURES 
 
After studying this chapter, you will be able to: 
? Understand the meaning of analytical procedures as per Standards on 
Auditing. 
? State the purposes and timing of analytical procedures. 
? Deal with the auditor’s use of analytical procedures as substantive procedures 
(“substantive analytical procedures”). 
? Identifying risk of material misstatement through preliminary Analytical review 
procedures. 
? Properly designing, documenting and evaluating the results of substantive
analytic  review  procedures.
 
CHAPTER 
8 
 
Page 2


 
 
LEARNING OUTCOMES 
  
 
  
 
 
ANALYTICAL 
PROCEDURES 
 
After studying this chapter, you will be able to: 
? Understand the meaning of analytical procedures as per Standards on 
Auditing. 
? State the purposes and timing of analytical procedures. 
? Deal with the auditor’s use of analytical procedures as substantive procedures 
(“substantive analytical procedures”). 
? Identifying risk of material misstatement through preliminary Analytical review 
procedures. 
? Properly designing, documenting and evaluating the results of substantive
analytic  review  procedures.
 
CHAPTER 
8 
 
 
 
8.2 AUDITING AND ASSURANCE 
  1. MEANING OF ANALYTICAL PROCEDURES 
Since routine checks cannot be depended upon to disclose all 
the mistakes or manipulation that may exist in accounts, 
certain other procedures also have to be applied like 
comparisons, trend and ratio analysis in addition to 
reasonable tests. These collectively are known as overall tests. 
With the passage of tests, analytical procedures have acquired 
lot of signi?cance as substantive audit procedure. SA-520 on 
Analytical Procedures discusses the application of analytical 
procedures during an audit. Let us try to understand the 
concept discussed above with the help of the following illustration: 
ILLUSTRATION 1: 
CA Amar wants to verify the payments made by XYZ Ltd. on account of building 
rent during the FY 2020-21. The rent amounts to Rs.50,000/- per month for the 
year. The monthly rent payments are consistent with the rent agreement. However, 
the other companies in the similar industry are paying rent of Rs. 10,000/- per 
month for a similar location. How will applying the analytical procedures impact 
the verification process of such rental payments by XYZ Ltd.? 
SOLUTION  
If CA Amar checks in detail the monthly rent payments, he may find that such 
payments are consistent with the rent agreement i.e. XYZ Ltd. paid Rs. 50,000/- per 
month as rent and the same is getting reflected in the rent agreement. Here, CA 
Amar may not be able to find out the inconsistency in the rent payment with respect 
to rent payment prevalent in the similar industry for rent of the similar location. 
If CA Amar applies analytical procedure i.e. compares the rent payment by XYZ Ltd. 
with the similar payments made by companies in similar industry and similar area, 
he will notice an inconsistency in such rent payments as the other companies are 
paying a very less monthly rent in similar industry for similar area.  
However, if CA Amar does not make such comparison and only checks the monthly 
payments and rent agreement of XYZ Ltd., he would not have found such 
inconsistency and as such the misstatement may remain undetected. 
Meaning of Analytical Procedures. As per the Standard on Auditing (SA) 520 
“Analytical Procedures”, the term “analytical procedures” means evaluations of 
?nancial information through analysis of plausible relationships among both 
?nancial and non-?nancial data. Analytical procedures also encompass such 
Page 3


 
 
LEARNING OUTCOMES 
  
 
  
 
 
ANALYTICAL 
PROCEDURES 
 
After studying this chapter, you will be able to: 
? Understand the meaning of analytical procedures as per Standards on 
Auditing. 
? State the purposes and timing of analytical procedures. 
? Deal with the auditor’s use of analytical procedures as substantive procedures 
(“substantive analytical procedures”). 
? Identifying risk of material misstatement through preliminary Analytical review 
procedures. 
? Properly designing, documenting and evaluating the results of substantive
analytic  review  procedures.
 
CHAPTER 
8 
 
 
 
8.2 AUDITING AND ASSURANCE 
  1. MEANING OF ANALYTICAL PROCEDURES 
Since routine checks cannot be depended upon to disclose all 
the mistakes or manipulation that may exist in accounts, 
certain other procedures also have to be applied like 
comparisons, trend and ratio analysis in addition to 
reasonable tests. These collectively are known as overall tests. 
With the passage of tests, analytical procedures have acquired 
lot of signi?cance as substantive audit procedure. SA-520 on 
Analytical Procedures discusses the application of analytical 
procedures during an audit. Let us try to understand the 
concept discussed above with the help of the following illustration: 
ILLUSTRATION 1: 
CA Amar wants to verify the payments made by XYZ Ltd. on account of building 
rent during the FY 2020-21. The rent amounts to Rs.50,000/- per month for the 
year. The monthly rent payments are consistent with the rent agreement. However, 
the other companies in the similar industry are paying rent of Rs. 10,000/- per 
month for a similar location. How will applying the analytical procedures impact 
the verification process of such rental payments by XYZ Ltd.? 
SOLUTION  
If CA Amar checks in detail the monthly rent payments, he may find that such 
payments are consistent with the rent agreement i.e. XYZ Ltd. paid Rs. 50,000/- per 
month as rent and the same is getting reflected in the rent agreement. Here, CA 
Amar may not be able to find out the inconsistency in the rent payment with respect 
to rent payment prevalent in the similar industry for rent of the similar location. 
If CA Amar applies analytical procedure i.e. compares the rent payment by XYZ Ltd. 
with the similar payments made by companies in similar industry and similar area, 
he will notice an inconsistency in such rent payments as the other companies are 
paying a very less monthly rent in similar industry for similar area.  
However, if CA Amar does not make such comparison and only checks the monthly 
payments and rent agreement of XYZ Ltd., he would not have found such 
inconsistency and as such the misstatement may remain undetected. 
Meaning of Analytical Procedures. As per the Standard on Auditing (SA) 520 
“Analytical Procedures”, the term “analytical procedures” means evaluations of 
?nancial information through analysis of plausible relationships among both 
?nancial and non-?nancial data. Analytical procedures also encompass such 
 
 
8.3 
 
 ANALYTICAL PRCEDURES 
investigation as is necessary of identi?ed ?uctuations or relationships that are 
inconsistent with other relevant information or that di?er from expected values by 
a signi?cant amount. 
 
ILLUSTRATION 2:  
Analytical procedure involves analysis of relationship among financial and non 
financial data. Explain with the help of an example as to how, the statutory auditor 
of ABC Ltd. will analyse such relationship with respect to the total wages paid by 
ABC Ltd. during the FY 2020-21. 
SOLUTION:  
As per SA 520, Analytical Procedures means evaluations of ?nancial information 
through analysis of plausible relationships among both ?nancial and non-?nancial 
data. The following example explains the analysis of relationship between financial 
and non financial data while applying analytical procedures.  
The statutory auditor of ABC Ltd. has to verify the total wages paid by the company 
having factories in various states. He can verify the same by analyzing the 
relationship between wages per worker and total number of workers across all the 
factories. 
i.e. Total wages = Wages per worker x Total number of workers. 
Here wages per worker is financial data i.e. in Rs. and total number of workers is a 
number which is a non financial data. Thus, the statutory auditor of ABC Ltd. is 
evaluating financial information i.e. total wages paid (in Rs.) by analyzing the 
relationship between wages per worker (in Rs.) which is financial data and number 
of workers which is a non financial data. 
Analytical 
Procedures 
means
evaluations of 
?nancial 
information
through 
analysis of 
plausible 
relationships
among both 
?nancial and 
non-?nancial 
data.
Page 4


 
 
LEARNING OUTCOMES 
  
 
  
 
 
ANALYTICAL 
PROCEDURES 
 
After studying this chapter, you will be able to: 
? Understand the meaning of analytical procedures as per Standards on 
Auditing. 
? State the purposes and timing of analytical procedures. 
? Deal with the auditor’s use of analytical procedures as substantive procedures 
(“substantive analytical procedures”). 
? Identifying risk of material misstatement through preliminary Analytical review 
procedures. 
? Properly designing, documenting and evaluating the results of substantive
analytic  review  procedures.
 
CHAPTER 
8 
 
 
 
8.2 AUDITING AND ASSURANCE 
  1. MEANING OF ANALYTICAL PROCEDURES 
Since routine checks cannot be depended upon to disclose all 
the mistakes or manipulation that may exist in accounts, 
certain other procedures also have to be applied like 
comparisons, trend and ratio analysis in addition to 
reasonable tests. These collectively are known as overall tests. 
With the passage of tests, analytical procedures have acquired 
lot of signi?cance as substantive audit procedure. SA-520 on 
Analytical Procedures discusses the application of analytical 
procedures during an audit. Let us try to understand the 
concept discussed above with the help of the following illustration: 
ILLUSTRATION 1: 
CA Amar wants to verify the payments made by XYZ Ltd. on account of building 
rent during the FY 2020-21. The rent amounts to Rs.50,000/- per month for the 
year. The monthly rent payments are consistent with the rent agreement. However, 
the other companies in the similar industry are paying rent of Rs. 10,000/- per 
month for a similar location. How will applying the analytical procedures impact 
the verification process of such rental payments by XYZ Ltd.? 
SOLUTION  
If CA Amar checks in detail the monthly rent payments, he may find that such 
payments are consistent with the rent agreement i.e. XYZ Ltd. paid Rs. 50,000/- per 
month as rent and the same is getting reflected in the rent agreement. Here, CA 
Amar may not be able to find out the inconsistency in the rent payment with respect 
to rent payment prevalent in the similar industry for rent of the similar location. 
If CA Amar applies analytical procedure i.e. compares the rent payment by XYZ Ltd. 
with the similar payments made by companies in similar industry and similar area, 
he will notice an inconsistency in such rent payments as the other companies are 
paying a very less monthly rent in similar industry for similar area.  
However, if CA Amar does not make such comparison and only checks the monthly 
payments and rent agreement of XYZ Ltd., he would not have found such 
inconsistency and as such the misstatement may remain undetected. 
Meaning of Analytical Procedures. As per the Standard on Auditing (SA) 520 
“Analytical Procedures”, the term “analytical procedures” means evaluations of 
?nancial information through analysis of plausible relationships among both 
?nancial and non-?nancial data. Analytical procedures also encompass such 
 
 
8.3 
 
 ANALYTICAL PRCEDURES 
investigation as is necessary of identi?ed ?uctuations or relationships that are 
inconsistent with other relevant information or that di?er from expected values by 
a signi?cant amount. 
 
ILLUSTRATION 2:  
Analytical procedure involves analysis of relationship among financial and non 
financial data. Explain with the help of an example as to how, the statutory auditor 
of ABC Ltd. will analyse such relationship with respect to the total wages paid by 
ABC Ltd. during the FY 2020-21. 
SOLUTION:  
As per SA 520, Analytical Procedures means evaluations of ?nancial information 
through analysis of plausible relationships among both ?nancial and non-?nancial 
data. The following example explains the analysis of relationship between financial 
and non financial data while applying analytical procedures.  
The statutory auditor of ABC Ltd. has to verify the total wages paid by the company 
having factories in various states. He can verify the same by analyzing the 
relationship between wages per worker and total number of workers across all the 
factories. 
i.e. Total wages = Wages per worker x Total number of workers. 
Here wages per worker is financial data i.e. in Rs. and total number of workers is a 
number which is a non financial data. Thus, the statutory auditor of ABC Ltd. is 
evaluating financial information i.e. total wages paid (in Rs.) by analyzing the 
relationship between wages per worker (in Rs.) which is financial data and number 
of workers which is a non financial data. 
Analytical 
Procedures 
means
evaluations of 
?nancial 
information
through 
analysis of 
plausible 
relationships
among both 
?nancial and 
non-?nancial 
data.
 
 
8.4 
 
AUDITING AND ASSURANCE 
Analytical procedures include the consideration of comparisons of the entity’s 
?nancial information with as well as consideration of relationships. 
Examples of Analytical Procedures having consideration of comparisons of the 
entity’s ?nancial information are: 
? Comparable information for prior periods. 
Example: 
CA Brijesh, while verifying the travelling expenses of PRT Ltd., may compare the 
travelling expenses of current year amounting to Rs. 2.50 lakhs with previous year 
travelling expense of PRT Ltd. amounting to Rs. 2 lakhs and infer that there has 
been an increase of 25% in the travelling expense incurred by the company. CA 
Brijesh may compare such percentage increase with the trend of the earlier several 
years. 
Thus, CA Brijesh, can use comparable information for prior periods of PRT Ltd. while 
applying analytical procedure with respect to the expenses incurred by the 
company. 
? Anticipated results of the entity, such as budgets or forecasts, or expectations 
of the auditor, such as an estimation of depreciation. 
? Similar industry information, such as a comparison of the entity’s ratio of sales 
to accounts receivable with industry averages or with other entities of 
comparable size in the same industry. 
Examples of Analytical Procedures having consideration of relationships are: 
? Among elements of ?nancial information that would be expected to conform   
to a predictable pattern based on the entity’s experience, such as gross 
margin percentages. 
? Between ?nancial information and relevant non-?nancial information, such as 
payroll costs to number of employees. 
 
Page 5


 
 
LEARNING OUTCOMES 
  
 
  
 
 
ANALYTICAL 
PROCEDURES 
 
After studying this chapter, you will be able to: 
? Understand the meaning of analytical procedures as per Standards on 
Auditing. 
? State the purposes and timing of analytical procedures. 
? Deal with the auditor’s use of analytical procedures as substantive procedures 
(“substantive analytical procedures”). 
? Identifying risk of material misstatement through preliminary Analytical review 
procedures. 
? Properly designing, documenting and evaluating the results of substantive
analytic  review  procedures.
 
CHAPTER 
8 
 
 
 
8.2 AUDITING AND ASSURANCE 
  1. MEANING OF ANALYTICAL PROCEDURES 
Since routine checks cannot be depended upon to disclose all 
the mistakes or manipulation that may exist in accounts, 
certain other procedures also have to be applied like 
comparisons, trend and ratio analysis in addition to 
reasonable tests. These collectively are known as overall tests. 
With the passage of tests, analytical procedures have acquired 
lot of signi?cance as substantive audit procedure. SA-520 on 
Analytical Procedures discusses the application of analytical 
procedures during an audit. Let us try to understand the 
concept discussed above with the help of the following illustration: 
ILLUSTRATION 1: 
CA Amar wants to verify the payments made by XYZ Ltd. on account of building 
rent during the FY 2020-21. The rent amounts to Rs.50,000/- per month for the 
year. The monthly rent payments are consistent with the rent agreement. However, 
the other companies in the similar industry are paying rent of Rs. 10,000/- per 
month for a similar location. How will applying the analytical procedures impact 
the verification process of such rental payments by XYZ Ltd.? 
SOLUTION  
If CA Amar checks in detail the monthly rent payments, he may find that such 
payments are consistent with the rent agreement i.e. XYZ Ltd. paid Rs. 50,000/- per 
month as rent and the same is getting reflected in the rent agreement. Here, CA 
Amar may not be able to find out the inconsistency in the rent payment with respect 
to rent payment prevalent in the similar industry for rent of the similar location. 
If CA Amar applies analytical procedure i.e. compares the rent payment by XYZ Ltd. 
with the similar payments made by companies in similar industry and similar area, 
he will notice an inconsistency in such rent payments as the other companies are 
paying a very less monthly rent in similar industry for similar area.  
However, if CA Amar does not make such comparison and only checks the monthly 
payments and rent agreement of XYZ Ltd., he would not have found such 
inconsistency and as such the misstatement may remain undetected. 
Meaning of Analytical Procedures. As per the Standard on Auditing (SA) 520 
“Analytical Procedures”, the term “analytical procedures” means evaluations of 
?nancial information through analysis of plausible relationships among both 
?nancial and non-?nancial data. Analytical procedures also encompass such 
 
 
8.3 
 
 ANALYTICAL PRCEDURES 
investigation as is necessary of identi?ed ?uctuations or relationships that are 
inconsistent with other relevant information or that di?er from expected values by 
a signi?cant amount. 
 
ILLUSTRATION 2:  
Analytical procedure involves analysis of relationship among financial and non 
financial data. Explain with the help of an example as to how, the statutory auditor 
of ABC Ltd. will analyse such relationship with respect to the total wages paid by 
ABC Ltd. during the FY 2020-21. 
SOLUTION:  
As per SA 520, Analytical Procedures means evaluations of ?nancial information 
through analysis of plausible relationships among both ?nancial and non-?nancial 
data. The following example explains the analysis of relationship between financial 
and non financial data while applying analytical procedures.  
The statutory auditor of ABC Ltd. has to verify the total wages paid by the company 
having factories in various states. He can verify the same by analyzing the 
relationship between wages per worker and total number of workers across all the 
factories. 
i.e. Total wages = Wages per worker x Total number of workers. 
Here wages per worker is financial data i.e. in Rs. and total number of workers is a 
number which is a non financial data. Thus, the statutory auditor of ABC Ltd. is 
evaluating financial information i.e. total wages paid (in Rs.) by analyzing the 
relationship between wages per worker (in Rs.) which is financial data and number 
of workers which is a non financial data. 
Analytical 
Procedures 
means
evaluations of 
?nancial 
information
through 
analysis of 
plausible 
relationships
among both 
?nancial and 
non-?nancial 
data.
 
 
8.4 
 
AUDITING AND ASSURANCE 
Analytical procedures include the consideration of comparisons of the entity’s 
?nancial information with as well as consideration of relationships. 
Examples of Analytical Procedures having consideration of comparisons of the 
entity’s ?nancial information are: 
? Comparable information for prior periods. 
Example: 
CA Brijesh, while verifying the travelling expenses of PRT Ltd., may compare the 
travelling expenses of current year amounting to Rs. 2.50 lakhs with previous year 
travelling expense of PRT Ltd. amounting to Rs. 2 lakhs and infer that there has 
been an increase of 25% in the travelling expense incurred by the company. CA 
Brijesh may compare such percentage increase with the trend of the earlier several 
years. 
Thus, CA Brijesh, can use comparable information for prior periods of PRT Ltd. while 
applying analytical procedure with respect to the expenses incurred by the 
company. 
? Anticipated results of the entity, such as budgets or forecasts, or expectations 
of the auditor, such as an estimation of depreciation. 
? Similar industry information, such as a comparison of the entity’s ratio of sales 
to accounts receivable with industry averages or with other entities of 
comparable size in the same industry. 
Examples of Analytical Procedures having consideration of relationships are: 
? Among elements of ?nancial information that would be expected to conform   
to a predictable pattern based on the entity’s experience, such as gross 
margin percentages. 
? Between ?nancial information and relevant non-?nancial information, such as 
payroll costs to number of employees. 
 
 
 
8.5 
 
 ANALYTICAL PRCEDURES 
ILLUSTRATION-3 
Particulars Client Industry 
Year 2019-20 2020-21 2019-20 2020-21 
Inventory 
Turnover 
2.8 2.9 3.1 2.8 
Gross Margin 22.5% 22.7% 23.6% 22.2% 
? Various methods may be used to perform analytical procedures.  
? These methods range from performing simple comparisons to performing 
complex analyses using advanced statistical techniques.  
? Analytical procedures may be applied to consolidated ?nancial statements, 
components and individual elements of information. 
Thus, we can say that Analytical Procedures may be segregated into the following 
major types: 
? as comparison of client and industry data,  
? comparison of client data with similar prior period data,  
? comparison of client data with client-determined expected results,  
? comparison of client data with auditor-determined expected results and  
? comparison of client data with expected results, using non ?nancial data. 
1.1 SA – 520, “Analytical Procedures” 
Scope of SA 520 
SA 520 deals with the auditor’s use of analytical procedures as substantive 
procedures (“substantive analytical procedures”), and as procedures near the end 
of the audit that assist the auditor when forming an overall conclusion on the 
financial statements.  
The use of analytical procedures as risk assessment procedures is dealt with in SA 315. 
SA 330 includes requirements and guidance regarding the nature, timing and 
extent of audit procedures in response to assessed risks; these audit procedures 
may include substantive analytical procedures.