Answer.
Analytical procedures are one of many audit processes which help an auditor understand the client’s business and changes in the business, and to identify potential risk areas to plan other audit procedures. It includes comparison of financial information, relating financial and non- financial information and consideration of practicable relationship of data.
The analytical procedures that will be adopted in obtaining audit evidence regarding the various assertions relating to revenue are as follows:
i. Comparison of Gross-profit ratio to sales for the current year with the corresponding figures of the previous years.
ii. Comparison of ratio of sales returns to sales for the current year with the corresponding figures for previous years.
iii. Comparison of trade discount to sales for the current year with previous year.
iv. Review of Reconciliation of Excise/VAT booked during the year with Excise/VAT returns submitted with the total sales booked.
v. Comparison of dividend/interest/royalty for the current year with the corresponding figures for previous years.
vi. Comparison of ratio of income on investments to average investment for the current year with corresponding figures for the previous year.
The factors that affect the extent of reliance on analytical procedures are as follows:
i. Materiality: When items are material, the auditor doesn‟t solely rely on the analytical procedures in forming conclusions but will carry other substantive procedures also.
ii. Other procedures: When other procedures are also directed towards the same objective, it might confirm or dispel the questions raised from the application of analytical procedures.
iii. Weak controls: When internal controls are weak, greater reliance is placed on tests of balances and tests of details of transactions rather than on analytical procedures.
iv. Accuracy: The accuracy with which expected results of analytical procedures can be predicted. For example, greater reliance is place on gross profit ratio compared to previous year than in comparing discretionary expenses such as donation.