It is the analysis of significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or which deviate from predicted amounts. Analytical procedures include comparison of financial information with prior period information, anticipated results, such as, budgets and similar industry information. Analytical procedures are used for the following purposes:
a. to assist the auditor in planning the nature and extent of audit procedures;
b. as a substantive test to obtain evidential matter related to account balances or classes of transactions; and
c. as an overall review of the financial information in the review stage of the audit.
The auditor should apply analytical procedures at the planning stage to assist in understanding the business and in identifying the business and in identifying areas of potential risk. Application of analytical procedures may indicate aspects of the business of which the auditor was unaware and will assist in determining the nature, timing and extent of other audit procedures.
Analytical procedure also constitutes substantive audit procedures to reduce detection risk relating to specific financial statements. The auditor should apply analytical procedures at or near the end of the audit when forming and overall conclusion as to whether the financial statements as a whole are consistent with the auditor’s knowledge of the business. In totality, analytical procedures are a valuable tool for an auditor to identify significant fluctuations or relationships that are in consistent with other relevant information or that deviate from predicted amounts, the auditor should investigate and obtain adequate explanations and appropriate corroborative evidence.