Question

Explain Analytical procedures as substantive tests.

Answer 1

Analytical procedures means information of financial information analysis of relationship among both financial and non financial data. It includes comparison with comparable information for prior periods like budgets for forecasts or similar industry information. This can be performed by either simple comparison or complex analysis by advanced statistical techniques.

The main objective of auditor with reference to analytical procedures are to obtain evidences when using substantive analytical procedures and design and perform analytical procedures near end of audit period to conclude whether financial statements are consistent with auditors understanding of entity.

When using substantive analytical procedures the auditor shall consider the following four factors

1. Suitability of particular SAP

He should determine suitability of SAP for a particular item. These are are generally adopted for those transactions that tend to be predictable over time. For example it can be used to compare gross profit ratio in a stable entity. However such comparisons like relationships between revenue and expenditure may not be performed by public sector undertakings.

2. Reliability of data to be compared

It is influenced by the following

A. Source of information available

B. Compatibility of information available

C. Relevance of information available

D. Control your preparation of information

3. Development of expectations

The auditor shall develop expectation of recorded values. these expectations should be sufficiently resize so that any misstatement can be easily identified.

4. Difference of recovered amount from expected values that is acceptable

The auditor is required to obtain more persuasive evidence if he identifies high-risk. Thus, furniture items acceptable differences should be low. If difference is more than acceptable difference he shall for the investigate to rule of the possibility of misstatement.

The auditor shall design and perform an analytical procedures near the end of audit. this way we can conclude whether financial statements are consistent with his understanding of entity. Thus, it helps him forming opinion on financial statements.

If the auditor identifies fluctuations a significant difference between recorded and expected values he shall investigate by inquiring of management and thereafter obtaining evidence to corroborate the same and performing other procedures as necessary in the circumstances.