Question

How would the analytical procedures be different if you were completing it as part of your risk assessment procedures compared to completing it as part of your substantive analytical procedures?

Answer 1

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.

Analytical Procedures performed as part of Risk assessment procedures are also known as "Preliminary analytical review – risk assessment" and Analytical Procedures performed as part of Substantive analytical procedures are known as ''Substantive analytical procedures''.

1. Preliminary analytical review – risk assessment (required by ISA 315)
   Preliminary analytical reviews are performed to obtain an understanding of the business and its environment (eg financial performance relative to prior years and relevant industry and comparison groups), to help assess the risk of material misstatement in order to determine the nature, timing and extent of audit procedures, ie to help the auditor develop the audit strategy and programme.

Although analytical procedures used in planning the audit often use only financial data, sometimes relevant nonfinancial information is considered as well. For example, number of employees, square footage of selling space, volume of goods produced, and similar information may contribute to accomplishing the purpose of the procedures.

2. Substantive analytical procedures
Analytical procedures are used as substantive procedures when the auditor considers that the use of analytical procedures can be more effective or efficient than tests of details in reducing the risk of material misstatements at the assertion level to an acceptably low level.

The primary purpose of substantive analytical procedures is to obtain assurance, in combination with other audit testing (such as tests of controls and substantive tests of details), with respect to financial statement assertions for one or more audit areas. Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be more predictable over time.

he application of substantive analytical procedures is based on the expectation that relationships among data exist and continue in the absence of known conditions to the contrary. The presence of these relationships provides audit evidence as to the completeness, accuracy and occurrence of transactions. Due to their nature, substantive analytical procedures can often provide evidence for multiple assertions, identify audit issues that may not be apparent from more detailed work, and direct the auditor’s attention to areas requiring further investigation. Furthermore, the auditor may identify risks or deficiencies in internal control that had not previously been identified, which may cause the auditor to re-evaluate his planned audit approach and require the auditor to obtain more assurance from other substantive testing than originally planned.