Analytical Procedures – ISA 520

Analytical procedures include:-

(a) The consideration of comparison with:
— Prior comparable accounting period, in order to establish trends and patterns and
to look for the unusual fluctuations in amounts in the current financial year that
seem to inconsistent with last year.
— Anticipated results of the entity, that is to compare the actual results with the
budget or forecast from the side of the entity so that differences could be identified
with a view to seek explanations, if differences are material.
— Expected results, it means that comparing the actual results with the expectations
of the auditor.
— Industry information, auditors can use industry information in order to evaluate the
actual performance of the client entity, for example through published financial
statements of the companies within the same industry.
(b) Those between elements of financial information that are expected to conform to a
predicted pattern based on the entity's experience, such as the relationship of gross profit to
sales.
(c) Those between financial information and relevant non-financial information, such as the
relationship of payroll costs to number of employees.

Related Items.  Payables and purchases

 Inventories and cost of sales
 Non-current assets and depreciation, repairs and maintenance
expense
 Intangible assets and amortisation
 Loans and interest expense
 Investments and investment income
 Receivables and bad debt expense
 Receivables and sales

Analytical Procedures 1 By:- Haris Hanif

Techniques of analytical procedures:-
 Ratio Analysis

 Examining related accounts

 Trend Analysis

 Reasonable test

Examples of unusual items

Note:-
Acceptable difference

Analytical Procedures 2 By:- Haris Hanif

Analytical Procedures and Financial statements Assertions
Analytical procedures provide the evidence on:-
- All assertions of transactions and disclosures
- All assertions of account balance and disclosures and related disclosures, except for Rights
and Obligations.
Examples:-
Transactions and related disclosures
Analytical Procedures
Compare current year GP margin with prior
years and with industry trends.
Compare current year effective tax charge with
the applicable rate of corporation tax for the
period.
Perform proof in total of payroll (based on
number of employees multiplied by average
wage)
Account balance and related disclosures
Analytical Procedures
Compare current year receivable collection
period to that of prior year.
Calculate current year ratio and compare with
that of prior year.
Analytical Procedures
Financial Statements Assertions
- Occurrence and completeness of
revenue
- Cut-off of revenue
- Accuracy of revenue
- Occurrence and completeness of cost
of sales
- Accuracy of cost of sales
- Classification of cost of sales
- Accuracy of tax expense
- Completeness of tax expense and
disclosures
- Occurrence and completeness of
payroll expense
- Accuracy of payroll expense
- Cut-off of payroll expense
Financial Statements Assertions
- Existence and completeness of trade
receivable
- Accuracy, valuation and allocation of
trade receivable
- Accuracy, valuation and allocation of
provision for irrecoverable receivables
- Existence and completeness of current
assets
- Accuracy, valuation and allocation of
current assets
- Existence and completeness of current
liabilities
- Accuracy, valuation and allocation of
current assets
- Presentation of going concern
disclosures
3 By:- Haris Hanif
Usage of Analytical Procedures

Note:- ISA 520 states that when using analytical procedures as substantive test, auditor must:-

Analytical Procedures 4 By:- Haris Hanif