# SA 520 – Analytical Procedures (AP)
## What are Analytical Procedures?
Analytical Procedures (AP) mean evaluations of financial information through analysis of plausible (logical) relationships among both financial and non-financial data.
AP also include investigation of identified fluctuations or relationships that are:
- Inconsistent with other relevant information, OR
- That differ from expected values by a significant amount.
AP involve comparisons of an entity's financial information AND analysis of relationships.
## Types of Comparisons in AP
Comparisons of entity's financial information with:
- Comparable info for prior periods.
- Anticipated results (e.g., budgets or forecasts).
- Similar industry information (e.g., entity's sales-to-receivables ratio vs. industry average).
AP considering relationships among:
- Elements of financial information that conform to a predictable pattern.
- Financial info AND relevant non-financial info (e.g., payroll cost vs. number of employees).
Major Types of AP:
1. Comparison of client and industry data.
2. Comparison of client data with similar prior period data.
3. Comparison of client data with client-determined expected results (budgets).
4. Comparison of client data with auditor-determined expected results.
5. Comparison of client data with expected results using non-financial data.
## Purpose of Analytical Procedures
- Use comparisons and relationships to assess whether account balances appear reasonable.
- Comparing P/L items with previous year identifies reasons for profit changes.
- Expense ratios comparison helps detect if accounts have been manipulated to inflate/suppress profits.
- Allows independent verification of items (e.g., sugar sold can be verified via GST paid; commission as % of sales).
- Helps identify unusual transactions or events with audit implications.
## Timing – When are AP Performed?
AP are required in all 3 phases of an audit:
1. Planning phase (risk assessment)
2. Testing phase (substantive)
3. Completion phase (overall review)
### AP in Planning
- Helps auditor understand client's business and identify areas of potential risk.
- Highlights aspects of the business previously unknown.
- Assists in determining Nature, Timing, Extent (NTE) of further audit procedures.
- Uses both financial and non-financial info.
## Substantive Analytical Procedures (SAP)
Substantive procedures at the assertion level may be TOD (Test of Details), SAP, or both. The decision is based on auditor's judgment about effectiveness & efficiency in reducing audit risk to an acceptably low level.
### Factors to Consider for SAP
| Factor | Implication |
|---|---|
| Availability of Data | Reliable & relevant data → effective AP |
| Disaggregation | More disaggregated data → better at detecting misstatements |
| Account Type | Income statement accounts → more predictable; B/S accounts → more mgt judgment |
| Source | Routine, similar transactions → more predictable; non-routine/estimation → less |
| Predictability | SAP more appropriate when relationships are predictable |
| Nature of Assertion | SAP more effective for completeness and valuation than for rights & obligations |
| Inherent Risk / Significant Risk | High inherent risk → use TOD; significant risk → SAP alone insufficient |
### Techniques Available as SAP
1. Trend Analysis – Compares current data with prior period balance(s) and evaluates whether the current balance follows the established trend.
2. Ratio Analysis – An individual B/S account is hard to predict alone, but its relationship to another account is often more predictable. Ratios can be compared over time, across group entities, or against industry peers.
3. Reasonableness Tests – Unlike trend analysis, these rely on non-financial data rather than prior events. Generally more applicable to income statement balances.
4. Structural Modelling – A modelling tool that constructs a statistical model from financial AND non-financial data of prior periods to predict current account balances.
## Designing & Performing SAP (Per SA 330)
The auditor shall:
1. Determine suitability of the particular AP given ROMM and TOD.
2. Evaluate reliability of data from which expectation is developed.
3. Develop an expectation of recorded amounts and evaluate whether expectation is sufficiently precise to identify a material misstatement.
4. Determine amount of difference that is acceptable without further investigation.
## Reliability of Data – Factors
- Nature & relevance of info available.
- Source – more reliable when obtained from independent sources.
- Controls over preparation of info (completeness, accuracy, validity).
- Comparability of info available.
## Precision of Expectation – Matters Relevant
- Accuracy with which expected results can be predicted.
- Degree to which info can be disaggregated.
- Availability of info (financial AND non-financial).
## Investigating Results of AP
If AP identify fluctuations or relationships inconsistent with other info or differing by significant amounts, the auditor shall:
1. Inquire of management and obtain appropriate audit evidence relevant to mgt's responses.
2. Perform other audit procedures as necessary when:
- Management is unable to provide explanation, OR
- The explanation + evidence for mgt response is not adequate.
## Quick Memory Aid
Remember T-R-R-S for SAP techniques: Trend analysis, Ratio analysis, Reasonableness tests, Structural modelling.