## Analytical Procedures as Risk Assessment Procedures

### Definition

Analytical procedures involve evaluating financial information by studying plausible relationships among both financial and non-financial data.

When used as risk assessment procedures, they help the auditor understand the entity and identify risks of material misstatement.

### What Analytical Procedures Can Do

Identify aspects of the entity the auditor was unaware of
Assist in assessing risks of material misstatement to design appropriate responses
Identify unusual transactions or events
Highlight amounts, ratios, and trends that might indicate audit-relevant matters
Help identify risks of material misstatement due to fraud (via unexpected relationships)

### Tools Used

Analytical procedures can include software tools to compare amounts across periods — e.g., comparing current year figures with preceding two years.

### Critical Limitation

> Risk assessment procedures by themselves do NOT provide sufficient appropriate audit evidence on which to base the audit opinion.

Analytical procedures used as risk assessment procedures are a basis for identifying and assessing risks — they must be supplemented by further audit procedures (tests of controls, substantive procedures).

Worked example

### Example 1

Scenario: CA Srishti uses software to compare amounts in financial statements for the current year with the preceding two years to evaluate risk of material misstatement. What type of procedure is this, and can the audit opinion be based solely on it?

Answer: CA Srishti is performing analytical procedures as risk assessment procedures. These help identify unusual trends or relationships and assess RMM. However, the audit opinion cannot be based solely on these procedures — they do not by themselves provide sufficient appropriate audit evidence.

### Example 2

Scenario: An auditor notices that revenue increased 40% while cost of goods sold increased only 5%. What should the auditor do next?

Answer: This is an unusual relationship identified through analytical procedures. The auditor should treat this as an indicator of potential RMM (possibly inflated revenue or understated costs) and design further substantive procedures to investigate it.

⚠️ Common exam mistakes

Stating that analytical procedures alone are sufficient to form an audit opinion — they are a risk assessment tool, not a substitute for further audit work.
Limiting analytical procedures to financial data only — they can also include non-financial information (e.g., units produced vs. revenue).
Forgetting that unusual or unexpected relationships identified by analytical procedures are specifically useful for detecting fraud risk.

Reference: — SA 315 – Identifying and Assessing the Risk of Material Misstatement through Understanding the Entity and its Environment

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