## Using Analytical Procedures as Substantive Procedures — REDS Framework
When the auditor decides to use AP as substantive procedures, four considerations apply (mnemonic: REDS):
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### R — Evaluate Reliability of Data (NSC²)
The auditor must assess the reliability of the data used to build the expectation:
| Sub-factor | Key Question |
|---|---|
| Nature & Relevance | Are budgets set as realistic expected results, or merely aspirational goals? |
| Source | Is data from an independent external source (more reliable) or internal management data? |
| Comparability | Is industry data directly comparable, or must it be adjusted for the entity's specialised products? |
| Controls | Are there controls over preparation, review, and maintenance of the data (e.g., budget approval process)? |
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### E — Develop a Sufficiently Precise Expectation (PAD)
The auditor must form an expectation precise enough to detect a material misstatement:
- Precision: How accurately can the expected result be predicted?
- Availability: Is both financial and non-financial data available to build the expectation?
- Disaggregation: The more granular the data, the more precise the expectation
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### D — Determine Acceptable Difference Without Further Investigation
The auditor sets a threshold — differences below this amount need no further inquiry. The threshold is influenced by:
- Materiality (higher materiality → larger acceptable difference)
- Desired level of assurance (higher assurance needed → smaller acceptable difference)
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### S — Determine Suitability for the Assertion
1. SAP work best for large volumes of predictable transactions
2. Relationships must be expected to continue absent known contrary conditions
3. The auditor must assess how effective the AP will be at detecting misstatement
4. Even simple predictive models can be effective (e.g., headcount × average wage = payroll)
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### Decision Flow
```
Is the data Reliable? (R)
→ Can I develop a sufficiently precise Expectation? (E)
→ What Difference is acceptable without further inquiry? (D)
→ Is this AP Suitable for the assertion? (S)
→ If all YES: use SAP
```