Nature of Assertion.

A second consideration when assessing the effectiveness of an

analytical procedure is the particular audit assertion under consideration. Analytical
procedures are particularly useful evidence with respect to assertions for which potential
misstatements would not necessarily be apparent from examining detailed evidence, or
for which detailed evidence is not available. This is particularly applicable to the
completeness assertion. Consider, for example, the assertion that a brewing company
has completely recorded its revenue. Doing a detailed test of the recorded beer sales
will tell the auditor nothing about the risk that other sales may not have been recorded.
However, an analytical procedure that relates recorded beer sales to barrels shipped as
verified by a government excise tax agent may be very powerful audit evidence.
Reliability of Data Used. A third consideration is the reliability of the data being used to
predict the dependent variable. The following considerations (most of which are drawn
from SAS No. 31, Evidential Matter) are pertinent:
* Data derived from sources external to the client are usually more reliable than data
from internal sources.
* Independently, internally generated data are generally more reliable than data
generated by the accounting system. However, the auditor must consider whether there
is any need to evaluate the controls over the preparation of operational data.
* If the data is generated from the accounting system, reliability is affected by whether
the system is well controlled or poorly controlled and whether the data has been
subjected to substantiation by other procedures. Some analytical procedures may only
be reliable if the auditor also selects audit procedures that provide evidence concerning
the accurate processing of transaction data.
* Apart from the quality of the data, the greater the number of sources of data, the more
effective the test is likely to be.
Precision of Expectation. Finally, the effectiveness of analytical procedures is affected
by their precision. The precision, in turn, will be dependent on whether reliable, relevant
data are used, as discussed previously, and also, the level of data disaggregation at
which they are employed. The greater the disaggregation of the data, the more effective
these procedures will be at detecting error because there is less chance of the error
being masked by bona fide offsetting changes in the business. Accordingly, analysis at
the business unit level is more effective than analysis at the consolidated level, and
analysis at the product-line level is more effective than analysis at the business-unit
level. Similarly, analysis of data on a monthly basis is much more likely to detect errors
than analysis of annual data.