This International Standard on Auditing (ISA) deals with the auditors use of analytical procedures as substantive procedures.

It also deals with the auditors responsibility to perform analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion on the financial statements.

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 This ISA is effective for audits of financial statements for periods beginning on or after December 15, 2009.

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 The objectives of the auditor are: (a) To obtain relevant and reliable audit evidence when using substantive analytical procedures; and (b) To design and perform analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion as to whether the financial statements are consistent with the auditors understanding of the entity.
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 For the purposes of the ISAs, the term analytical procedures means evaluations of financial information through analysis of plausible relationships among both financial and non-financial data.

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 Simple Trend Analysis (of one account) Ratio analysis

Trend Analysis Comparative Analysis Common-sized analysis

Reasonableness tests Structural Modeling

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 Analytical procedures can be applied to all the stages of the audit i.e. 1. Planning 2. Fieldwork 3. Final review.

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 At the planning stage, they serve to identify areas of potential audit risk and help in planning the nature, timing and extent of other procedures. For example: 1. Ratio analysis 2. Simple trend analysis

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Compare client data with: 1. Industry data 2. Similar prior-period data 3. Client-determined expected results 4. Auditor-determined expected results 5. Expected results using nonfinancial data.

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Client 2007 2006 2007

Industry 2006

Inventory turnover Gross margin

3.4 26.3%

3.5 26.4%

3.9 27.3%

3.4 26.2%

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2007 (000) Prelim. Net sales Cost of goods sold Gross profit Selling expense Administrative expense Other Earnings before taxes Income taxes Net income $143,086 103,241 $ 39,845 14,810 17,665 1,689 $ 5,681 1,747 $ 3,934 % of Net sales 100.0 72.1 27.9 10.3 12.4 1.2 4.0 1.2 2.8

2006 (000) % of Prelim. Net sales $131,226 94,876 $ 36,350 12,899 16,757 2,035 $ 4,659 1,465 $ 3,194 100.0 72.3 27.7 9.8 12.8 1.6 3.5 1.1 2.4

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 AP is used at this stage to obtain evidence about the financial statement account balances. For example: 1. Pay role expense 2. A/R turnover 3. Recorded production cost

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 The auditor wants to determine whether job No. 123 which has 950 direct labour hours really resulted in the recorded production costs of $42,000. y = 30602 + 15.8436 x Job No. 123 should carry production costs of 30602 + 15.8436 (950) = $45,653.27

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Help the auditor assess the adequacy The sufficiency of the evidential matter Validity of the conclusions reached, Including the opinion on the financial statements taken as a whole.

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As the amount of the difference increases and as the auditor's reliance on the analytical procedures increases, the auditor should use more reliable means of investigating differences between recorded amounts and expectations. First, did the auditor forget to consider something when developing the expectation. Next, ask the client to explain the difference. Obtain more objective evidence as necessary.
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The auditor shall: A) Determine the suitability of particular substantive analytical procedures for given assertions, taking account of the assessed risks of material misstatement and tests of details, if any, for these assertions

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B) Evaluate the reliability of data from which the auditors expectation of recorded amounts or ratios is developed, taking account of source, comparability, and nature and relevance of information available, and controls over preparation.

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C) Develop an expectation of recorded amounts or ratios and evaluate whether the expectation is sufficiently precise to identify a misstatement that, individually or when aggregated with other misstatements, may cause the financial statements to be materially misstated

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D) Determine the amount of any difference of recorded amounts from expected values that is acceptable without further investigation

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 If analytical procedures performed in accordance with this ISA identify fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount, the auditor shall investigate such differences by: (a) Inquiring of management and obtaining appropriate audit evidence relevant to managements responses; and (b) Performing other audit procedures as necessary in the circumstances.
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 Audit evidence relevant to managements responses may be obtained by evaluating those responses taking into account the auditors understanding of the entity and its environment, and with other audit evidence obtained during the course of the audit.

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 The need to perform other audit procedures may arise when, for example, management is unable to provide an explanation, or the explanation, together with the audit evidence obtained relevant to managements response, is not considered adequate.

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 The conclusions drawn from the results of analytical procedures designed and performed in accordance with paragraph 6 are intended to corroborate conclusions formed during the audit of individual components or elements of the financial statements. This assists the auditor to draw reasonable conclusions on which to base the auditors opinion.

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 The results of such analytical procedures may identify a previously unrecognized risk of material misstatement. In such circumstances, ISA 315 requires the auditor to revise the auditors assessment of the risks of material misstatement and modify the further planned audit procedures accordingly

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 The analytical procedures performed in accordance with paragraph 6 may be similar to those that would be used as risk assessment procedures.

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Summary of Analytical Procedures

They involve the computation of ratios and other comparisons of recorded amounts to auditor expectations.

They are used in planning to understand the clients business and industry.

They are used throughout the audit to identify possible misstatements, reduce detailed tests, and to assess going-concern issues.

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