Analytical Procedures

• Author: Jean Bedard, James Maroney
• Pages: 29-31

Page 29

Analytical procedures have become increasingly important to audit firms and are considered to be an integral part of the audit process. The importance of analytical procedures is demonstrated by the fact that the Auditing Standards Board, which establishes the standards for conducting financial statement audits, has required that analytical procedures be performed during all audits of financial statements. The Auditing Standards Board did so through the issuance of Statement on Auditing Standards (SAS) No. 56 in 1988, which requires that analytical procedures be used by auditors as they plan the audit and also in the final review of the financial statements. In addition, SAS No. 56 encourages auditors to use analytical procedures as one of the procedures they use to gather evidence related to account balances (referred to in auditing as a substantive test). The purpose of this article is to provide the reader with a general understanding of analytical procedures and to describe the process that auditors use in applying analytical procedures.

SAS No. 56 describes analytical procedures as the "evaluation of financial information made by a study of plausible relationships among both financial and non-financial data" (AICPA, 1998, 56 p. 1). Accounting researchers have helped to clarify the process that auditors use to perform analytical procedures by developing models that describe the various stages of the process. One such model developed by Hirst and Koonce (1996) describes the performance of analytical procedures as consisting of five components: expectation development, explanation generation, information search and explanation evaluation, decision making, and documentation.

The first step in the analytical procedures process is the development of an expected account balance. SAS No. 56 and auditing textbooks (e.g., O'Reilly et al., 1998) provide some guidance as to the sources of information an auditor can use to develop these expectations. Examples of such sources include the following:

Financial information from comparable prior periods adjusted for any changes expected to affect the balances of the current period. For example, an expectation of sales revenues for the current year might be based on the prior year's sales, adjusted for factors such as price increases or the known addition or loss of major customers.

Expected results based on budgets or forecasts prepared by the client or projections of expected results prepared by the auditor from interim periods or prior comparable periods.

Available information from the...