por We explain what the analytical procedure is, its characteristics, advantages, disadvantages and types
What is the analytical procedure?
He analytical procedure It is the evaluation of financial information through the analysis of acceptable relationships between financial and non-financial data. It is a type of evidence used during an audit. This procedure flags possible problems with a company’s financial records, which can then be further investigated.
It is used in financial auditing to help understand business operations and to identify potential risk areas that need to be reviewed. It also includes investigating fluctuations in relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.
Fluctuations in expected data ratios could reveal some type of misrepresentation or fraudulent reporting committed by company management. In most cases, these relationships should remain constant over time.
Otherwise, it means that the financial records are incorrect, possibly due to errors or fraudulent reporting.
Characteristics of the analytical procedure
Security as main purpose
The primary purpose of analytical procedures is to obtain assurance, in combination with other audit tests (tests of controls and tests of details), about what the financial statements say in one or more areas.
Data Relationships
The application of analytical procedures is based on the possibility that acceptable relationships exist between the data. The presence of these relationships provides audit evidence as to the completeness and accuracy of the transactions.
The particular conditions that produce variations in these relationships are: unusual transactions, accounting changes, business changes, random fluctuations or misstatements.
Analytical procedures range from simple comparisons (for example, prior year ending balances versus current year ending balances) to the use of complex models involving many relationships and data elements.
Understanding financial relationships is essential for planning and evaluating the results of analytical procedures. Knowledge of the company and the industry in which it operates is generally required.
The analytical procedures compare the recorded amounts and the indicators developed in the company with the expectations developed by the auditor. These expectations are the cornerstones of success.
Use in audits
In review work they are used to give some guarantee that the financial statements do not require significant adjustments. They are essential to evaluate financial data and the variations that occur in them.
They are used in the three stages of the audit: in the planning, in the execution and finally in its review.
Factors Affecting the Precision of the Analytical Procedure
Data breakdown
The more detailed the level at which analytical procedures are performed, the greater their potential accuracy.
Analytical procedures performed at a high level could mask important but corrective differences, as they are more likely to attract attention than when the procedures are performed on disaggregated data.
The objective of the audit procedure will determine whether and to what extent data should be disaggregated for an analytical procedure.
Data reliability
The more reliable the data, the more accurate the expectation. The data used to shape the expectation in an analytical procedure may be external industry and economic data, collected through independent research.
The available source of information is particularly important. Internal data generated from already audited records is considered more reliable, or not subject to manipulation by people who may influence accounting activities.
Data predictability
There is a direct correlation between the predictability of data and the quality of the expectation derived from that data. In general, the more precise the expectation for an analytical procedure, the greater the potential reliability of that procedure.
Types of analytical procedures
There is a direct correlation between the type of analytical procedure selected and the precision it can provide. The greater the precision inherent in an analytical procedure, the greater the potential reliability of that procedure.
Therefore, an appropriate analytical procedure must be selected; for example, a reasonableness test instead of a trend.
trend analysis
It is the analysis of changes in an account over time.
Analysis of reasons
It is the comparison, over time, of the relationship between financial statement accounts and non-financial data.
reasonableness test
Analysis of accounts between accounting periods. It involves the development of a model to form an expectation based on financial data, non-financial data, or both.
Advantages
– The main advantage of analytical procedures is that they can be applied at all stages of the audit, to investigate the amounts reflected in the financial statements and the relationships between those amounts.
– They help the auditor to see if there are continuing problems within the company and if the client’s financial statements match what the auditor believes they should be after making any adjustments.
– Due to their nature, analytical procedures often provide evidence for multiple allegations, identifying audit issues that might not be apparent without more detailed work, directing the auditor’s attention to areas that require further investigation.
– They help the auditor to make comparisons periodically, taking into account previous years. This gives the auditor a better overall understanding of the business and individual accounts.
– The auditor may identify risks or deficiencies that had not previously been identified in internal control. This causes the auditor to reevaluate the audit approach and requires more assurance to be obtained with other tests than originally planned.
Disadvantages
– Because analytical procedures often have to be performed on incomplete accounts before final financial statements have been prepared, significant adjustments are not taken into account, and are often made at a later stage.
– Many auditors do not rely on analytical procedures due to the low precision observed in them and the lack of reliability in the data necessary for the procedures.
– Analytical procedures alone are not adequate to detect fraud. There could be adjustments that have given rise to artificial changes in the analyzed relationships of the financial statements, causing the auditor to draw erroneous conclusions.
– If the auditor does not adequately understand the business, he may be tempted to accept the results of analytical procedures that do not show unusual variances. This is not the case if there have been significant changes in the business, of which the auditor is unaware and which management may try to hide.