It is mandatory that the auditor should perform risk assessment for the identification and
assessment of risks of material misstatement at the financial statement and assertion
level, and the risk assessment procedures should include analytical procedures (ISA 315).
It is also mandatory that the auditor should perform analytical procedures near the end
of the audit that assess whether the financial statements are consistent with the auditor’s
understanding of the entity (ISA 520).
Analytical procedures are also commonly used in non-audit and assurance engagements,
such as reviews of prospective financial information, and non-audit reviews of historical
financial information. While the use of analytical procedures in such engagements is not
covered in the ISAs, the principals regarding their use are relevant.
Definition of analytical procedures
Analytical procedures consist of ‘evaluations of financial information through analysis of
plausible relationships among both financial and non-financial data. They also encompass
‘such investigation as is necessary of identified fluctuations or relationships that are
inconsistent with other relevant information or that differ from expected values by a
significant amount’ (ISA 520). A basic premise underlying the application of analytical
procedures is that plausible relationships among data may reasonably be expected to
exist and continue in the absence of conditions to the contrary.
Purposes of analytical procedures
Analytical procedures are used throughout the audit process and are conducted for three
primary purposes:
1. Preliminary analytical review – risk assessment (required by ISA 315)
Preliminary analytical reviews are performed to obtain an understanding of the business
and its environment (e.g. financial performance relative to prior years and relevant
industry and comparison groups), to help assess the risk of material misstatement in
order to determine the nature, timing and extent of audit procedures, i.e. to help the
auditor develop the audit strategy and programme.
2. Substantive analytical procedures
Analytical procedures are used as substantive procedures when the auditor considers that
the use of analytical procedures can be more effective or efficient than tests of details in
reducing the risk of material misstatements at the assertion level to an acceptably low
level.