Analytical Procedures - AICPA Audit Guide [Subscription]

Receive guidance on the effective use of analytical procedures with an emphasis on analytical procedures as substantive tests. This release includes a discussion of SAS No. 56 and the underlying concepts and definitions, a series of questions and answers, and an illustrative case study.

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Chapter 1 fn *
The Use of Analytical Procedures
1.01
This chapter discusses the concepts and definitions found in AU section 329, Analytical Procedures (AICPA, Professional Standards, vol. 1; AICPA, PCAOB Standards and Related Rules). Also discussed are the four phases of the analytical procedure process: expectation formation, identification, investigation, and evaluation.
1.02
Analytical procedures are a natural extension of the auditor’s understanding of the client’s business, and add to his or her understanding because the key factors that influence the client’s business may be expected to affect the client's financial information. Analytical procedures are used in all three stages of the audit. In the planning stage, the purpose of analytical procedures is to assist in planning the nature, timing, and extent of auditing procedures that will be used to obtain evidential matter for specific account balances or classes of transactions. fn 1 fn † In the substantive testing stage of the audit, the purpose of analytical procedures is to obtain evidence, sometimes in combination with other substantive procedures, to identify misstatements in account balances and thus to reduce the risk that misstatements will remain undetected. fn 2 In the overall review stage, the objective of analytical procedures is to assist the auditor in assessing the conclusions reached and in evaluating the overall financial statement presentation.
1.03    
When designing substantive analytical procedures, the auditor also should evaluate the risk of management override of controls. As part of this process, the auditor should evaluate whether such an override might have allowed adjustments outside of the normal period-end financial reporting process to have been made to the financial statements. Such adjustments might have resulted in artificial changes to the financial statement relationships being analyzed, causing the auditor to draw erroneous conclusions. For this reason, substantive analytical procedures alone are not well suited to detecting fraud.
1.04    
Before using results obtained from substantive analytical procedures, the auditor should either test the design and operating effectiveness of controls over financial information used in the substantive analytical procedures or perform other procedures to support the completeness and accuracy of the underlying information.

Footnotes (Chapter 1 — The Use of Analytical Procedures):
fn * Refer to the Preface of this Guide for important information about the applicability of the professional standards to audits of issuers and non-issuers (see definitions in the Preface). As applicable, this chapter contains dual referencing to both the AICPA and the PCAOB’s professional standards.
    In December of 2005, the Auditing Standards Board (ASB) issued SAS No. 102, Defining Professional Requirements in Statements on Auditing Standard and SSAE No. 13, Defining Professional Requirements in Statements on Standards for Attestation Engagements. These standards established two categories of professional requirements that are identified by specific terms. The words must or is required are used to indicate an unconditional requirement. The word should is used to indicate a presumptively mandatory requirement. The provisions of SAS No. 102 and SSAE No. 13 were effective upon issuance. The specific terms used to define professional requirements in SAS No. 102 and SSAE No. 13 are not intended to apply to interpretive publications (which includes auditing guidance included in AICPA Audit and Accounting Guides) issued under the authority of the ASB, since interpretive publications are not auditing standards. It is the ASB’s intention to make conforming changes to this guide and other interpretive publications over the next several years to remove any language that would imply a professional requirement where not exists.
fn 1 Analytical procedures in the planning stage of the audit may also be useful in understanding the client’s business. In understanding the business, auditors can use the results from analytical procedures to assess auditors’ business risk (refer to AU section 312, Audit Risk and Materiality in Conducting an Audit [AICPA, Professional Standards, vol. 1; AICPA, PCAOB Standards and Related Rules]).
fn † In March 2006, the ASB issued eight SASs related to risk assessment. It is anticipated that to implement the SASs appropriately, many firms will have to make significant revisions to their audit methodologies and train their personnel accordingly. The SASs are effective for audits of financial statements for periods beginning on or after December 15, 2006; earlier application is permitted. Refer to the Preface of this Guide for more information. This Guide will be updated to reflect these eight standards closer to their effective date.
fn 2 The auditors’ use of substantive tests to achieve an audit objective related to a particular assertion may be supported by test of details, analytical procedures, or a combination. The decision about which tests to use to reduce the risk that a material misstatement will not be detected is based on the auditor’s judgment about the expected effectiveness and efficiency of the available procedures (cost/benefit). The following guidance has been added, as described in AU section 329.10 (AICPA, PCAOB Standards and Related Rules) for audits conducted in accordance with PCAOB standards, “For significant risks of material misstatement, it is unlikely that audit evidence obtained from substantive analytical procedures alone will be sufficient.”
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January 2007