Analytical procedures evaluate financial information by examining economically plausible connections among amounts, operating activity, and other relevant information. Their usefulness depends on whether the relationship should hold under the entity's actual circumstances.
The auditor may perform analytical procedures at several stages, but their purpose determines the evidence needed and the conclusion supported. The same comparison can identify a planning concern without being precise enough to substantiate an account.
An assertion is a management representation embodied in financial statement information, such as whether expenses are complete or accurately measured. The auditor evaluates which possible error a proposed relationship could reveal.
- Salaries estimated from independently supported staffing and pay rates can reveal omitted or excessive compensation expense.
- Interest estimated from supported debt terms can address interest expense accuracy and completeness for the borrowing population considered.
- An interest calculation based only on recorded loans cannot establish that every borrowing has been identified.
- A plausible total salary expense does not establish that every recorded employee exists or that every payment reached its intended recipient.
Common mistakes
- Wrong time base. Applying December's staffing and salary rate to all twelve months ignores the distinct first-half population in Elmont's expectation.
- Overstated evidential reach. Interest derived from recorded borrowings does not establish completeness of the borrowing population.
- Threshold selected afterward. Raising Elmont's $12,000 threshold to $15,000 after finding the residual would avoid the required investigation without improving evidence.
Bottom line
- Risk-assessment and near-completion analytics are required; substantive analytics are an optional procedure choice.
- Suitability depends on the assertion, relationship, input reliability, precision, assessed risk, and assurance needed.
- Independently reasoned expectations reflect relevant operating drivers, timing, populations, and accounting classifications.
- The acceptable difference is established before evaluation and considers materiality, desired assurance, and possible combined misstatements.
Exam shortcut
The requested conclusion determines the procedure's purpose: planning risk, support for a named assertion, or overall financial statement consistency. Changes in headcount, rates, dates, and account composition determine the calculation. A change in an operating driver requires separate periods. The original expectation and threshold remain documented. Each explanation connects to evidence, each supported component enters once, and the residual remains separately identified.
The full lesson (about 4,780 words, 32 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- III.D2
Browse all free CPA AUD lessons or jump into free CPA AUD practice questions.