ANALYTICAL PROCEDURE (ACCOUNTING): CHARACTERISTICS, ADVANTAGES - DUDAS - 2025

The analytical procedure 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 indicates potential problems with a company's financial records, which can then be investigated further.

It is used in financial auditing to help understand business operations and to identify potential areas of risk that should 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 the expected relationships of the data could reveal some type of misrepresentation or fraudulent reporting committed by the company's management. In most cases, these relationships should remain constant over time.

If not, it means that the financial records are incorrect, possibly due to errors or fraudulent reports.

characteristics

The main purpose of analytical procedures is to obtain assurance, in combination with other audit tests (tests of controls and tests of details), as to what the financial statements say in one or more areas.

The application of analytical procedures is based on the possibility of acceptable relationships 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, changes in accounting, changes in business, random fluctuations or misstatements.

Analytical procedures range from simple comparisons (for example, ending balances from the previous year versus ending balances from the current year) to using complex models that involve many relationships and data elements.

Understanding financial relationships is essential to 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 amounts recorded and the indicators developed in the company with the expectations developed by the auditor. It is these expectations that are the cornerstones of success.

Use in audits

In revision work they are used to give a certain guarantee that the financial statements do not require significant adjustments. They are essential for evaluating financial data and the variations that occur in it.

They are used in the three stages of the audit: in planning, in execution and finally in its review.

Key factors affecting its accuracy

Data breakdown

The more detailed the level at which analytical procedures are performed, the greater their potential precision.

Analytical procedures performed at a high level could mask important but corrective differences, as they are more likely to attract attention than when procedures are performed on disaggregated data.

The objective of the audit procedure will determine whether and to what extent the data should be disaggregated for an analytical procedure.

Data reliability

The more reliable the data, the more accurate the expectation. The data used to form the expectation in an analytical procedure can be external industrial and economic data, collected through independent research.

The source of information available is particularly important. Internal data generated from records that have already been audited, or not subject to manipulation by people who may influence accounting activities, are considered more reliable.

Data predictability

There is a direct correlation between the predictability of the 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

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 the changes in an account over time.

Ratio analysis

It is the comparison, over time, of the relationship between financial statement accounts and non-financial data.

Reasonableness test

The analysis of the accounts between accounting periods. It involves developing a model to form an expectation based on financial data, non-financial data, or both.

Advantage

- 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 ongoing 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 may 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 on a regular basis, taking into account the previous years. This gives the auditor a better overall understanding of the business and individual accounts.

- The auditor can identify risks or deficiencies that had not been previously identified in internal control. This causes the auditor to reevaluate the audit approach and require more assurance with other tests than originally planned.

Disadvantages

- Because analytical procedures often have to be performed on incomplete accounts before final financial statements are prepared, significant adjustments are not taken into account, which are often made at a later stage.

- Many auditors do not trust analytical procedures due to the low precision observed in these and the lack of reliability in the data necessary for the procedures.

- Analytical procedures alone are not adequate to detect fraud. There may be adjustments that have resulted in artificial changes in the analyzed financial statement relationships, 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 variations. This is not the case if there have been significant changes in the business of which the auditor is not aware and which management may attempt to conceal.

References

1. PCAOB (2016). Substantive Analytical Procedures. Taken from: pcaobus.org.
2. Wikipedia, the free encyclopedia (2017). Analytical procedures (finance auditing). Taken from: en.wikipedia.org.
3. Steven Bragg (2018). Analytical procedures. Accounting Tools. Taken from: accountingtools.com.
4. Acca Global (2016). ANALYTICAL PROCEDURES. Taken from: accaglobal.com.
5. My Accounting Course (2018). What are Analytical Procedures? Taken from: myaccountingcourse.com.
6. Audit and Assurance (2012). Advantages and disadvantages of Analytical procedures. Taken from: auditingandassurance.blogspot.com.
7. Mary Ellen Biery (2013). What are analytical procedures and when are they used? Sageworks. Taken from: sageworks.com.