isa 520 (redrafted) - mapping documents

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1

SUPPLEMENT TO EXPOSURE DRAFT,

PROPOSED ISA 520 (REDRAFTED):

MAPPING DOCUMENTS

This supplement to the International Auditing and Assurance Standards Board (IAASB) Exposure

Draft, proposed ISA 520 (Redrafted), “Analytical Procedures” has been prepared by IAASB staff to

demonstrate how the material in extant ISA 520 has been reflected in proposed ISA 520 (Redrafted).

Exhibit 1 identifies sentences describing auditor actions in the present tense and other relevant

statements in extant ISA 520 and indicates whether they are treated as a requirement or as

application and other explanatory material in proposed ISA 520 (Redrafted).

Exhibit 2 maps the text of extant ISA 520 (which may have been reworded as necessary) to proposed

ISA 520 (Redrafted). The highlighted text identifies material that is proposed to be deleted. An

explanation of the proposed deletion and other comments are provided, where appropriate.

Exhibit 3 presents proposed ISA 520 (Redrafted) and shows the source of the text from extant ISA

520 (which may have been reworded as necessary).

The material included herein is provided only to assist readers of the Exposure Draft of proposed

ISA 520 (Redrafted). It is for information purposes only and does not form part of the ExposureDraft. The IAASB has not approved, disapproved, or otherwise acted upon this supplement. It is

neither authoritative nor an official pronouncement nor statement of the IAASB.

Exhibit 1

Proposed Disposition of the Present Tense and Other Statements in the Draft Redrafted

ISA 520

I. Those That Have Been Elevated to a Requirement

Para. Statements in extant ISA 520

New para.

ref.

Rationale and comment

(as necessary)

12 When designing and performing analytical

procedures as substantive procedures, the auditor

will need to consider a number of factors such as

the following:

• The suitability of using substantive analytical

procedures given the assertions (paragraphs

12a and 12b).

• The reliability of the data, whether internal or

external, from which the expectation of

recorded amounts or ratios is developed

(paragraphs 12c and 12d).

• Whether the expectation is sufficiently precise

8

8(a)

8(c)

Essential to the

achievement of the

proposed objective in

paragraph 6(a) of ED-

ISA 520 (Redrafted).

Specifically, it is

necessary that each of

the matters identified in

extant paragraph 12 beconsidered to achieve the

rigor and consistency of

performance expected

when analytical

procedures are



SUPPLEMENT TO PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS

2


New para.

ref.


(as necessary)

to identify a material misstatement at the

desired level of assurance (paragraph 12e).

• The amount of any difference of recorded

amounts from expected values that is

acceptable (paragraph 12f).

8(d)

8(e)

performed as substantive

procedures, such as to be

effective in responding to

assessed risks.Applicable in virtually

all cases.

12b In determining the suitability of substantive

analytical procedures given the assertions, the

auditor considers the following:

(a) The assessment of the risk of material

misstatement...

(b) Any tests of details directed toward the same

assertion…

8(a) Each of the

considerations identified

are essential matters to

be taken account of in

order to achieve

consistent application of

the proposed requirement

in paragraph 8(a) of ED-ISA 520 (Redrafted).

Applicable in virtually

all cases.

12c … In determining whether data is reliable for

purposes of designing substantive analytical

procedures, the auditor considers the following:

(a) Source of the information available …

(b) Comparability of the information available …

(c) Nature and relevance of the information

available …

(d) Controls over the preparation of the

information …

8(c) Each of the

considerations identified

are essential matters to

be taken account of in

order to achieve

consistent application of

the proposed requirementin paragraph 8(c) of ED-


Applicable in virtually

all cases.

18. The investigation of unusual fluctuations and

relationships ordinarily begins with inquiries of

management, followed by:

(a) Corroboration of management’s responses…

(b) Consideration of the need to apply other audit

procedures based on the results of such

inquiries….

10(b)While extant paragraph

18(a) explains further the

extant requirement (and

therefore need not be

elevated to a




3


New para.

ref.


(as necessary)

requirement), paragraph

18(b) is an essential

consideration to ensure

appropriate action (inaddition to inquiry and

corroboration) is taken in

the circumstances where

analytical procedures

identify unusual

relationships requiring

further investigation.

II. Those That Have Been Treated as Application and Other Explanatory Material and

Redrafted


New para.

ref.


(as necessary)

11 The auditor will ordinarily inquire of management

as to the availability and reliability of information

needed to apply substantive analytical procedures

and the results of any such procedures performed

by the entity.

A2 Inquiry of management

may assist the auditor in

understanding the work,

if any, already done, but

it is not essential to the

effective design and

performance of

analytical procedures to be performed by the

auditor. Accordingly, not

considered necessary to

elevate as a requirement.

It may be efficient to use analytical data prepared

by the entity, provided the auditor is satisfied that

such data is properly prepared.

Proposed ISA 500

(Redrafted) establishes

requirements relevant to

the relevance and

reliability of evidence to

be used for audit purposes. Accordingly,

not considered necessary

to elevate as a

requirement.




4


New para.

ref.


(as necessary)

12b In determining the suitability of substantive

analytical procedures given the assertions, the


(a) The assessment of the risk of material

misstatement. The auditor considers the

understanding of the entity and its internal

control, the materiality and likelihood of

misstatement of the items involved, and the

nature of the assertion in determining whether

substantive analytical procedures are suitable

…

A6 Application guidance in

nature, explaining the

components of the

auditor’s risk assessment. ISA 315

(Redrafted) establishes

the relevant

requirements in this

regard and, accordingly,

it is unnecessary to

repeat the requirements

in ED-ISA 520

(Redrafted).

12d The auditor considers testing the controls, if any,over the entity’s preparation of information used by

the auditor in applying substantive analytical

procedures. When such controls are effective, the

auditor has greater confidence in the reliability of

the information and, therefore, in the results of

substantive analytical procedures …

A10 Matters covered byrelated requirements

established in ISA 330

(Redrafted); unnecessary

to repeat in ED-ISA 520

(Redrafted).

12d … In determining the audit procedures to apply to

the information upon which the expectation for

substantive analytical procedures is based, the

auditor considers the guidance in paragraph 11 of ISA 500, “Audit Evidence.”

A10 Reference guidance;

unnecessary to establish

as a requirement in ED-

ISA 520 (Redrafted) as proposed ISA 200

(Revised and Redrafted)

requires the auditor to

comply with all ISAs

relevant to the audit.

12e In assessing whether the expectation can be

developed sufficiently precise to identify a material

misstatement at the desired level of assurance, the

auditor considers factors such as the following:

• The accuracy with which the expected results of

substantive analytical procedures can be

predicted …

• The degree to which information can be

A12 The factors identified

are not necessarily

applicable in virtually all

cases when performing

analytical procedures;their relevance will vary

depending on the

circumstances.

Accordingly, they are

considered application




5


New para.

ref.


(as necessary)

disaggregated …

• The availability of the information, both

financial and non-financial …

material in nature,

supporting the related

proposed new

requirement in paragraph 9(d) of ED-


12f In designing and performing substantive analytical

procedures, the auditor considers the amount of

difference from expectation that can be accepted

without further investigation. This consideration is

influenced primarily by materiality and the

consistency with the desired level of assurance …

A13 Application material in

nature, supporting the

related proposed new

requirement in

paragraph 9(e) of ED-


12f … The auditor increases the desired level of

assurance as the risk of material misstatement

increases by reducing the amount of difference

from the expectation that can be accepted without

further investigation.


nature, supporting the

related proposed new

requirement in

paragraph 9(e) of ED-

ISA 520 (Redrafted). In

addition, ISA 330

(Redrafted) already

establishes a

requirement for the

auditor to obtain more

persuasive evidence thehigher the auditor’s

assessment of risk.

12g When the auditor performs substantive procedures

at an interim date and plans to perform substantive

analytical procedures with respect to the

intervening period, the auditor considers how the

matters discussed in paragraphs 12a-12f affect the

ability to obtain sufficient appropriate audit

evidence for the remaining period.


nature.

This includes considering whether the period end

balances of the particular classes of transactions or

account balances are reasonably predictable with

respect to amount, relative significance, and

composition. See ISA 330, paragraphs 56-61, for

additional guidance.

Requirements relevant to

audit procedures

performed at an interim

date are established in

ISA 330 (Redrafted);

unnecessary to repeat in




6


New para.

ref.


(as necessary)

ED-ISA 520

(Redrafted).




7

Mapping Document

This mapping document demonstrates how the material in the extant ISA 520 has been reflected in the propose

identifies material that is proposed to be eliminated or repositioned as a result of redrafting. An explanation comments are provided, where appropriate.

Extant ISA 520

New

para.

ref.

Introduction

1. The purpose of this International Standard on Auditing (ISA) is to establish standards and provide guidance on the application of analytical procedures during an audit.

1

2. The auditor should apply analytical procedures as risk assessment procedures to

obtain an understanding of the entity and its environment and in the overall review at

the end of the audit. Analytical procedures may also be applied as substantive procedures.

6

3.

“Analytical procedures” means evaluations of financial information made by a study of plausible relationships among both financial and non-financial data. Analytical procedures

also encompass the investigation of identified fluctuations and relationships that are

inconsistent with other relevant information or deviate significantly from predicted amounts.

7




8

Extant ISA 520

New

para.

ref.

Nature and Purpose of Analytical Procedures

4. Analytical procedures include the consideration of comparisons of the entity’s financial

information with, for example:

• Comparable information for prior periods.

• Anticipated results of the entity, such as budgets or forecasts, or expectations of the

auditor, such as an estimation of depreciation.

• Similar industry information, such as a comparison of the entity’s ratio of sales toaccounts receivable with industry averages or with other entities of comparable size in

the same industry.

2

5. Analytical procedures also include consideration of relationships:

• Among elements of financial information that would be expected to conform to a

predictable pattern based on the entity’s experience, such as gross margin percentages.

• Between financial information and relevant non-financial information, such as payroll

costs to number of employees.

3

6. Various methods may be used in performing the above audit procedures. These range from

simple comparisons to complex analyses using advanced statistical techniques. Analytical

procedures may be applied to consolidated financial statements, financial statements of

components (such as subsidiaries, divisions or segments) and individual elements of

financial information. The auditor’s choice of audit procedures, methods and level of

4




9

Extant ISA 520

New

para.

ref.

application is a matter of professional judgment.

7. Analytical procedures are used for the following purposes:

(a) As risk assessment procedures to obtain an understanding of the entity and its

environment (paragraphs 8-9).

(b) As substantive procedures when their use can be more effective or efficient than tests

of details in reducing the risk of material misstatement at the assertion level to an

acceptably low level (paragraphs 10-19).

(c) As an overall review of the financial statements at the end of the audit (paragraph

13).

-

Analytical Procedures as Risk Assessment Procedures

8.1 The auditor should apply analytical procedures as risk assessment procedures to

obtain an understanding of the entity and its environment.

8.2 Application of analytical procedures may indicate aspects of the entity of which the auditor

was unaware and will assist in assessing the risks of material misstatement in order todetermine the nature, timing and extent of further audit procedures.

-

-




10

Extant ISA 520

New

para.

ref.

9. Analytical procedures applied as risk assessment procedures use both financial and non-

financial information, for example, the relationship between sales and square footage of

selling space or volume of goods sold. Paragraph 10 of ISA 315, “Understanding the Entity

and Its Environment and Assessing the Risks of Material Misstatement” contains additional

guidance on applying analytical procedures as risk assessment procedures.

-

Analytical Procedures as Substantive Procedures

10. The auditor designs and performs substantive procedures to be responsive to the related assessment of the risk of material misstatement at the assertion level. The auditor’s

substantive procedures at the assertion level may be derived from tests of details, from

substantive analytical procedures, or from a combination of both.

The decision about which audit procedures to use to achieve a particular audit objective is

based on the auditor’s judgment about the expected effectiveness and efficiency of the

available audit procedures in reducing the assessed risk of material misstatement at the

assertion level to an acceptably low level.

-

A1

10. The auditor will ordinarily inquire of management as to the availability and reliability of

information needed to apply substantive analytical procedures and the results of any such procedures performed by the entity. It may be efficient to use analytical data prepared by the

entity, provided the auditor is satisfied that such data is properly prepared.

A2

11. When designing and performing analytical procedures as substantive procedures, the auditor

will need to consider a number of factors such as the following:

8




11

Extant ISA 520

New

para.

ref.

• The suitability of using substantive analytical procedures given the assertions

(paragraphs 12a and 12b).

• The reliability of the data, whether internal or external, from which the expectation of

recorded amounts or ratios is developed (paragraphs 12c and 12d).

• Whether the expectation is sufficiently precise to identify a material misstatement at the

desired level of assurance (paragraph 12e).

• The amount of any difference of recorded amounts from expected values that is

acceptable (paragraph 12f).

Suitability of Using Substantive Analytical Procedures Given the Assertions

12a. Substantive analytical procedures are generally more applicable to large volumes of

transactions that tend to be predictable over time. The application of substantive analytical

procedures is based on the expectation that relationships among data exist and continue in

the absence of known conditions to the contrary. The presence of these relationships

provides audit evidence as to the completeness, accuracy and occurrence of transactions

captured in the information produced by the entity’s information system. However, reliance

on the results of substantive analytical procedures will depend on the auditor’s assessment of

the risk that the analytical procedures may identify relationships as expected when, in fact, amaterial misstatement exists.

A3

12b. In determining the suitability of substantive analytical procedures given the assertions, the





12

Extant ISA 520

New

para.

ref.

(a) The assessment of the risk of material misstatement. The auditor considers the

understanding of the entity and its internal control, the materiality and likelihood of

misstatement of the items involved, and the nature of the assertion in determining

whether substantive analytical procedures are suitable. For example, if controls over

sales order processing are weak, the auditor may place more reliance on tests of details

rather than substantive analytical procedures for assertions related to receivables. As

another example, when inventory balances are material, the auditor ordinarily does not

rely only on substantive analytical procedures when performing audit procedures on

the existence assertion. ISA 330, “The Auditor’s Procedures in Response to Assessed

Risks” indicates that, when the approach to significant risks consists only of

substantive procedures, the audit procedures appropriate to address such significantrisks consist of tests of details only, or a combination of tests of details and substantive

analytical procedures.

(b) Any tests of details directed toward the same assertion. Substantive analytical

procedures may also be considered appropriate when tests of details are performed on

the same assertion. For example, when auditing the collectibility of accounts

receivable, the auditor may apply substantive analytical procedures to an aging of

customers’ accounts in addition to tests of details on subsequent cash receipts.

8(a),

A6

8(a),

A7

The Reliability of the Data

12c. The reliability of data is influenced by its source and by its nature and is dependent on the

circumstances under which it is obtained. In determining whether data is reliable for

purposes of designing substantive analytical procedures, the auditor considers the following:

(a) Source of the information available. For example, information is ordinarily more

A9

8(c),




13

Extant ISA 520

New

para.

ref.

reliable when it is obtained from independent sources outside the entity.

(b) Comparability of the information available. For example, broad industry data may

need to be supplemented to be comparable to that of an entity that produces and sells

specialized products.

(c) Nature and relevance of the information available. For example, whether budgets have

been established as results to be expected rather than as goals to be achieved.

(d) Controls over the preparation of the information. For example, controls over the

preparation, review and maintenance of budgets.

A9

8(c),

A9

8(c),

A9

8(c),

A9

12d. The auditor considers testing the controls, if any, over the entity’s preparation of

information used by the auditor in applying substantive analytical procedures. When such

controls are effective, the auditor has greater confidence in the reliability of the information

and, therefore, in the results of substantive analytical procedures. The controls over non-

financial information can often be tested in conjunction with other tests of controls. For

example, an entity in establishing controls over the processing of sales invoices may

include controls over the recording of unit sales. In these circumstances, the auditor could

test the operating effectiveness of controls over the recording of unit sales in conjunction

with tests of the operating effectiveness of controls over the processing of sales invoices.

Alternatively, the auditor may consider whether the information was subjected to audit

testing in the current or prior period. In determining the audit procedures to apply to the

information upon which the expectation for substantive analytical procedures is based, the

auditor considers the guidance in paragraph 11 of ISA 500, “Audit Evidence.”

A10




14

Extant ISA 520

New

para.

ref.

Whether the Expectation is Sufficiently Precise

12e. In assessing whether the expectation can be developed sufficiently precise to identify a

material misstatement at the desired level of assurance, the auditor considers factors such as

the following:

• The accuracy with which the expected results of substantive analytical procedures can

be predicted . For example, the auditor will ordinarily expect greater consistency in

comparing gross profit margins from one period to another than in comparing

discretionary expenses, such as research or advertising.

• The degree to which information can be disaggregated. For example, substantive

analytical procedures may be more effective when applied to financial information on

individual sections of an operation or to financial statements of components of a

diversified entity, than when applied to the financial statements of the entity as a whole.

• The availability of the information, both financial and non-financial. For example, the

auditor considers whether financial information, such as budgets or forecasts, and non-

financial information, such as the number of units produced or sold, is available to

design substantive analytical procedures. If the information is available, the auditor also

considers the reliability of the information as discussed in paragraphs 12c and 12d

above.

A12

Amount of Difference of Recorded Amounts from Expected Values that is Acceptable

12f. In designing and performing substantive analytical procedures, the auditor considers the

amount of difference from expectation that can be accepted without further investigation.

A13




15

Extant ISA 520

New

para.

ref.

This consideration is influenced primarily by materiality and the consistency with the

desired level of assurance. Determination of this amount involves considering the possibility

that a combination of misstatements in the specific account balance, class of transactions, or

disclosure could aggregate to an unacceptable amount. The auditor increases the desired

level of assurance as the risk of material misstatement increases by reducing the amount of

difference from the expectation that can be accepted without further investigation.

Paragraphs 17 and 18 below discuss the auditor’s response when the amount of difference

between the expected value and the reported value exceeds the amount that can be accepted

without further investigation.

12g. When the auditor performs substantive procedures at an interim date and plans to performsubstantive analytical procedures with respect to the intervening period, the auditor

considers how the matters discussed in paragraphs 12a-12f affect the ability to obtain

sufficient appropriate audit evidence for the remaining period. This includes considering

whether the period end balances of the particular classes of transactions or account balances

are reasonably predictable with respect to amount, relative significance, and composition.

See ISA 330, paragraphs 56-61, for additional guidance.

A14

Analytical Procedures in the Overall Review at the End of the Audit

13. The auditor should apply analytical procedures at or near the end of the audit when

forming an overall conclusion as to whether the financial statements as a whole areconsistent with the auditor’s understanding of the entity.

The conclusions drawn from the results of such audit procedures are intended to corroborate

conclusions formed during the audit of individual components or elements of the financial

statements and assist in arriving at the overall conclusion as to the reasonableness of the

9

A15,

A16




16

Extant ISA 520

New

para.

ref.

financial statements. However, they may also identify a previously unrecognized risk of

material misstatement. In such circumstances, the auditor may need to re-evaluate the

planned audit procedures, based on the revised consideration of assessed risks for all or some

of the classes of transactions, account balances, or disclosures and related assertions.

14.-16. Paragraphs 14-16 were deleted when the Audit Risk Standards1

became effective. -

Investigating Unusual Items

17. When analytical procedures identify significant fluctuations or relationships that are

inconsistent with other relevant information or that deviate from predicted amounts,

the auditor should investigate and obtain adequate explanations and appropriate

corroborative audit evidence.

10

18. The investigation of unusual fluctuations and relationships ordinarily begins with inquiries

of management, followed by:

(a) Corroboration of management’s responses, for example, by comparing them with the

auditor’s understanding of the entity and other audit evidence obtained during the

course of the audit; and

(b) Consideration of the need to apply other audit procedures based on the results of such

inquiries, if management is unable to provide an explanation or if the explanation is

A18

10(b),

1 The Audit Risk Standards comprise ISA 315, “Understanding the Entity and Its Environment and Assessing the Risks o

Auditor’s Procedures in Response to Assessed Risks,” and ISA 500, “Audit Evidence.” The Audit Risk Standards gave r

other ISAs.




17

Extant ISA 520

New

para.

ref.

not considered adequate. A19

Public Sector Perspective

1. The relationships between individual financial statement items traditionally considered in

the audit of business entities may not always be appropriate in the audit of governments or

other non-business public sector entities; for example, in many such public sector entities

there is often little direct relationship between revenues and expenditures. In addition,

because expenditure on the acquisition of assets is frequently non-capitalized, there may be

no relationship between expenditures on, for example, inventories and fixed assets and the

amount of those assets reported in the financial statements. In addition, in the public sector,industry data or statistics for comparative purposes may not be available. However, other

relationships may be relevant, for example, variations in the cost per kilometer of road

construction or the number of vehicles acquired compared with vehicles retired. Where

appropriate, reference has to be made to available private sector industry data and

statistics. In certain instances, it may also be appropriate for the auditor to generate an in-

house database of reference information.

A8




18

Exhibit 3

Mapping Document

Paragraph of

extant ISA 520 Proposed ISA 520 (Redrafted)

Introduction

Scope of this ISA

1

1. The purpose of tThis International Standard on Auditing (ISA) is to

establish standards and provide guidance on deals with the auditor’s use

the applicationof analytical procedures as substantive procedures in

response to assessed risks, and as procedures that assist in arriving at the

auditor’s overall conclusion during in an audit of financial statements.

The use of analytical procedures as risk assessment procedures is dealt

with in ISA 315 (Redrafted).

Nature of Analytical Procedures

4.1 2. Analytical procedures include the consideration of comparisons of the

entity’s financial information with, for example:

4 1st

bullet

• Comparable information for prior periods.

4 2nd

bullet

• Anticipated results of the entity, such as budgets or forecasts, or

expectations of the auditor, such as an estimation of depreciation.

4 3rd

bullet

• Similar industry information, such as a comparison of the entity’s

ratio of sales to accounts receivable with industry averages or with

other entities of comparable size in the same industry.

5.1 3. Analytical procedures also include consideration of relationships, for

example:

5 1st

bullet

• Among elements of financial information that would be expected to

conform to a predictable pattern based on the entity’s experience,

such as gross margin percentages.

5 2nd

bullet

• Between financial information and relevant non-financial

information, such as payroll costs to number of employees.

6 4. Various methods may be used in to performing the above auditanalytical

procedures. These methods range from performing simple comparisons

to performing complex analyses using advanced statistical techniques.




19

Paragraph of


Analytical procedures may be applied to consolidated financial

statements, financial statements of components (such as subsidiaries,

divisions, branches or segments) and individual elements of financial

information. The auditor’s choice of audit procedures, methods and level

of application is a matter of professional judgment.

Effective Date

New 5. This ISA is effective for audits of financial statements for periods

beginning on or after [December 15, 2009].

Objectives

2.1 6. The objectives of the auditor should apply are:

2.1 and 2.2

(a) When using analytical procedures as substantive procedures inresponse to assessed risks, to design and perform such analytical

procedures so that they are effective in responding as risk

assessment procedures to obtain an understanding of the entity and

its environment andAnalytical procedures may also be applied as

substantive proceduresto assessed risks of material misstatement in

the financial statements at the assertion level; and

2.1 (b) To design and perform analytical procedures that assist in arriving

at in the overall conclusion review at the end of in an the audit of

the financial statements.

Definition

3 7. For the purposes of the ISAs, the term “analytical procedures” means

evaluations of financial information made by a study of plausible

relationships among both financial and non-financial data. Analytical

procedures also encompass the investigation of identified fluctuations

and relationships that are inconsistent with other relevant information or

deviate that differ from expected values by a significantly from predicted

amounts.

Requirements


8.1 The auditor should apply analytical procedures as risk assessment procedures

to obtain an understanding of the entity and its environment.




20

Paragraph of


Analytical Procedures as Substantive Procedures

12 8. In deciding to use, and Wwhen designing and performing, analytical

procedures, either alone or in combination with test of details, assubstantive procedures in accordance with ISA 330 (Redrafted), the

auditor shall will need to consider a number of factors such as the

following:

(a) Determine tThe suitability of using substantive analytical

procedures given the assertions, taking account of the assessed

risks of material misstatement and tests of details, if any, directed

towards the same assertion (paragraphs 12a and 12b).;

(b) Develop an expectation of recorded amounts or ratios;

(b)(c) EvaluateThe reliability of data, whether internal or external, from

which the auditor’s expectation of recorded amounts or ratios is

developed, taking account of source, comparability, and nature and

relevance of information available, and controls over preparation

(paragraphs 12c and 12d).;

(c)(d) Evaluate wWhether the expectation is sufficiently precise to

identify a material misstatement that, when aggregated with other

misstatements, may cause the financial statements to be materially

misstatedat the desired level of assurance (paragraph 12e).;

(d)(e) Determine tThe amount of any difference of recorded amountsfrom expected values that is acceptable without further

investigation as required by paragraph 10 (paragraph 12f).

Analytical Procedures that Assist in Arriving at the Auditor’s Overall

Conclusion in an Audit of Financial Statements

13.1 9. The auditor should apply analytical procedures at or near the endshall of

the audit when design and perform analytical procedures that assist in

arriving at the forming an overall conclusion as to whether the financial

statements as a whole are consistent with the auditor’s understanding of

the entity.

Investigating Results of Analytical Procedures

17 10. IfWhen analytical procedures identify significant fluctuations or

relationships that are inconsistent with other relevant information or that




21

Paragraph of


deviate differ from expected values by a significant amountpredicted

amounts, the auditor should shall investigate such differences by and

obtain adequate explanations and appropriate corroborative audit

evidence.:

(a) Inquiring of management and obtaining appropriate audit evidence

relevant to management’s responses; and

(b) Performing other audit procedures as necessary in the

circumstances.

Application and Other Explanatory Material


8.2 Analytical procedures may indicate aspects of the entity of which theauditor was unaware and will assist in assessing the risks of material

misstatement in order to determine the nature, timing and extent of further

audit procedures. [See proposed conforming amendment to ISA 315

(Redrafted)]

9 Analytical procedures applied as risk assessment procedures use both

financial and non-financial information, for example, the relationship

between sales and square footage of selling space or volume of goods sold.

[See proposed conforming amendment to ISA 315 (Redrafted)]

Considerations Specific to Smaller Entities

IAPS 1005.71 The nature and extent of analytical procedures at the planning stage of the

audit of a small entity may be limited by the timeliness of processing of

transactions by the entity. Small entities may not have interim or monthly

financial information that can be used in analytical procedures at the

planning stage. The auditor may, as an alternative, conduct a brief review of

the general ledger or such other accounting records as may be readily

available. [See proposed conforming amendment to ISA 315 (Redrafted)]

Analytical Procedures as Substantive Procedures in Response to

Assessed Risks

10.2-3 A1. The auditor’s substantive procedures at the assertion level may be

derived from tests of details, from substantive analytical procedures, or

from a combination of both. The decision about which audit procedures

to use is based on the auditor’s judgment about the expected

effectiveness and efficiency of the available audit procedures to reduce




22

Paragraph of


audit risk at the assertion level to an acceptably low level.

11 A2. The auditor will ordinarily may inquire of management as to the

availability and reliability of information needed to apply substantive

analytical procedures as substantive procedures, and the results of anysuch procedures performed by the entity. It may be efficient effective to

use analytical data prepared by the entity management, provided the

auditor is satisfied that such data is properly prepared.

Suitability of Using Substantive Analytical Procedures Given the Assertions

12a A3. Substantive aAnalytical procedures as substantive procedures are

generally more applicable to large volumes of transactions that tend to be

predictable over time. The application of substantive analytical

procedures is based on the expectation that relationships among data

exist and continue in the absence of known conditions to the contrary.The presence of these relationships provides audit evidence as to the

completeness, accuracy and occurrence of transactions captured in the

information produced by the entity’s information system relevant to

financial reporting. However, reliance on the results the suitability of a

particular substantive analytical procedures would will depend upon the

auditor’s assessment of the risk how effective it will be in detecting a

misstatement that, when aggregated with other misstatements, may cause

the financial statements to be materially misstated the analytical

procedures may identify relationships as expected when, in fact, a

material misstatement exists.

IAPS 1005.73 A4. In some cases, even an unsophisticated predictive model may be

effective as an analytical procedure. For example, where an entity has

employed a known number of staff at fixed rates of pay throughout the

period, it may be possible for the auditor to use this data to estimate the

total payroll costs for the period with a high degree of accuracy, thereby

providing audit evidence for a significant item in the financial statements

and reducing the need to perform tests of details on the payroll. The use

of widely recognized trade ratios (such as profit margins for different

types of retail entities) can often be used effectively in analytical

procedures to provide evidence to support the reasonableness of recorded

items.

IAPS 1005.75 A5. Different types of analytical procedures provide different levels of

assurance. Analytical procedures involving, for example, the prediction

of total rental income on a building divided into apartments, taking the

rental rates, the number of apartments and vacancy rates into




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consideration, can provide be a very persuasive source of evidence and

may eliminate the need for further verification by means of tests of

details, provided the components are appropriately verified. In contrast,

calculation and comparison of gross margin percentages as a means of

confirming a revenue figure may provide be a less persuasive source of

evidence, but may provide useful corroboration if used in combination

with other audit procedures.

12b.1 and 12b(a) A6. The In determination of ing the suitability of substantive analytical

procedures as substantive procedures given the assertions is influenced

by, the auditor may consider the following: Tthe nature of the assertion

and the auditor’s assessment of the risk of material misstatement. The

auditor considers the understanding of the entity and its internal control,

the materiality and likelihood of misstatements of the items involved,

and the nature of the assertion in determining whether analytical

procedures are suitable. For example if controls over sales order

processing is are weak, the auditor may place more reliance on tests of

details rather than substantive analytical procedures for assertions related

to receivables; or when inventory balances are material, the auditor may

decide not to rely only on substantive analytical procedures when

performing audit procedures on the existence assertion.

12b(b) A7. Any tests of details directed toward the same assertion. Substantive

aAnalytical procedures as substantive procedures may also be considered

appropriate when tests of details are performed on the same assertion.

For example when obtaining audit evidence regarding the valuation

assertion for auditing the collectibility of accounts receivable balances,

the auditor may apply substantive analytical procedures to an aging of

customers’ accounts in addition to tests of details on subsequent cash

receipts to determine the collectability of the receivables.




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Considerations Specific to Public Sector Entities

PSP.1 A8. The relationships between individual financial statement items

traditionally considered in the audit of business entities may not always be appropriate relevant in the audit of governments or other non-business

public sector entities; for example, in many such public sector entities

there is often may be little direct relationship between revenues and

expenditures. In addition, because expenditure on the acquisition of

assets is frequently may not be non-capitalized, there may be no

relationship between expenditures on, for example, inventories and fixed

assets and the amount of those assets reported in the financial statements.

In additionAlso, in the public sector, industry data or statistics for

comparative purposes may not be available in the public sector.

However, other relationships may be relevant, for example, variations in

the cost per kilometer of road construction or the number of vehiclesacquired compared with vehicles retired. Where appropriate, reference

has to be made to available private sector industry data and statistics. In

certain instances, it may also be appropriate for the auditor to generate an

in-house database of reference information.

The Reliability of the Data

12c.1-2 A9. The reliability of data is influenced by its source and by its nature, and is

dependent on the circumstances under which it is obtained. Accordingly,

the following are relevant when In determining whether data is reliable

for purposes of designing substantive analytical procedures assubstantive procedures, the auditor considers the following:

12c(a) (a) Source of the information available. For example, information may

be more reliable when it is obtained from independent sources

outside the entity;.

12c(b) (b) Comparability of the information available. For example, broad

industry data may need to be supplemented to be comparable to

that of an entity that produces and sells specialized products;.

12c(c) (c) Nature and relevance of the information available. For example,

whether budgets have been established as results to be expected

rather than as goals to be achieved;. and

12c(d) (d) Controls over the preparation of the information that are designed

to ensure its completeness, accuracy and validity. For example,

controls over the preparation, review and maintenance of budgets.




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12d A10. The auditor may considers testing the operating effectiveness of controls,

if any, over the entity’s preparation of information used by the auditor in

applying substantive analytical procedures as substantive procedures in

response to assessed risks. When such controls are effective, the auditor generally has greater confidence in the reliability of the information and,

therefore, in the results of substantive analytical procedures. The

operating effectiveness of controls over non-financial information can

may often be tested in conjunction with other tests of controls. For

example, an entity in establishing controls over the processing of sales

invoices, an entity may include controls over the recording of unit sales.

In these circumstances, the auditor could test the operating effectiveness

of controls over the recording of unit sales in conjunction with tests of

the operating effectiveness of controls over the processing of sales

invoices. Alternatively, the auditor may consider whether the

information was subjected to audit testing in the current or prior period.In determining the audit procedures to apply to the information upon

which the expectation for substantive analytical procedures is based, the

auditor considers the guidance in paragraph 11 of Proposed ISA 500

(Redrafted) establishes requirements and provides guidance in

determining the audit procedures to apply to the information upon which

the expectation for substantive analytical procedures is based.“Audit

Evidence.”

Considerations Specific to Smaller Entities

IAPS 1005.73 A11. An unsophisticated predictive model can sometimes be effective as ananalytical procedure. For example, where a small entity has employed a

known number of staff at fixed rates of pay throughout the period, it may

be possible for the auditor to use this data to estimate the total payroll

costs for the period with a high degree of accuracy, thereby providing

audit evidence for a significant item in the financial statements and

reducing the need to perform tests of details on the payroll. The use of

widely recognized trade ratios (such as profit margins for different types

of retail entities) can often be used effectively in analytical procedures to

provide evidence to support the reasonableness of recorded items. The

extent of use of analytical procedures as substantive procedures in

response to assessed risks in the audit of a smaller entity may be limited because of the non-availability unreliability, or lack, of information on

which the analytical procedures are based.

Evaluation of whether the Expectation is Sufficiently Precise




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12e A12. When the auditor assessesIn evaluating determining whether the

expectation can be developed sufficiently precisely to identify a material

misstatement that, when aggregated with other misstatements, may cause

the financial statements to be materially misstatedat the desired level of assurance, the auditor may consider matters such as the following:

12e 1st

bullet • The accuracy with which the expected results of substantive

analytical procedures can be predicted. For example, the auditor will

ordinarily may expect greater consistency in comparing gross profit

margins from one period to another than in comparing discretionary

expenses, such as research or advertising.

12e 2nd

bullet • The degree to which information can be disaggregated. For

example, substantive analytical procedures may be more effective

when applied to financial information on individual sections of anoperation or to financial statements of components of a diversified

entity, than when applied to the financial statements of the entity as

a whole.

12e 3rd

bullet • The availability of the information, both financial and non-financial.

For example, the auditor may considers whether financial

information, such as budgets or forecasts, and non-financial

information, such as the number of units produced or sold, is

available to design substantive analytical procedures as substantive

procedures. If the information is available, the auditor may also

considers the reliability of the information as discussed in paragraphs 12c and 12d A9 and A10 above.

Amount of Difference of Recorded Amounts from Expected Values that is

Acceptable

12f A13. In designing and performing substantive analytical procedures, tThe

auditor’s determination considers of the amount of difference from

expectation that can be accepted without further investigation . This

consideration is influenced primarily by materiality and the consistency

with the desired level of assurance, taking account of . Determination of

this amount involves considering the possibility that a misstatement,when aggregated with other misstatements, may cause the financial

statements to be materially misstatedcombination of misstatements in the

specific account balance, class of transactions, or disclosure could

aggregate to an unacceptable amount. The auditor ISA 330 (Redrafted)

requires the auditor to obtain more persuasive audit evidence the higher

the auditor’s assessment of risk. Accordingly, a smaller amount of




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difference that would be considered acceptable without investigation is

needed to achieve the desired level assurance as the assessed risk

increases. increases the desired level of assurance as the risk of material

misstatement increases by reducing the amount of difference from the

expectation that can be accepted without further investigation.

Paragraphs 17 and 18 below discuss the auditor’s response when the

amount of difference between the expected value and the reported value

exceeds the amount that can be accepted without further investigation..

12g A14. When the auditor performed substantive procedures at an interim date

and plans to perform substantive analytical procedures with respect to

the intervening period, the auditor considers how tThe matters discussed

in paragraphs 9 (a)-(d) 12a-12fare relevant irrespective of whether the

auditor performs analytical procedures as substantive procedures on the

entity’s period end financial statements, or at an interim date and plans to

perform analytical procedures with respect to the intervening period as

part of the period end. affect the auditor’s ability to obtain sufficient

appropriate audit evidence for the remaining period. This includes

considering whether the period end balances of the particular classes of

transactions or account balances are reasonably predictable with respect

to amount, relative significance, and composition. See ISA 330

(Redrafted), paragraphs 56-61 forestablishes requirements and provides

guidance on substantive procedures performed at an interim date

additional guidance.

Analytical Procedures that Assist in Arriving at the Auditor’s Overall

Conclusion in an Audit of Financial Statements

13.2-4 A15. The conclusions drawn from the results of such audit analytical

procedures during the overall review stage of the audit are intended to

corroborate conclusions formed during the audit of individual

components or elements of the financial statements, and assist in arriving

at the auditor’s overall conclusion on whether the financial statements as

a whole are free from material misstatementsas to the reasonableness of

the financial statements.

A16. However, theyThe results of such analytical procedures may also

identify a previously unrecognized risk of material misstatement. In suchcircumstances, the auditor ISA 315 (Redrafted) requires the auditor to

revise the auditor’s assessment of the risks of material misstatement and

modify the further planned audit procedures accordingly. may need to re-

evaluate the planned audit procedures, based on the revised consideration

of assessed risks for all or some of the classes of transactions, account




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balances, or disclosures and related assertions.

IAPS 1005.76

included under

general applicationmaterial as it is not

only applicable to

smaller entities

A17. The analytical procedures performed as part of the auditor’s overall

review of the financial statementsat this stage of the audit are often very

similar to those that would be used as risk assessment proceduresat the planning stage of the audit. These may include the following:

• Comparing the financial statements for the current year to those of

previous years.

• Comparing the financial statements to any budgets, forecasts, or

management expectations.

• Reviewing trends in any important financial statement ratios.

• Considering whether the financial statements adequately reflect anychanges in the entity of which the auditor is aware.

• Inquiring into unexplained or unexpected features of the financial

statements.

Investigating Results of Analytical Procedures

18 and 18(a) A18. The investigation of unusual fluctuations and relationships ordinarily

begins with inquiries of management, followed by: Corroborating Audit

evidence relevant to management’s responses for example, by comparing

them may be obtained by considering how those responses compare with

the auditor’s understanding of the entity and its environment, or and with

other audit evidence obtained during the course of the audit.; and

18(b) A19. Consideration of tThe need to apply other audit procedures based on the

results of such inquiries, if may arise when, for example, management is

unable to provide an explanation, or if the explanation is not considered

adequate.