Who on the engagement team performs planning analytical procedures

Project Status

Project completed.

The objective of this project was to revise ISA 300, Planning, in light of the Audit Risk Standards and recent trends in firms' audit methodologies.

The project dealt with the audit procedures and activities performed to properly plan the audit and supervise engagement team members to ensure that the audit is performed in an effective manner.

Audit planning is a continual process throughout the audit engagement. In order to recognize audit planning as a continual process, and to align the guidance on audit planning with the new Audit Risk Standards, the IAASB approved a project to revise ISA 300.

ISA 300 (Revised) deals with planning an audit of financial statements. The revised ISA:

• Requires the auditor to plan the audit so that the engagement will be performed in an effective manner.
• Recognizes that planning involves the engagement partner and other key members of the engagement team to benefit from their experience and insight.
• Recognizes that planning is not a discrete phase of the audit but, instead, a continual and iterative process that continues until the completion of the audit.
• Requires the auditor to perform preliminary engagement activities regarding engagement acceptance and continuance, evaluation of compliance with ethical requirements including independence, and establishing an understanding of the terms of the engagement.
• Requires the auditor to establish an overall audit strategy for the audit that sets the scope, timing and direction of the audit, and that guides the development of the more detailed audit plan.
• Provides guidance on the overall audit strategy in terms of consideration of the resources to deploy for specific audit areas, the timing of when these resources are used, and how such resources are managed, directed and supervised.
• Requires the auditor to develop a detailed audit plan based on the high-level direction provided by the overall audit strategy.
• Requires the auditor to update and change the overall audit strategy and audit plan as necessary during the audit.
• Requires the auditor to plan the nature, timing and extent of direction and supervision of engagement team members and review of their work.
• Establishes documentation requirements.

The IAASB approved the proposed ISA 300 (Revised) in June 2004. The revised ISA is effective for audits of financial statements for periods beginning on or after December 15, 2004.

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Definitions

Analytical procedures are audit procedures used to help conduct a more economic, efficient and effective audit. They consist of studying plausible relationships between both financial and non-financial data, whether within the same period and entity and/or from different periods and entities. Analytical procedures, which are used more for audits of reliability than compliance, may be used to:

• analyse relationships for consistency with each other and with the auditor’s knowledge of the organisation and its activities; or
• predict values which may be compared to actual values.

The term also includes the investigation of identified fluctuations and relationships that are inconsistent with other information or deviate significantly from predicted amounts.

Principles

Considerations

The auditor should bear in mind that analytical procedures are more reliable in a strong control environment with effective internal controls and good external data. However, such procedures require comprehensive and up-to-date information concerning financial and other data, which may not be the case in significant fields of EU activity. Various methods may be used when performing analytical procedures. These range from simple comparisons to complex analyses using advanced statistical techniques, for which appropriate computer software may be necessary. The auditor's choice of procedure is a matter of professional judgement. In general, analytical procedures provide a warning that something appears to be wrong, rather than providing positive, persuasive evidence of what (if anything) is wrong, and thus on their own do not normally provide sufficient, relevant and reliable audit evidence.

Instructions

Process for using analytical procedures

The use of analytical procedures involves acquiring information from various sources in order to determine what is expected; comparing the actual situation with that expectation; investigating the reasons for any discrepancies arising; and evaluating the results, as follows:

When to use analytical procedures

Analytical procedures should be used at the following phases of the audit:

• Planning as risk assessment procedures, in order to identify areas of potential risk and help design further audit procedures;
• Examination: • as substantive procedures, when their use can be more efficient than tests of details and can provide corroboration; and • as part of the overall review at the end of the audit, to help assess if external information is consistent with audit findings.

Substantive analytical procedures

Quality review

In addition to performing tests of details, the auditor may also employ substantive analytical procedures as part of his/her substantive procedures in order to reduce risk to an acceptably low level. Substantive analytical procedures are used to predict values, based on the expectation that relationships among data exist and continue in the absence of known conditions to the contrary. However, the risk of forming an incorrect conclusion may be higher for substantive analytical procedures than for tests of details because of the former's extensive use of the auditor's judgement. Accordingly, quality management procedures are of critical importance.

Reliable data needed

Predictive testing of this sort should only be undertaken on revenue or expenditure streams that are themselves highly predictable and where reliable data are readily available so that the predictions can be made, e.g. interest paid/received on lending and borrowing operations, payments of salaries and allowances to staff, etc.

Part of substantive testing strategy

While substantive analytical procedures will not normally on their own provide sufficient, relevant and reliable substantive audit evidence, it may be possible to use predictive testing as part of the overall substantive testing strategy for material account balances and transaction streams. For example, when, say, 60% of the transactions (by value) are high-value items, these might be tested in detail while a predictive test is used for the remaining 40% of (low-value) transactions. Or, when a small proportion, by value, of transactions is processed at a geographical location which it is not possible or efficient to visit, predictive testing may be used for that location.

Analytical procedures in the overall review

The auditor should apply analytical procedures at or near the end of the audit when forming an overall conclusion. The conclusions drawn from the results of such analytical procedures are intended to corroborate conclusions formed during the audit of individual components and assist in arriving at the overall conclusion and, if required, an opinion. Analytical procedures used at the overall review stage can be the same as those used during the planning phase and hence can be compared against each other. The review may indicate that additional evidence is required.

Resources

Examples of analytical procedures in financial and compliance audits

Audit evidence regarding the reliability of the accounts is mostly secured through tests of details, with substantive analytical procedures also undertaken when appropriate. The main areas in which substantive analytical procedures are employed are in the analytical review of:

• the main accounting data for consistency and reasonableness;
• the accounts regarding off-balance sheet commitments;
• the economic outturn account and segment reporting;small bank balances (those opened in connection with imprests);
• so-called "small" accounts.

Analytical procedures may, in certain circumstances, assist the auditor in evaluating compliance. For example, where allowances under a grants scheme are subject to a maximum value and the number of recipients is known, the auditor may use analytical procedures to establish whether the permitted maximum has been breached. Another example is an analytical review of the consistency of expenditures compared to budget or prior years. Examples of the use of predicted versus actual values:

• the study of changes in an account balance over prior periods leading to a prediction for the current period (e.g. regular payment of a loan over x years);
• computations that give a prediction of a given value, e.g. using farm data to predict per hectare payments per farmer.

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Who on the engagement team performs analytical procedures?

What are planning analytical procedures?

Who is responsible for the planning of the audit?

When Must analytical procedures be performed?