What are Analytical Procedures?
Analytical procedures = using comparisons and relationships to spot anything “weird” in the numbers.
Examples:
- Compare this year vs last year sales.
- Compare gross profit margin vs industry average.
- Compare ratios (e.g. current ratio) to previous years.
These are usually done at planning stage of the audit → called preliminary analytical procedures.
- To assist in planning the nature, timing & extend of Audit procedures
- To identify potential errors
- To determine areas thatr equire detailed checking & substantive tests
Why auditors do them:
1. Understand the business
See how the company is performing overall (profits, sales trends, etc.)
2. Identify unusual items / trends
Example: Sales go up 50%, but cost of sales only up 5% → something to investigate.
3. Help plan the audit
- Decide where the higher risk areas are (e.g. inventories, receivables)
- Decide how much work is needed in each area.
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