Analytical Review Procedures

ISA 520: ANALYTICAL REVIEW PROCEDURES
Analytical review procedures involve reasoning by the auditors for purpose of

determining any relationship between information from one accounting period to
another or by relating financial information to non-financial information. Such
procedures are useful to the auditor in providing additional information and also in
determining the level of consistency of evidence. These may also help the auditor to
determine the fairness of information contained in the financial statement
Types of analytical review

1. Comparison of financial information and non-financial information e.g.
comparing the payroll cost with the number of employees in a particular period
or comparing the repairs and maintenance cost with the tangible assets
maintained by the entity.
2. Analyzing the relationship between prospective financial information e.g.
budget and for costs with the actual figures in the financial statement to be able
to investigate any variances
3. Computing account ratios such as profitability ratios liquidity ratios, etc from
one accounting period to another or comparing the entity ratio to other
competitors within the industry.
4. Carry out the trend analysis e.g. by studying the behavior of a particular
account over a given period to be able to determine any motional fluctuation
which require to be investigated
5. Studying any related incidence affecting various accounts e.g. the depreciation
charged to the various assets accounts or relating the stock account to the cost
of sales or relating the hard debts expense account to debtor (receivables)
6. Carrying out reasonable tests e.g. by calculating expected values in items and
then checks the records to confirm whether the values calculated are
consistent with what is attained in the records. This is particularly common
where formulas have been used to arrive to certain information.
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Objectives of Analytical Review Procedures (ARP)
1. Such procedures enable the auditor to understand nature of the clients business
2. They may also help the auditor in identifying areas of potential risks which may
require high concentration of the auditors procedures
3. Such procedures also help the auditor in determining the consistency of
evidence from different sources to be able to draw conclusion
4. The auditor can also use the analytical review procedures information gathered
to defend time and incase of dispute
5. Help the auditor to gather additional evidence.
Sources of Information for analytical review

The auditor should normally consider the source and nature of information used to
carryout analytical review procedures in terms of reliability e.g. where auditors are
dealing with a weak system information such as bad debts may not be reliable to be
used for analytical review procedures.
The following may include sources of information:

1. The client interim financial statements and the annual financial statements for
the audit process
2. The clients other internal reports e.g. management account and cost accounting
records
3. Any prospective financial information such as budgets and forecasts prepared
internally by the client
4. Industry statistics either obtained from the competitors or generated by the
regulating authorities
5. Any available non-financial information that the auditor may obtain during the
course of their function
6. Previous working papers obtained by the auditors including copies of the
previous audits financial statement
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7. Documents such as the entity bank statements and cash records.
8. Working papers of the internal auditors especially where the auditor is dealing
with a reliable system
9. Review of the director’s minute book for evidence of the discussions on matters
relating to the entity’s performance.
Stages of analytical review

Analytical Review procedures can be performed at three stages during the audit,
namely:
1. At planning stage: when performed at planning stage such procedures enable the
auditor to understand the nature of the clients operation to identify area of
potential risk and also to determine the nature, timing and work procedures to
be performed
2. In the middle of the audit during substantive test: when carried out in the middle
of the audit such as procedures are considered to be part of the substantive test
therefore enable the auditors to get additional evidence and also to be able to
differentiate various financial statement assertions.
3. At overall conclusion stage of the audit: when performed at overall conclusion
stage such procedures enable the auditor to determine the consisting of evidence
from different sources and also be able to draw overall conclusions regarding the
reasonableness and fairness of the financial statement as a whole.
Factors that influence analytical review procedures

1. Nature of the clients business and operation: Analytical review procedure may
be suitable where auditors are dealing with an entity that have existed for a long
period and various branches which are competing in terms of performance or in
terms of various types of business which would therefore require comparison.
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2. The auditor previous knowledge regarding the entity operation: ARP techniques
would also be suitable where auditors have previous cumulative knowledge
which is contained in previous paper which may enable the auditor to compare
information from previous period to information to current period or where the
client’s entity produces internal reports such as management accounts.
3. The clients management own use of ARP: Some clients entity use ARP for their
own internal decision making requirements e.g. through periodic preparations of
budgets, management account or analyzing account ratios etc. Where auditors
are dealing with such entities they are like to get ready information which they
can use during their audit functions. In such a situation however, the external
auditor should have evaluated the client system to be strong in order to rely on
such internal information.
4. Availability of non-financial information: Some clients normally generate their
own statistical information together with the financial statements which may be
useful to the auditors. In other situations industrial statistical information may
be used by the auditor.
5. Availability of competent audit staff: ARP requires auditors to have the necessary
intellectual capacity, competence and experience. The auditor firm should
therefore ensure what such procedures are required to be performed during an
assignment. Such work should be delegated to the appropriate staff
6. Cost benefit consideration: The auditor should normally consider by performing
ARP may be adding value to the audit process. This is because in certain
situations may have gathered sufficient information to be able to draw
appropriate conclusion :- performing such procedures may not create additional
benefit i.e. audit process
Advantages of ARP
1. Such procedures constitutes a source of evidence which may be useful in
supporting other evidence gathered through other procedures
2. They may be considered to be reliable especially where auditor get direct
evidence himself
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3. Institutions where auditors gets available information. They may conduct the
procedures much faster and gather sufficient information within a short period
4. When dealing with a strong and reliable system such procedures generate
accurate information
5. The procedures may be applied by the auditors at all stages of the audit making
them more consistent
6. The procedures may help the auditors to gain an understanding of the nature of
the client operation especially during the risk assessment.
Disadvantages of ARP
1. Some of the techniques may be completed requiring highly experienced and
intelligent audit staff
2. Such techniques may create additional cost e.g. in terms of time spent to
accomplish the audit process.
3. The techniques may not produce reliable information where auditors are dealing
with a weak system
4. The techniques may not be appropriate where the auditor are dealing with the
clients for the first time
5. Lack of relevant information e.g. industry statistics, management account,
budgetary systems etc may also affect such procedures.

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ISA 520: ANALYTICAL REVIEW PROCEDURES

Analytical review procedures involve reasoning by the auditors for purpose of

Types of analytical review

Sources of Information for analytical review

The following may include sources of information:

Stages of analytical review

Factors that influence analytical review procedures

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