Definition
An analytical procedure compares what was recorded with what the auditor expected, based on relationships such as revenue to headcount, gross margin to prior years, or interest expense to average debt. Differences beyond a set threshold are investigated and corroborated, not simply explained by management's say-so.
Why it matters in an audit or review
Analytical procedures appear in three places. AU-C 315 requires them as risk assessment procedures. AU-C 520 covers their use as substantive procedures, which is optional, and requires them in an overall review near the end of the audit. The same technique also anchors review engagements, where analytics and inquiry are the main procedures.
Example
Rent expense is $144,000 (illustrative) against a lease at $11,000 a month. The expected amount is $132,000. The auditor sets a $5,000 investigation threshold, finds the $12,000 gap exceeds it, and learns of a CAM reconciliation paid in December. The invoice is inspected to corroborate the explanation.
Common mistakes
- Setting the threshold after seeing the differences.
- Accepting an explanation from the client without evidence.
- Using a prior-year ratio as the expectation when business conditions changed.
FAQ
Can analytics alone support a material balance?
Only when the expectation is precise enough for the risk, and the underlying data is reliable. High-risk assertions usually need tests of details as well.
Sources
- AICPA, AU-C Section 520, Analytical Procedures
- AICPA, AU-C Section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (as amended by SAS No. 145)
- AICPA, AR-C Section 90, Review of Financial Statements
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error