Document ID: chunk:federal_register_of_legislation:F2021C01244:reg:1:p4
Version: federal_register_of_legislation:F2021C01244
Segment Type: reg
Provision Reference: reg 1 (pt 4/7)
Character Range: 14654–17748

planned analytical procedures is based on the expectation that relationships among data exist and continue in the absence of known conditions to the contrary.  However, the suitability of a particular analytical procedure will depend upon the auditor's assessment of how effective it will be in detecting a misstatement that, individually or when aggregated with other misstatements, may cause the financial report to be materially misstated.

A7.             In some cases, even an unsophisticated predictive model may be effective as an analytical procedure.  For example, where an entity has a known number of employees 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 report and reducing the need to perform tests of details on the payroll.  The use of widely recognised trade ratios (such as profit margins for different types of retail entities) can often be used effectively in substantive analytical procedures to provide evidence to support the reasonableness of recorded amounts.

A8.             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 consideration, can provide persuasive evidence and may eliminate the need for further verification by means of tests of details, provided the elements are appropriately verified.  In contrast, calculation and comparison of gross margin percentages as a means of confirming a revenue figure may provide less persuasive evidence, but may provide useful corroboration if used in combination with other audit procedures.

A9.             The determination of the suitability of particular substantive analytical procedures is influenced by the nature of the assertion and the auditor's assessment of the risk of material misstatement.  For example, if controls over sales order processing are deficient, the auditor may place more reliance on tests of details rather than on substantive analytical procedures for assertions related to receivables.

A10.         Particular substantive analytical procedures may also be considered suitable when tests of details are performed on the same assertion.  For example, when obtaining audit evidence regarding the valuation assertion for accounts receivable balances, the auditor may apply analytical procedures to an ageing of customers' accounts in addition to performing tests of details on subsequent cash receipts to determine the collectability of the receivables.

Considerations Specific to Public Sector Entities

A11.         The relationships between individual financial report items traditionally considered in the audit of business entities may not always be relevant in the audit of governments or other non-business public sector entities; for example,