How are analytical procedures used in an audit engagement What premise underlies the use of analytical procedures in auditing What sources of information can an auditor use to develop expectations Give examples AU 329 02 Analytical Procedures SAS 56 defines analytical procedures as evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data Such procedures range from simple comparisons to the use of complex mathematical and statistical models involving many relationships and data elements Analytical procedures are used in auditing for the following purposes 1 In the planning phase of the audit to assist the auditor in planning the nature timing and extent of other auditing procedures 2 In the testing phase as a substantive test to obtain evidential matter about particular assertions related to account balances or classes of transactions 3 At the conclusion of the audit in a final review of the overall reasonableness of the audited financial statements An auditor can use analytical procedures to obtain evidential matter about every material account balance or transaction class Analytical procedures can assist the auditor in planning by 1 enhancing the auditor s understanding of the client s business and 2 identifying unusual relationships and unexpected fluctuations in data that may indicate areas of greater risk of misstatement A basic premise underlying the use of analytical procedures in auditing is that relationships among data may be expected to continue in the absence of known conditions to the contrary For example the auditor might know of consistent relationships between client financial data and industry statistics If the auditor is able to determine that there is a reliable pattern between client financial data and industry statistics the auditor can assume that such a relationship will also exist in the audit period unless the auditor knows of particular conditions that make the prior relationships invalid Response 2 Analytical procedures are evaluations of financial information that is made by a study of plausible relationships for both financial and nonfinancial data These procedures are used to help the planning phase of an audit assist an auditor in planning the audit and have a final review of the audited financial statements Analytical procedures can also help auditors understand an organization and identify the risk of misstatements Plausible and predictability underlies in the use of analytical procedures Auditors need to compare the current ratio from one year to another and this helps with the relationship of data to continue When auditors use the plausible and predictability he or she is more effective at finding unintentional misstatements than intentional misstatements Using the plausible part could also lead to data that may not be related and this could cause erroneous conclusions There are many different sources that can affect the reliability of data that is used for analytical procedures Sources of information that an auditor may use are industry data client financial information and the relationship of financial information with relevant nonfinancial information Sources that are reliable would be audited prior year entity data than unaudited prior data Internal information that is subjected to effective internal control procedures is also more reliable than information that is not effectively controlled Industry data would depend on the similarity between entity s operations and accounting methods of the industry