702

of financial information made by a study and comparison of plausible relationships among both financial and nonfinancial data

• preliminary (planning) analytical
• procedures, substantive analytical procedures, and overall review
• analytical procedures. Both preliminary and overall review analytical
• procedures are required in an audit.

of the audit and are discussed in section 604. Overall review analytical procedures are performed in the final review stage of the audit and are discussed in section 808.

discretionary.

trend analysis, ratio analysis, and predictive or reasonableness tests.

• the absolute dollar amount or
• percentage change in accounts over time. When the auditor reads
• comparative financial statements and questions the fluctuations in
• accounts between years, he is applying a form of trend analysis

Assessment Revenue and Assessments Receivable

Wages and Salaries Expense and Payroll Taxes Health Insurance

• Interest Expense
• and Long-term Debt

Assessments Receivable and Bad Debt Expense Legal Expense (for bad debt collection)

Cash and Investments and Investment Income (such as interest and dividends)

two financial statement amounts or between financial and relevant nonfinancial amounts.

• • Relationships among balance
• sheet accounts, such as between the allowance for uncollectible accounts
• and the balance of assessments receivable
• .•
• Relationships between balance sheet and income statement accounts,
• such as interest expense and long-term debt, and assessment revenue and
• average assessments receivable

.• Relationships among income statement accounts, such as bad debt expense and assessment revenue.

a financial statement amount or the change in an amount from the prior year.

• the reasonableness of interest
• expense can be evaluated by dividing the average principal amounts
• outstanding during the period by the contractual or average interest
• rates. Other reasonableness tests involve estimating account balances by
• using nonfinancial data. For example, the reasonableness of assessment
• revenue can be evaluated by multiplying the number of members by
• approved member assessments.

a. Developing an expectation of what an account balance should be.

b. Comparing the expected amount with the recorded amount.

c. Determining whether any difference between the recorded and expected amount is significant.

d. Investigating the cause of any unexpected significant difference.

e. Evaluating the likelihood of material misstatement.f. Documenting the analytical procedures.

comparisons of recorded amounts, or ratios of recorded amounts, to expectations developed by the auditor.

• financial and nonfinancial
• information, but the most important aspect of developing expectations is
• having a thorough knowledge and understanding of the CIRA and its
• industry and the risks the CIRA faces in doing business.

• the recorded amount to the
• expectation, but the authors prefer to think of analytical procedures as
• a coordinated family of procedures that include scanning and inquiry as
• well as computations and comparisons.

• What account balances have
• increased significantly since the prior year? Are there new accounts?
• Inquiry is also a critical companion procedure in all aspects of
• applying analytical procedures. Inquiry procedures are a crucial part of
• the process of identifying all of the following: useful analytical
• procedures, worthwhile sources of information for developing
• expectations, and explanations for differences between recorded amounts
• and expectations.

• The use of substantive analytical procedures is appropriate considering the relevant assertions. Paragraph 700.17 discusses the appropriateness of analytical procedures with respect to various assertions.

• • The data from which the expectation of recorded amounts or ratios is developed is reliable. The discussion in paragraph 700.15
• about the reliability of audit evidence includes considerations that
• are relevant with respect to the reliability of data used in substantive
• analytical procedures.

• • The expectation is
• sufficiently precise to identify the possibility of a material
• misstatement at the desired level of assurance. This is discussed in
• paragraph 702.9.

• •
• The amount of any difference in recorded amounts from expected values
• is acceptable. Evaluation of differences is discussed beginning in
• paragraph 702.10.

• • Nature of the Account.
• (Revenues, expenses, and changes in fund balance accounts are
• generally more favorable to the use of analytical procedures as
• substantive tests than are balance-sheet accounts.)

• Nature of the Assertion Being Tested. (Analytical procedures can be more effective than tests of details for testing the completeness assertion.)

• • Likely Cause of Potential Misstatement.
• (Analytical procedures tend to be more effective when the risk of
• misstatement is assessed as being primarily from error rather than from
• fraud.)

• Degree to Which the Data to Which the Analytical Procedure is Applied Are Related to One Another. • The Stability of the Client Environment. (Analytical procedures are generally more effective in a stable environment.)

• Existence of Offsetting Factors that affect the amount being tested, for example, if product mix affects total sales.

• • The Source and Reliability of Data Used in the Test.
• (Examples of reliable data include internal financial information
• from comparable prior periods, budgets, extrapolations from interim or
• annual data, or data developed under a reliable system with adequate
• controls; internal nonfinancial or operating data from sources
• independent of those responsible for the amount being audited; and
• external industry statistics or comparable company data.)

• The Level of Detail Used to Develop the Expectation. (For instance, a more effective test generally results from use of monthly and/or budget rather than annual data.)

of accuracy of the expectation developed by the auditor to the actual amount.

the more difficult it is to develop a precise expectation.

• be material to the financial
• statements taken as a whole. In some cases, to develop a precise
• expectation, the auditor might need to break the recorded amount down
• into more predictable components. Expectations developed at a more
• detailed level have a greater chance of detecting a misstatement of a
• given amount. For example, expectations developed concerning monthly
• amounts are generally more precise than annual amounts. Comparisons by
• location or department are generally more precise than entity-wide
• comparisons. Sometimes, an account balance can be separated into
• different categories of transactions. For example, assessment revenue
• might be separated by type of unit in a mixed-use association (for
• example, residential, timeshare, and commercial), or compensation
• expense might be separated by salaried and hourly employees.

past operations, taking into account expected operations.

• when the results of analytical
• procedures indicate significant fluctuations from expected amounts that
• should be investigated further. The authors recommend that auditors
• determine the magnitude of changes that will be considered significant
• before applying analytical procedures so that those judgments will be as
• objective as possible

• a. Expected Size of the Fluctuation.
• Some fluctuation from prior years (or expected results) often would
• be considered reasonable based on the CIRA and the circumstances.
• However, fluctuations in excess of expected amounts generally should be
• considered significant.

• b. Materiality.
• Fluctuations should be considered in light of materiality for the
• financial statements, by financial statement line as well as in the
• aggregate.

• c. Percentage Change.
• Usually the percentage change rather than the absolute amount of the
• change should be considered in deciding whether a change in an account
• balance is significant, especially in smaller accounts.

• d. Precision of the Analytical Procedure.
• Relationships that are more direct and involve fewer variables can be
• expected to provide more accurate estimates of actual account balances.

• Discussions with management may
• provide explanations for the variances. However, in most instances,
• auditors should combine additional inquiry or analytical procedures with
• preparing other accounting schedules or analyses to explain
• fluctuations. If the fluctuations cannot be explained, the auditor
• should perform other audit procedures to determine if the differences
• are likely misstatements

• a. Inquiries may be more effective for certain assertions or
• accounts. For example, analytical procedures are ineffective when
• accounts are subject to significant management discretion, such as those
• involving estimates, because relationships are unpredictable.

b. Analytical procedures are ineffective when factors affecting accounts are not constant over time.

c. Analytical procedures are less precise and accurate as account relationships become more remote.

d. Reasonableness tests, to some extent, usually depend on operating data, which may not be available.

• e.
• Ratios may not be comparable with industry averages, with ratios
• computed for similar CIRAs, or within the same CIRA over time, because
• of changes in accounting principles or because of differences in the way
• they are computed.

• the expectation and the factors considered in its development (unless readily determinable from the work performed),

• the results of comparing recorded amounts to the expectation, and

• any additional procedures performed in response to significant unexpected differences and the results of those procedures

• information about the auditor's approach to evaluating the significance
• of the difference between the recorded amount and the expectation (for
• example, a percentage of tolerable misstatement). Also, many auditors
• document analytical procedures, particularly the results of ratio and
• trend analysis, in carryforward workpapers or in a permanent file to
• facilitate historical comparisons. The “Substantive Analytical
• Procedures Worksheet” at HOA-CX-9.1 can be used to document the analytical procedures and the evaluation of the results.

• at HOA-CX-9.1
• can be used to document the performance of analytical procedures that
• involve the development of an expected amount. The “Ratio Analysis
• Worksheet” at HOA-CX-9.2 can be used to document calculations of ratios. Rather than manually completing HOA-CX-9.1 or HOA-CX-9.2,
• some auditors may prefer to adapt the formats for use in electronic
• spreadsheets. By using such a spreadsheet, once the information is
• captured, all computations and comparisons can be automated. PPC's Workpapers,
• which provide practice aids not available in your PPC Guides, includes a
• set of automated spreadsheet templates. These templates include a
• certain number of the analytical ratios presented on HOA-CX-9.2.