Analytical Procedures in Audit: Planning, Substantive, Final

Analytical procedures compare what the client recorded with what you expect, based on other data. They show up three times in an audit, and only one of those times is optional.

The three stages

Stage	Required?	Purpose	Standard
Planning (risk assessment)	Yes	Find unusual changes and areas of risk	AU-C 315, ISA 315
Substantive	No, a choice	Get evidence that a balance is not materially misstated	AU-C 520, ISA 520
Final review	Yes	Check the financial statements make sense as a whole, near the end	AU-C 520, ISA 520

For public companies the matching standards are AS 2110 (planning), AS 2305 (substantive) and AS 2810 (final).

Planning and final analytics can be broad: this year against last year, ratios, a look at anything that moved more than you would expect. Substantive analytics have to be much sharper, because they replace or reduce tests of details.

Substantive analytical procedures, step by step

1. Build an independent expectation. Use data that does not come from the account you are testing. For interest expense: average loan balance × the rate in the loan agreement, by month.
2. Set a threshold for an acceptable difference, based on materiality and how much assurance you need from this procedure.
3. Compare the recorded amount with the expectation.
4. Investigate differences above the threshold. Get an explanation and corroborate it with evidence. A manager's explanation on its own is not enough.
5. Document the expectation, the data behind it, the threshold, the difference and the conclusion.

What makes an expectation precise

• Disaggregation. Monthly or by location beats one annual number. A $50,000 error is easy to see in one month and invisible in an annual total.
• Reliable data. Data from outside the entity, or from systems whose controls you tested, is worth more. Payroll headcount from HR is better than a number the controller types in.
• Predictable relationships. Rent, interest, depreciation and payroll follow stable patterns. Revenue in a volatile business does not.

"Revenue is up 8%, the client says business was good" has no independent expectation behind it, so it gives you very little evidence.

Examples that work well

Account	Expectation
Interest expense	Average debt × contractual rate
Payroll	Headcount by month × average pay, adjusted for raises
Depreciation	Asset cost by class ÷ useful life
Rent	Lease payments from the agreements
Commission expense	Commission-eligible sales × commission rate

Final analytical review

Near the end of the audit, read the financial statements as a whole. Ask whether the numbers are consistent with what you learned during the audit. A margin change nobody explained, or a balance that moved against the trend, may mean more testing.

Where Warp Accounting fits

Warp Accounting reads the financial statements, lines up the years, and lays out the changes and ratios for planning and final analytical review, with each figure linked back to the page it came from. See also our guides to substantive testing and audit evidence.