## Learning Outcomes

After reading this article, you will be able to explain the purpose and use of analytical procedures during the planning stage of an external audit. You will understand how analytical procedures are applied to identify audit risk, help direct audit focus, and form expectations about financial performance. You will also be able to describe factors affecting their effectiveness and give relevant examples.

## ACCA Foundations in Audit (FAU) Syllabus

For ACCA Foundations in Audit (FAU), you are required to understand the planning process in an audit, with specific emphasis on the use of analytical procedures. Focus your revision on:

- The purpose and need for planning an audit
- The role and process of developing the audit strategy and audit plan
- The definition and use of analytical procedures during audit planning
- How analytical procedures help identify and assess risks of material misstatement
- Factors that influence the reliability of analytical procedures at planning

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. What are analytical procedures and when are auditors required to use them during an audit?
2. Give two examples of financial data relationships that might be analysed at the planning stage.
3. Why are analytical procedures useful for identifying risk areas at the start of an audit?
4. List one factor that can reduce the reliability of analytical procedures during audit planning.

## Introduction

Efficient audit planning allows auditors to focus resources on the highest risk areas. Analytical procedures are a central tool used at the start of every audit to spot unusual balances, trends, or inconsistencies. These observations help develop a risk-based audit plan, targeting efforts where the risk of material misstatement is greatest. A clear understanding of analytical procedures and their practical role is essential for ACCA exam success.

> **Test Tip:**
> In the exam, link analytical procedures at the planning stage to identifying risk areas and deciding where further audit work is needed.

### Understanding Analytical Procedures in Audit Planning

Analytical procedures are an essential method required by International Standards on Auditing (ISA 315) during the initial risk assessment phase. They help auditors gain a broad understanding of the client’s financial position and highlight areas for further investigation.

> **Key Term: Analytical procedures**
> Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data, including investigation of significant variations from expected amounts.
> **Key Term: Risk assessment procedures**
> Audit procedures performed to obtain an understanding of the entity and its environment, including internal control, to identify and assess the risks of material misstatement.

### Why Use Analytical Procedures at the Planning Stage?

Auditors use analytical procedures early in the audit to:

- Highlight unusual movements or trends in key figures
- Identify unexpected relationships or ratios that suggest possible misstatement
- Select areas with higher risks that warrant extra audit work

These procedures help auditors form an initial picture of the business and direct their audit approach appropriately.

> **Key Term: Risk of material misstatement**
> The risk that the financial statements contain material misstatements before further audit procedures are performed.

### Methods and Sources for Analytical Procedures

Analytical procedures involve comparing:

- Current period data with prior years
- Actual figures against budgets, forecasts, or industry norms
- Relationships between related items, such as sales and gross profit or payroll costs and headcount

For example, a sudden drop in the gross profit margin may point to issues in cost recognition or revenue recording.

Data sources typically include management accounts, budgets, and last year’s audited financial statements. Non-financial information—such as production output, employee numbers, or units sold—can also be used for comparison.

### Steps in Applying Analytical Procedures

The process generally involves:

![Usefulness of analytical procedures in audit planning based on data reliability, predictability, non-financial information, and auditor knowledge, leading to high, limited, or low usefulness.](https://static.pastpaperhero.com/images/acca-fau-audit-strategy-and-plan-analytical-procedures-in-planning_00.png)

_Analytical procedures are assessed as high, limited, or low usefulness for risk identification according to reliability, predictability, availability, and auditor knowledge._

1. **Developing an expectation**: Using knowledge about the client, auditors predict what figures or ratios should look like.
2. **Comparing actuals to expectations**: The auditor checks the client’s reported information against these expectations.
3. **Investigating differences**: Unexplained or significant differences are noted as potential risks and included in the audit plan for additional testing.

### Factors Influencing Usefulness of Analytical Procedures

The effectiveness of analytical procedures at planning depends on:

- **Reliability of available data**: Management accounts or interim figures should be reviewed for accuracy.
- **Predictability of relationships**: Stable relationships (for example, sales and commissions) yield more meaningful results.
- **Availability of relevant information**: Access to informative non-financial data enhances the auditor’s analysis.
- **Auditor’s knowledge of the business**: Greater familiarity allows more informed expectations and better risk identification.

In fast-changing or variable environments, or when data is unreliable, analytical procedures may give less useful results.

### Worked Example 1.1

> **Question:**
> A new auditor is planning the audit of Delta Ltd. Comparing draft results to last year, the auditor notices that sales have remained stable but cost of sales has increased by 15%. What should the auditor do next?
>
> **Answer:**
> The auditor should use analytical procedures to investigate the increase in cost of sales. This could indicate higher purchase prices, inventory write-downs, or issues in recording costs. The auditor should follow up with management, then plan more detailed testing on cost of sales and inventory for possible misstatements.

### Worked Example 1.2

> **Question:**
> The auditor reviews supplier payments and notices a significant decrease in utility expenses despite similar production levels. What is the likely implication for the audit plan?
>
> **Answer:**
> Unexpected decreases may suggest errors, omissions, or cut-off problems. The auditor should flag utility expenses as a risk area and design procedures to ensure completeness and correct period recognition.
>
> **Exam Warning:**
> Do not treat analytical procedures at planning as conclusive substantive evidence. They are used to direct audit focus, and conclusions must be supported by further detailed testing later in the audit.

## Summary

Analytical procedures in audit planning allow auditors to efficiently identify problem areas and focus their work where the risk is highest. These early comparisons, ratios, and trend analyses are a required part of forming an effective risk-based audit strategy. Analytical procedures must be based on reliable information, with results followed up by targeted audit procedures during fieldwork.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- Definition and objective of analytical procedures in audit planning
- Typical uses and benefits of analytical procedures at the planning stage
- Examples of sources for comparison and relationships to analyse
- Steps in applying analytical procedures and investigating exceptions
- Key factors affecting the usefulness and reliability of analytical procedures
- The role of analytical procedures in targeting areas of higher risk within the audit plan

## Key Terms and Concepts

- Analytical procedures
- Risk assessment procedures
- Risk of material misstatement


Audit strategy and plan - Analytical procedures in planning