This document discusses steps for system-based auditing including understanding the business, evaluating internal controls, testing internal controls, and analytical procedures. It describes analytical procedures as comparing data or investigating fluctuations to identify inconsistencies. The document also discusses when and how to apply analytical procedures during an audit, including as preliminary tests to identify risks and as substantive tests to draw conclusions. Finally, it addresses tests of detail as a substantive testing technique, describing different types of testing methods and ways to select sample items.

1. © OECD
A joint initiative of the OECD and the European Union, principally financed by the EU
Tirana, 10-12 September 2014
Workshop System Based Auditing
13. Analytical procedures

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4. 13.1 What are steps of SBA?
Steps audit of system
•Understanding the business
•Evaluating Internal control system
•Testing Internal control system
Steps of testing transactions and account balances
•Analytical procedures
•Test of transactions
•Test of account details
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5. 13.2 Audit evidence: Assurance Bucket
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6. 13.3 Analytical procedures – ISSAI 4100
•What are analytical procedures?
ISSAI 4100 paragraph 109/4200 paragraph 116:
Analytical procedures involve comparing data, or investigating fluctuations or relationships that appear inconsistent. In compliance auditing, such procedures may, for example, involve comparing an increase in pension benefits payments from one year to the next with demographic information such as the number of citizens having reached retirement age within the last year. If the criteria relate to the terms of an agreement which state, for example, that project funding is provided based on performance levels such as the number of job placements made, then any changes in project funding might be compared to changes in employment statistics.
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7. 13.4 Applying analytical procedures
•When to apply analytical procedures?
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Purpose
Preliminary
Substantive
Final
ISAs
(520 & 315)
Required
Required
Optional
ISA requirements
Assurance
Identify risks
Draw Conclusion

8. 13.5 Types of analytical procedures
•Ratio’s
•Trend analysis
•Reasonableness testing
•Regressing analysis
•Scanning analysis
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9. 13.6 Benefits of analytical procedures
•To determine if an extension of the audit procedures is necessary
•Preliminary analytics are mandatory
•Helps identifying unusual fluctuations
•Exceptions are based on expected business evolutions
•No audit evidence obtained !
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10. 13.7 Analytical procedures – True or False?
A municipalities budget shows a decrease in local tax income for four consecutive years. The auditor compares the trend with:
a)Number of inhabitants
b)Tax level
Is this a correct analysis?
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11. 13.8 Analytical procedures – True or False?
•A ministry has announced an end to a subsidy scheme as of 31 March on 1 April, allowing all requests arriving on or before 1 April to be considered. The amount spent was within budget.
•The auditor makes an overtime analysis of the amount accounted and notices a significant decrease in April from August and no payment afterwards
Is this a correct analysis?
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12. 13.9 Analytical procedures –True or false?
After the compliance of a ministry has been examined the HSC reviewer asks you what the explanation is for the increase in the spending in budget item X. You answer that budget item X was reviewed looking at the top 10 items included and no irregularities were found.
Should the reviewer accept this explanation?
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13. 13.10 Tests of detail -substantive testing
•What are the types?
•How many items to examine?
•To what extent to examine?
•Ways of testing
•How to do this in practice
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14. 13.11 Types of testing
•Physical Examination
•Inquiry
•Observation
•Recalculation
•Recomputation
•Reconciliation
•Confirmation
•Vouching
•Cut-off testing
•Examination
•Use of work of specialists
•Tracing
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15. 13.12 How many? A possible decision tree
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No
No
Either expand targeted testing or perform substantive analytical procedures, non-statistical sampling or accept-reject testing on untested items. Reconsider the option to achieve a higher level of controls testing as well.
Can we efficiently test items?
Perform TARGETED TESTING
No further testing required (document rationale/conclusion)
Yes
Possible & appropriate to project misstatements?
Yes
No
Perform ACCEPT-REJECT TESTING
Perform
NON-STATISTICAL
SAMPLING
Yes
Considering the results of tests of controls, substantive analytics and targeted testing, do we need more assurance with regard to the untested items?
Are the aggregated untested items above materiality?
Can we select items within an account or population based on a higher value, higher risk, or other characteristic to address our test objective?
No
No
Yes
Yes

16. 13.13 Tests of detail – ways of selecting
•Risk based
•Judgemental
•Statistical
In all cases:
•Selecting the type of procedure
•Selecting the items to test
•Actually testing the items selected
•Evaluating results
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17. QUESTIONS?
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