Guide to Using International Standards on Auditing in - IFAC

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<strong>Guide</strong> <strong>to</strong> <strong>Using</strong> <strong>International</strong> <strong>Standards</strong> on Auditing in the Audits of Small- and Medium-Sized Entities Volume 1—Core Concepts
statements with an expectation developed from information obtained from understanding the entity, and
other audit evidence.
If the inherent risks are low for a class of transactions, substantive analytical procedures alone may provide
sufficient appropriate audit evidence. However, if the assessed risk is low because of related internal controls,
the audi<strong>to</strong>r would also perform tests of those controls. Consequently for significant risks identified, analytical
procedures would always be used in combination with other substantive tests or tests of control.
To use an analytical procedure as a substantive procedure, the audi<strong>to</strong>r should design the procedure <strong>to</strong>
reduce the risk of not detecting a material misstatement in the relevant assertion <strong>to</strong> an acceptably low level.
This means that the expectation of what the recorded amount should be is precise enough <strong>to</strong> indicate the
possibility of a material misstatement, either individually or in the aggregate.
CONSIDER POINT
For audit-planning purposes, substantive analytical procedures may be grouped in<strong>to</strong> three distinct
levels based on the level of assurance obtained. These are described below.
Exhibit 10.4-1
Impact on
Reducing
Audit Risk
Highly Effective
(Low Level of Risk
that the Recorded
Amount is
Misstated)
Moderately
Effective
Limited
Description
Procedure is intended <strong>to</strong> be the primary source of evidence regarding a financial
statement assertion. It “effectively” proves the recorded amount. However, if the risk
involved is significant, it would be supplemented by other relevant procedures.
Procedure is only intended <strong>to</strong> corroborate evidence obtained from other procedures.
A moderate level of assurance is obtained.
Basic procedures, such as comparing an amount in the current period <strong>to</strong> a previous
period, are useful but only provide a limited level of assurance.
Techniques
There are a number of possible techniques that can be used <strong>to</strong> perform the analytical procedures. The
objective is <strong>to</strong> select the most appropriate technique <strong>to</strong> provide the intended levels of assurance and
precision. Techniques include:
• Ratio analysis;
• Trend analysis;
• Break-even analysis;
• Pattern analysis; and
• Regression analysis.