Auditing
Analytical Procedures in Auditing: Examples and Common Exam Traps
By SimplyCPA · 11 October 2026
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- Meaning: Evaluating financial information by analysing plausible relationships among financial and non-financial data.
- Required twice: In risk assessment (planning) and near the end of the audit to form an overall conclusion.
- Optional as substantive evidence: Substantive analytical procedures can replace or reduce tests of details when relationships are predictable.
- Four design factors: Suitability for the assertion, reliability of the data, precision of the expectation, and the threshold for an acceptable difference.
- Investigating differences: Management's explanation must be corroborated with evidence — an unexplained difference may indicate misstatement.
Three uses
| Stage | Required? | Purpose |
|---|---|---|
| Risk assessment (planning) | Yes | Identify unusual transactions, amounts, ratios and trends that may indicate risks of material misstatement |
| Substantive procedure | No — auditor's choice | Obtain evidence about an assertion, often in place of some tests of details |
| Overall review (final) | Yes | Assess whether the financial statements are consistent with the auditor's understanding of the entity |
Designing a substantive analytical procedure (AU-C 520)
- Suitability — relationships among income statement items over time are usually more predictable than balance sheet items. They work best for high-volume, stable accounts (payroll, interest, rent, utilities).
- Reliability of the data — source (external or internal), comparability, nature and relevance, and the controls over its preparation.
- Precision of the expectation — the more disaggregated (by month, location or product line), the more precise.
- Acceptable difference — the amount of difference from the expectation that can be accepted without further investigation, set considering materiality and the desired assurance.
Worked example: payroll reasonableness test
A company had 200 employees at the start of the year and 220 at the end. A 4% pay rise took effect on January 1. Last year's payroll was $10,000,000.
Average headcount = 210, a 5% increase. Expectation = $10,000,000 × 1.05 × 1.04 = $10,920,000.
Recorded payroll is $11,600,000 — a difference of $680,000. With an acceptable difference of $250,000, the auditor must investigate — for example, unrecorded new hires, overtime, bonuses, or fictitious employees.
Common techniques
- Trend analysis — comparing balances over time.
- Ratio analysis — gross margin, receivables turnover, days in inventory.
- Reasonableness tests — building an expectation from operating data, such as occupancy × room rates × days for a hotel's revenue, or average loan balance × average rate for interest income.
- Regression analysis — statistical models for more precise expectations.
Exam traps
- Analytical procedures are required at planning and final review, but not required as substantive procedures.
- Substantive analytics alone aren't sufficient for a significant risk — tests of details are needed (see tests of controls vs tests of details).
- A lack of change can be a red flag too — for example, flat bad debt expense when the economy has weakened.
- Management's explanation of a fluctuation is not evidence until it's corroborated.
- Analytics are less effective for detecting fraud where management can manipulate both sides of a relationship.
Study the full topic in AUD analytical procedures.