Analytical Procedures

When

• Risk assessment: required.
• Substantive: optional.
• Final overall review: required.

Substantive analytics

1. Expectation → 2. Threshold → 3. Compare → 4. Investigate and corroborate.

• Best for large, predictable populations; income statement > balance sheet.
• Precision improves with disaggregated data and reliable, independent sources.
• Not enough alone for significant risks.

Ratios to know

• Gross margin up sharply → overstated sales or inventory.
• Receivables turnover down → collection issues, fictitious sales.
• Inventory turnover down → obsolete or overstated inventory.
• Days = 365 ÷ turnover.

Types

Trend · ratio · reasonableness (nonfinancial drivers) · regression.

Exam traps

• "No unexpected difference" proves little if the expectation was built from the same data being tested — use independent, reliable data.
• An expected change that didn't happen (gross margin flat after a price cut) is as much a red flag as an unexpected one.
• Final-review analytics check overall consistency with the auditor's understanding; they aren't designed to find specific misstatements. New risks found here → more procedures.