STANDARD ON INTERNAL AUDIT (SIA) 6
ANALYTICAL PROCEDURES*
Contents
Paragraph(s)
Introduction ............................................................................... 1-3
Nature and Purpose of Analytical Procedures........................... 4-9
Analytical Procedures as Risk Assessment
Procedures and in Planning the Internal Audit ...................... 10-11
Analytical Procedures as Substantive Procedures ................ 12-14
Analytical Procedures in the Overall Review at the
End of the Internal Audit .............................................................15
Extent of Reliance on Analytical Procedures......................... 16-18
Investigating Unusual Items or Trends ................................. 19-20
Effective Date .............................................................................21
The following is the text of the Standard on Internal Audit
(SIA) 6, Analytical Procedures , issued by the Council of the
Institute of Chartered Accountants of India. These Standards
should be read in conjunction with the Preface to the
Standards on Internal Audit, issued by the Institute.
In terms of the decision of the Council of the Institute of
Chartered Accountants of India taken at its 260 th meeting held
in June 2006, the following Standard on Internal Audit shall be
recommendatory in nature in the initial period. The Standards
shall become mandatory from such date as notified by the
Council.
Published in the October 2008 issue of The Chartered Accountant.
*
Standard on Internal Audit (SIA) 6
Introduction
1. The purpose of this Standard on Internal Audit (SIA) is to establish
standards on the application of analytical procedures during an
internal audit.
2. The internal auditor should apply analytical procedures as the
risk assessment procedures at the planning and overall review
stages of the internal audit. Risk assessment procedures refer to the
internal audit procedures performed to obtain an understanding of the
entity and its environment, including the entity's internal control, to
identify and assess the risks of material misstatement, whether due to
fraud or error, in the information subjected to internal audit. Analytical
procedures may also be applied at other stages.
3. "Analytical procedures" means the analysis of significant ratios and
trends, including the resulting investigation of fluctuations and
relationships in both financial and non-financial data that are
inconsistent with other relevant information or which deviate
significantly from predicted amounts. Analytical procedures provide the
internal auditor with an efficient and effective means of making an
assessment of information collected in an audit. The assessment results
from comparing such information with expectations identified or
developed by the internal auditor.
Nature and Purpose of Analytical Procedures
4. Analytical procedures include the consideration of comparisons of the
entity's financial and non-financial information with, for example:
Comparable information for prior periods.
Anticipated results of the entity, such as budgets or forecasts or
expectations of the internal auditor.
Predictive estimates prepared by the internal auditor, such as
an estimation of depreciation charge for the year.
Similar industry information, such as a comparison of the
entity's ratio of sales to trade debtors with industry averages, or
with other entities of comparable size in the same industry.
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Analytical Procedures
5. Analytical procedures also include consideration of relationships:
Among elements of financial information that would be
expected to conform to a predictable pattern based on the
entity's experience, such as gross margin percentages.
Between financial information and relevant non-financial
information, such as payroll costs to number of employees or
total production costs to quantity produced.
6. Various methods may be used in performing the above procedures.
These range from simple comparisons to complex analyses using
advanced statistical techniques. Analytical procedures may be applied
to consolidated financial statements, financial statements of
components (such as subsidiaries, divisions or segments) and
individual elements of financial information and relevant non-financial
information. The internal auditor's choice of procedures, methods and
level of application is a matter of professional judgement. Specific
analytical procedures include, but are not limited to ratio, trend, and
regression analysis, reasonableness tests, period-to-period
comparisons, comparisons with budgets, forecasts, and external
economic information.
7. In determining the extent to which the analytical procedures
should be used, the internal auditor should consider the
following factors, including:
The significance of the area being examined.
The adequacy of the system of internal control.
The availability and reliability of financial and non-financial
information.
The precision with which the results of analytical
procedures can be predicted.
The availability and comparability of information regarding
the industry in which the organization operates.
The extent to which other auditing procedures provide
support for audit results.
After evaluating the aforementioned factors, the internal auditor
should consider and use additional auditing procedures, as
necessary, to achieve the audit objective.
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Standard on Internal Audit (SIA) 6
8. Analytical procedures are used for the following purposes:
to assist the internal auditor as risk assessment procedures to
obtain initial understanding of the entity and its environment
and thereafter in planning the nature, timing and extent of other
internal audit procedures;
as substantive procedures when their use can be more
effective or efficient than tests of details in reducing detection
risk for specific financial statement assertions;
as an overall review of the systems and processes in the final
review stage of the internal audit; and
to evaluate the efficiency of various business/ management
systems.
9. Analytical procedures may identify, among other things, differences
that are not expected or absence of differences when they are
expected, which may have arisen on account of factors such as errors,
frauds, unusual or non recurring transaction or events, etc.
Analytical Procedures as Risk Assessment Procedures
and in Planning the Internal Audit
10. The internal auditor should apply analytical procedures as risk
assessment procedures to obtain an understanding of the
business, the entity and its environment and in identifying areas
of potential risk. Application of analytical procedures may indicate
aspects of the business of which the internal auditor was unaware and
will assist in determining the nature, timing and extent of other internal
audit procedures.
11. Analytical procedures in planning the internal audit use both financial
and non-financial information, for example, in retail business, the
relationship between sales and square footage of selling space or
volume of goods sold.
Analytical Procedures as Substantive Procedures
12. The internal auditor's reliance on substantive procedures to reduce
detection risk relating to specific financial statement assertions and
assertions relating to process, systems and controls may be derived
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Analytical Procedures
from tests of details, from analytical procedures, or from a combination
of both. The decision about which procedures to use to achieve a
particular internal audit objective is based on the internal auditor's
judgement about the expected effectiveness and efficiency of the
available procedures in reducing detection risk for specific financial
statement assertions or assertions relating to process, systems and
controls.
13. The internal auditor will ordinarily inquire of management as to the
availability and reliability of information needed to apply analytical
procedures and the results of any such procedures performed by the
entity. It may be efficient to use analytical data prepared by the entity,
provided the internal auditor is satisfied that such data is properly
prepared.
14. When intending to perform analytical procedures as substantive
procedures, the internal auditor will need to consider a number of
factors such as the:
Objectives of the analytical procedures and the extent to which
their results can be relied upon.
Nature of the business, entity and the degree to which
information can be disaggregated.
Availability of information, both financial, such as budgets or
forecasts, and non-financial, such as the number of units
produced or sold.
Reliability of the information available, for example, whether
budgets is prepared with sufficient professional care.
Relevance of the information available, for example, whether
budgets have been established as results to be expected rather
than as goals to be achieved.
Source of the information available, for example, sources
independent of the entity are ordinarily more reliable than
internal sources.
Comparability of the information available, for example, broad
industry data may need to be supplemented to be comparable
to that of an entity that produces and sells specialised products.
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Standard on Internal Audit (SIA) 6
Knowledge gained during previous internal audits, together with
the internal auditor's understanding of the effectiveness of the
accounting and internal control systems and the types of
problems that in prior periods have given rise to accounting
adjustments.
Controls over the preparation of the information, for example,
controls over the preparation, review and maintenance of MIS
reports, budgets, etc.
Analytical Procedures in the Overall Review at the End of
the Internal Audit
15. The internal auditor should apply analytical procedures at or near
the end of the internal audit when forming an overall conclusion
as to whether the systems, processes and controls as a whole
are robust, operating effectively and are consistent with the
internal auditor's knowledge of the business. The conclusions
drawn from the results of such procedures are intended to corroborate
conclusions formed during the internal audit of individual components
or elements of the financial statements, e.g., purchases, and assist in
arriving at the overall conclusion. However, in some cases, as a result
of application of analytical procedures, the internal auditor may
identify areas where further procedures need to be applied before the
internal auditor can form an overall conclusion about the systems,
processes and associated controls.
Extent of Reliance on Analytical Procedures
16. The application of analytical procedures is based on the expectation
that relationships among data exist and continue in the absence of
known conditions to the contrary. The presence of these relationships
provides the internal auditor evidence as to the completeness,
efficiency and effectiveness of systems, processes and controls.
However, reliance on the results of analytical procedures will depend
on the internal auditor's assessment of the risk that the analytical
procedures may identify relationships as expected when, in fact, a
material misstatement exists.
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Analytical Procedures
17. The extent of reliance that the internal auditor places on the results of
analytical procedures depends on the following factors:
materiality of the items involved, for example, when inventory
balances are material, the internal auditor does not rely only on
analytical procedures in forming conclusions. However, the
internal auditor may rely solely on analytical procedures for
certain income and expense items when they are not
individually material;
other internal audit procedures directed toward the same
internal audit objectives, for example, other procedures
performed by the internal auditor while reviewing the credit
management process, in the collectibility of accounts
receivable, such as the review of subsequent cash receipts,
might confirm or dispel questions raised from the application of
analytical procedures to an ageing schedule of customers'
accounts;
accuracy with which the expected results of analytical
procedures can be predicted. For example, the internal auditor
will ordinarily expect greater consistency in comparing gross
profit margins from one period to another than in comparing
discretionary expenses, such as research or advertising; and
assessments of inherent and control risks, for example, if
internal control over sales order processing is weak and,
therefore, control risk is high, more reliance on tests of details
of transactions and balances than on analytical procedures in
drawing conclusions on receivables may be required.
18. The internal auditor will need to consider testing the controls, if any,
over the preparation of information used in applying analytical
procedures. When such controls are effective, the internal auditor will
have greater confidence in the reliability of the information and,
therefore, in the results of analytical procedures. The controls over
non-financial information can often be tested in conjunction with tests
of accounting-related controls. For example, an entity in establishing
controls over the processing of sales invoices may include controls
over the recording of unit sales. In these circumstances, the internal
auditor could tests the controls over the recording of unit sales in
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Standard on Internal Audit (SIA) 6
conjunction with tests of the controls over the processing of sales
invoices.
Investigating Unusual Items or Trends
19. When analytical procedures identify significant fluctuations or
relationships that are inconsistent with other relevant information
or that deviate from predicted amounts, the internal auditor
should investigate and obtain adequate explanations and
appropriate corroborative evidence. The examination and
evaluation should include inquiries of management and the
application of other auditing procedures until the internal auditor
is satisfied that the results or relationships are sufficiently
explained. Unexplained results or relationships may be indicative
of a significant condition such as a potential error, irregularity, or
illegal act. Results or relationships that are not sufficiently
explained should be communicated to the appropriate levels of
management. The internal auditor may recommend appropriate
courses of action, depending on the circumstances.
20. The investigation of unusual fluctuations and relationships ordinarily
begins with inquiries of management, followed by:
corroboration of management's responses, for example, by
comparing them with the internal auditor's knowledge of the
business and other evidence obtained during the course of the
internal audit; and
consideration of the need to apply other internal audit
procedures based on the results of such inquiries, if
management is unable to provide an explanation or if the
explanation is not considered adequate.
Effective Date
21. This Standard on Internal Audit is applicable to all internal audits
commencing on or after ______. Earlier application of the SIA is
encouraged.
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