The existing review engagement standards provide limited guidance on how to conduct analytical procedures in a review. For instance, Section 8100 provides examples such as comparing the current and prior period information and considering the reasonableness of financial and other inter-relationships. It goes on to explain that analytical procedures performed during a review engagement would normally be less extensive than analytical procedures performed during an audit but does not go into much further detail. The existing standard does go on to state that explanations for relationships and individual items that appear to be unusual would be obtained by directing inquiries to appropriate personnel of the enterprise. Furthermore, the accountant may accept the responses to these inquiries without examination of supporting evidence as long as such responses appear plausible.
While the guidance in the existing review engagement standards is limited we now have the benefit of being able to look forward to the new review engagement standards which were added to the CPA Canada Handbook in March 2016. CSRE 2400.A101 provides guidance on the various purposes that analytical procedures serve in a review engagement.
In a review of financial statements, performing analytical procedures assists the practitioner in:
- Obtaining or updating the practitioner's understanding of the entity and its environment, including to be able to identify areas in the financial statements where material misstatements are likely to arise.
- Identifying inconsistencies or variances from expected trends, values or norms in the financial statements such as the level of congruence of the financial statements with key data, including key performance indicators.
- Providing corroborative evidence in relation to other inquiry or analytical procedures already performed.
- Serving as additional procedures when the practitioner becomes aware of matter(s) that cause the practitioner to believe that the financial statements may be materially misstated. An example of such an additional procedure is a comparative analysis of monthly revenue and cost figures across profit centres, branches or other components of the entity, to provide evidence about financial information contained in line items or disclosures contained in the financial statements.
CSRE 2400.A102 provides guidance regarding the various methods that may be used to perform analytical procedures.
Various methods may be used to perform analytical procedures. These methods range from performing simple comparisons to performing complex analysis using statistical techniques. For example, the practitioner may apply analytical procedures to evaluate the financial information underlying the financial statements through analysis of plausible relationships among both financial and non-financial data, and assessment of results for consistency with expected values with a view to identifying relationships and individual items that appear unusual, or that vary from expected trends or values. The practitioner would compare recorded amounts, or ratios developed from recorded amounts, to expectations developed by the practitioner from information obtained from relevant sources. Examples of sources of information the practitioner often uses to develop expectations, depending on the engagement circumstances, include:
- Financial information for comparable prior period(s), taking known changes into account.
- Information about expected operating and financial results, such as budgets or forecasts including extrapolations from interim or annual data.
- Relationships among elements of financial information within the period.
- Information regarding the industry in which the entity operates, such as gross margin information, or comparison of the entity's ratio of sales to accounts receivable with industry averages or with other entities of comparable size in the same industry.
- Relationships of financial information with relevant non-financial information, such as payroll costs to number of employees.
Adequacy of the Data
CSRE 2400.48 states that in designing analytical procedures, the practitioner must consider whether the data from the client’s accounting system / records are adequate for the purpose of performing the analytical procedures. Specifically, CSRE 2400.A103 provides guidance on whether data to be used for analytical procedures are satisfactory for the
The practitioner's consideration of whether data to be used for analytical procedures are satisfactory for the intended purpose(s) of those procedures is based on the practitioner's understanding of the entity and its environment, and is influenced by the nature and source of the data, and by the circumstances in which the data are obtained. The following considerations may be relevant:
- Source of the information available. For example, information may be more reliable when it is obtained from independent sources outside the entity;
- Comparability of the information available. For example, broad industry data may need to be supplemented or be adjusted to be comparable to data of an entity that produces and sells specialized products;
- Nature and relevance of the information available. For example, whether the entity's budgets are established as results to be expected rather than as goals to be achieved; and
- The knowledge and expertise involved in the preparation of the information, and related controls that are designed to ensure its completeness, accuracy and validity. Such controls may include, for example, controls over the preparation, review and maintenance of budgetary information.