Analytical Procedures and Substantive Testing
Evidence
Analytical Procedures and Substantive Testing
Syllabus tag: KASNEB CPA | Advanced Level | CA36 Advanced Auditing and Assurance
1. Analytical procedures — ISA 520
Required at planning (identify risk areas) and overall review stages (assess whether financial statements are consistent with the auditor's understanding). Optionally used as substantive analytical procedures to test specific assertions.
Types: trend analysis (comparing to prior periods), ratio analysis (GP margin, receivables days, inventory days), reasonableness testing (building an independent expectation from non-financial data — e.g. expected payroll = headcount × average salary × months), and regression analysis.
2. Directional testing
Testing in both directions guards against both overstatement and understatement:
- Overstatement of assets: start from accounting records → trace to supporting documents (test existence/accuracy)
- Understatement of assets / completeness: start from source documents → trace to accounting records
Example: completeness of receivables tested by tracing from goods despatch notes to the sales ledger. Existence of receivables tested by confirming recorded balances directly with customers.
3. Substantive procedures by area
Cash and bank: bank confirmation letter; petty cash count; bank reconciliation review; clear outstanding reconciling items after year-end.
Receivables: customer confirmation (positive or negative circularisation); after-date cash receipts review; aged debtor listing analysis; test adequacy of bad debt provisions; cut-off testing (invoices before/after year-end).
Inventory: attend physical count and test-count a sample; trace counts to inventory listing; test valuation (lower of cost and NRV); identify slow-moving or obsolete stock.
Payables and accruals: supplier statement reconciliations; unrecorded liabilities search (invoices received after year-end); cut-off testing of goods received notes; purchase ledger circularisation.
Revenue: analytical review (monthly, by product, by region); cut-off testing of sales invoices; IFRS 15 contract assessment for long-term contracts.
Property, plant and equipment: agree opening balance to prior year; additions — vouch to invoices, confirm capitalisation (not expensed); disposals — verify proceeds and gain/loss; depreciation recalculation; revaluation — independent valuer evidence.
4. Management estimates — ISA 540
The auditor evaluates whether the method is appropriate and consistently applied; tests inputs to the estimate for accuracy; develops an independent expectation; assesses disclosure adequacy. Particular attention to high-subjectivity estimates: goodwill impairment, pension liabilities, expected credit losses, provisions for warranties and litigation.