Analytical procedures in planning - Data sources and reliabi...

Learning Outcomes

After reading this article, you will be able to describe how analytical procedures are used at the planning stage of an audit, identify common sources of data, and evaluate their reliability. You will explain why evidence quality is critical, recognise factors affecting data dependability, and apply these concepts to practical audit planning scenarios. You will also learn to identify data-related risks and how these may impact audit conclusions.

ACCA Audit and Assurance (AA) Syllabus

For ACCA Audit and Assurance (AA), you are required to understand how analytical procedures support risk assessment and planning, including the importance of reliable data. This article addresses the following syllabus areas:

• The role and purpose of analytical procedures at the planning stage.
• Identification and explanation of different data sources used for analytical procedures.
• Evaluation of the reliability and relevance of data used in analytical procedures.
• Recognition of risks related to questionable data and the potential effect on audit risk assessment.
• Application of analytical procedures to real-world planning scenarios.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Why is the reliability of data particularly important when performing analytical procedures at the planning stage?
2. Give two examples of internal and two examples of external data sources used for planning analytical procedures.
3. What factors make audit data more or less reliable for use in risk assessment?
4. A draft sales forecast is based on incomplete customer records. What is the risk to your analytical procedures and audit risk assessment?

Introduction

Analytical procedures are required at the planning stage to help identify areas of potential material misstatement. The value of these procedures depends significantly on the quality and source of the data used. Auditors must judge the reliability of financial and non-financial information obtained from both the client and outside sources before relying on it for risk assessment.

Key Term: analytical procedures
Evaluations of financial or non-financial data by studying plausible relationships and identifying fluctuations that may represent risk of misstatement.

Analytical Procedures in Planning

The Purpose of Analytical Procedures

Analytical procedures at planning support auditors in highlighting unusual transactions, trends, or anomalies. These might indicate areas that are at higher risk of material misstatement.

At the planning stage, analytical procedures typically involve comparisons such as:

• Year-on-year changes in financial statement items or ratios.
• Actual results vs budgets or forecasts.
• Company data vs industry benchmarks.
• Relationships between financial and supporting non-financial data (e.g. payroll costs and employee numbers).

Key Term: risk assessment procedures
Audit activities performed to identify and assess risks of material misstatement at both the financial statement and assertion levels.

Data Sources for Analytical Procedures

Data used in analytical procedures is drawn from a range of sources:

Internal Sources

• Draft financial statements.
• Management accounts and internal reports.
• Operational records (e.g. production volumes).
• Budgets and forecasts prepared by management.
• Internal control reports.

External Sources

• Banks, lenders, or trade suppliers providing confirmations or third-party statements.
• Market data, such as industry averages or competitor results.
• Publicly available tax filings.
• Analyst and credit agency reports.

Key Term: internal data
Data originating within the client’s organisation, such as accounting records and management reports.

Key Term: external data
Information obtained from third parties outside the client organisation, including public records and confirmation letters.

Assessing Data Reliability

Before relying on any data for planning analytical procedures, auditors need to assess both reliability and relevance.

Factors Affecting Data Reliability

• Source of information: External sources are typically more reliable than client-generated data.
• Quality of controls: Data from systems with strong internal controls is more dependable.
• Objectivity: Unbiased data, or information delivered without management override, is preferable.
• Documentation: Written evidence, especially in original form, is more reliable than oral explanations or copies.
• Currency: Outdated data may not reflect current business conditions or risks.

Key Term: reliability of evidence
The degree to which audit evidence is trustworthy, influenced by its source, nature, and how it is obtained.

Practical Examples

• A customer confirmation provided directly to the auditor is considered reliable.
• A forecast prepared by management without review or robust supporting assumptions is less reliable.
• Industry benchmarks from a recognised professional body are reliable, while unpublished statistics may not be.

Worked Example 1.1

An auditor is reviewing the client’s gross profit margin trend. Current year draft data comes from the client’s trial balance; prior year audited data comes from published financial statements.

Question: Which set of data is more reliable, and why?

Answer:
Prior year audited financial statements are more reliable because they have been examined independently. Current year draft balances have not yet been audited and may contain posting errors or uncorrected misstatements.

Data Quality and Audit Risk

Poor-quality data can lead to:

• Inaccurate identification of risk areas.
• Overlooking areas of significant misstatement.
• Inefficient allocation of audit resources.

If unreliable input data is used in planning, the auditor’s risk assessment may be flawed, increasing the chance of material misstatements being undetected.

Key Term: audit risk
The risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated.

Common Pitfalls and Limitations

Exam Warning

If an examiner scenario highlights heavy reliance on unaudited management accounts, you must challenge their reliability. Do not base conclusions on weak, internally prepared data without supporting evidence.

Currency and Consistency

Always check that data periods match—comparing full-year activity to partial-year figures can mislead. Adjust for seasonality or shifts in business operations.

Automated Data Analytics

Use of audit software and data analytics can help, but outputs are only as good as the inputs. If the foundational data is incomplete or manipulated, analytical results will be misleading.

Worked Example 1.2

A company’s internal payroll report shows a rise in staff costs. To confirm, the auditor compares the reported number to payroll payments from bank statements.

Question: If the totals do not reconcile, what should you question in your analytical procedure?

Answer:
The reliability of the internal payroll report is suspect and cannot be used, as it is not supported by independent bank evidence. Additional investigation is required.

Responses to Data Reliability Issues

• If data is incomplete, seek alternative sources or corroborate with external evidence.
• Adjust analytical procedures to factor in the increased risk.
• Document your assessment of data reliability and any limitations when planning further audit work.

Revision Tip

Focus on using cross-checks: Where possible, corroborate internally-generated data with evidence from outside the company, such as third-party confirmations or industry data.

Summary

Analytical procedures at the planning stage are effective only when based on high-quality, reliable data. Auditors must critically evaluate both the source and nature of information before using it for risk assessment. Doubts about reliability should always be documented and addressed, as flawed data undermines audit quality and increases overall risk.

Key Point Checklist

This article has covered the following key knowledge points:

• The purpose of analytical procedures and how they inform audit planning.
• Typical internal and external data sources for analytical procedures.
• Key factors that affect the reliability of data used in audit planning.
• The importance of evidence reliability and the risks of using low-quality information.
• How to respond when data is considered unreliable during audit planning.
• The link between data quality and overall audit risk.

Key Terms and Concepts

• analytical procedures
• risk assessment procedures
• internal data
• external data
• reliability of evidence
• audit risk