Define analytical procedures:

evaluations of financial information made by a study of plausible relationships among financial and nonfinancial data which involves comparing recorded amounts to expectations developed by the auditor.

Describe the 5 sources of expectations

Financial information for other comparable prior periods. ❑ Are prior trends continuing? ❑ Are new trends developing? ❑ Have changes not occurred where you expect to find them? ❑ The text (p. 374) discusses two ways to develop expectations, simple trend analysis and regression analysis.

Budgeted amounts and anticipated results ❑ The variance, or lack of variance, may warrant further investigation.

Relationships among elements of financial information within the period ❑ Ratios can be based on ❑ Two income statement accounts ❑ Two balance sheet accounts ❑ A balance sheet and income statement account. ❑ The auditor may also consider several accounts using common size statements.

Similar information regarding the entity's industry. ❑ Due to your experience, you will develop "rules of thumb" ❑ e.g., in banking ❑ net income / total assets = ~1% ❑ total loans / total assets = ~ 60% ❑ The text also discusses other sources of industry information, such as Dun and Bradstreet or Robert Morris Associates.

Relationships of financial information to operating data or other relevant nonfinancial information. ❑ For example, hotel rental income = number of rooms * average room rate * occupancy percentage. ❑ Other examples are given on p. 381, "Reasonable Tests".

Use of Analytical Procedures

Audit Planning ❑ Highlights ❑ Unusual or unexpected balances. ❑ Unusual or unexpected relationships.