There are five types of analytical procedure commonly used for performing analytical procedures on an audit engagement. All five types of analytical procedures may be used as substantive procedures and will influence the precision of the expectation. We choose among these procedures based on our objectives for the procedure (i.e., purpose of the test, desired level of assurance).
Each of the five types uses a different method to form an expectation. The first four are ranked from lowest to highest in order of their inherent precision. Scanning analytics are different from the other types of analytical procedures in that scanning analytics search within accounts or other entity data to identify anomalous individual items, while the other types use aggregated financial information.
Expectations can be developed for analytical procedures as basic as a simple trend analysis (using the prior-year balance, adjusted for expected changes, as the expectation for the current year), or as complex as multiple regression analysis incorporating both financial and non-financial data. We select the most appropriate type of analytical procedure by considering the nature of the account, purpose of the test, and desired level of assurance.
If we need a high level of assurance from a substantive analytical procedure, we should develop a relatively precise expectation by selecting an appropriate analytical procedure (e.g., a reasonableness test instead of a simple trend or "flux" analysis). As discussed in PwC Audit 4172, the types of analytical procedures (excluding scanning analytics) can generally be ranked from lower to higher in terms of precision as follows: trend analysis, ratio analysis, reasonableness testing, and regression analysis. Thus, determining which type of substantive analytical procedure to use is a matter of professional judgment.
In summary, there is a direct correlation between the type of analytical procedure selected and the precision it can provide. Generally, the more precision inherent in an analytical procedure used, the greater the potential reliability of that procedure. Additional information is included in PwC Audit 4172.
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