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Analytical procedure is a type of audit evidence which is used during an audit procedure. It consist of different procedures for the comparison of financial and operational information while examining the historical data. This procedure is applied to check the possible problem in the financial records which helps in further investigation. Analytical procedure is performed in three different parts of audit which consist of the risk assessment procedures, substantive analytical procedure and the final analytical procedures (Ferreira et al., 2017). Risk assessment procedure is used to help the auditor in performing the audit work while understanding the business and the plan. It is known as the foundation of audit as it help to understand the company plan and procedures to provide reliable information to the user of the financial statement.
Analytical procedure is used during risk assessment process because it help to perform the required procedures and steps in order to obtain the understanding of the business and its environment including its internal control. It also helps to identify the risk of material, financial misstatement and any fraud or error. This procedure is applied before the completion of the fiscal year while enquiring with the management, employees, operation in control and inspection of the documents.
The regulatory bodies like Auditing and Assurance Standard Board (IAASB) and the UK Financial Reporting Council (FRC) issues rules and regulation which consist of professional skepticism required for auditing. The main objective of the professional skepticism in an audit of financial statement is to explain the importance of the auditors mind set and approach toward an audit (Van Wychen and Laurens 2016). IAASB or FRC explains the professional skepticism which includes the attitude and alertness of an auditor so that they can indicate the possible error and fraud in the financial statement. Professional skepticism includes the audit evidence, conditions to determine the fraud, inquires about the audit evidence and the need for the audit procedures.
Professional skepticism plays an important role in planning of audit as it forms an integrated part of the auditor skills. So some of the importance it are as follows:
Planning materiality is known to the misstatement of the amount which is fixed by the auditor during the planning stage of an audit. It is used by the auditor to assess the misstatement of a financial statement. Whereas the Auditors are required to assess the materiality of the financial statement from the planning stage which is done by using the combination of both quantitative and qualitative method (Nascimento, Rocha and Rocha 2015).
There are number of important points which are required to be considered when choosing the benchmark as it includes the nature of the entity and the industry environment where it operates. User can focus on any particular item of the financial statement. Choosing the appropriate benchmark helps to know the users intention or concern about the financial statements. Profit before tax is volatile in nature and basically used at the starting point so it may not be deemed as the appropriate benchmark. Total revenue is more appropriate than other benchmarks as the level of income varies from year to year whereas the expenditure remain constant. Total asset can also be an appropriate benchmark especially for the startup companies who have little profit. So, the choice of benchmark totally depends on the Auditors personnel judgment and it need to be justifiable with the proper documents.
From the above ratio analysis it can be said that the gross profit margin of the current year has fallen which may impact the business revenue as it looks at how the company is controlling the cost of its inventory. Net profit margin is reducing which is in negative which shows that how much of the sales gives the net income. Return on assets is also decreasing which is an important profitability ratio as it helps to measures the efficiency of the company and manages the investments. Return on equity is also decreasing which is also an important financial ratio of the company as it measures the return on the money invested (Simão, Dias and Carasek 2016).
Current ratio is also decreased in the current year as it compares the current assets and current liability which includes the inventory. Quick ratio is the same ratio as cash ratio which includes the account receivable of the assets while avoiding inventory which is difficult to convert into cash. This all liquidity ratio plays a key role in assessing the short term financial position of the business. All financial banks are generally interested in this analysis as it help to determine the efficiency of the company to utilize the working capital. Shareholders and creditors also use these ratio to assess the dividend and interest payment.
Analytical procedure should be applied to the extent where all the financial statement can be made accordingly. Financial statement need to be made in accordance with the generally accepted auditing principles. Amounts need to be recorded to develop the ratio and can be explained by the auditor more properly. Proper analytical procedure need to be followed with proper plans so that it can enhance the quality of auditors work and increase the business efficiency (Ferreira et al., 2017).
Causanilles, A., Baz-Lomba, J.A., Burgard, D.A., Emke, E., González-Mariño, I., Krizman-Matasic, I., Li, A., Löve, A.S., McCall, A.K., Montes, R. and van Nuijs, A.L., 2017. Improving wastewater-based epidemiology to estimate cannabis use: focus on the initial aspects of the analytical procedure. Analytica chimica acta, 988, pp.27-33.
Ferreira, S.L., Caires, A.O., Borges, T.D.S., Lima, A.M., Silva, L.O. and dos Santos, W.N., 2017. Robustness evaluation in analytical methods optimized using experimental designs. Microchemical Journal, 131, pp.163-169.
Kwa?niewska, K., Gadza?a-Kopciuch, R. and Cendrowski, K., 2015. Analytical procedure for the determination of zearalenone in environmental and biological samples. Critical reviews in analytical chemistry, 45(2), pp.119-130.
Nascimento, C.F., Rocha, D.L. and Rocha, F.R., 2015. A fast and environmental friendly analytical procedure for determination of melamine in milk exploiting fluorescence quenching. Food chemistry, 169, pp.314-319.
Senjanovi?, I., Tomi?, M., Vladimir, N. and Hadži?, N., 2015. An approximate analytical procedure for natural vibration analysis of free rectangular plates. Thin-walled structures, 95, pp.101-114.
Simão, V., Merib, J., Dias, A.N. and Carasek, E., 2016. Novel analytical procedure using a combination of hollow fiber supported liquid membrane and dispersive liquid–liquid microextraction for the determination of aflatoxins in soybean juice by high performance liquid chromatography–Fluorescence detector. Food chemistry, 196, pp.292-300.
Vaclavikova, M., Dzuman, Z., Lacina, O., Fenclova, M., Veprikova, Z., Zachariasova, M. and Hajslova, J., 2015. Monitoring survey of patulin in a variety of fruit-based products using a sensitive UHPLC–MS/MS analytical procedure. Food control, 47, pp.577-584.
Van Wychen, S. and Laurens, L.M., 2016. Determination of total carbohydrates in algal biomass: laboratory analytical procedure (LAP) (No. NREL/TP-5100-60957). National Renewable Energy Lab.(NREL), Golden, CO (United States).
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