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Analytical Procedures

removed architectural barriers and began to provide assis- financial data” (AICPA, 1998, 56 p. 1). Accounting
tance to passengers with disabilities by means of lift- researchers have helped to clarify the process that auditors
equipped buses. Another example of the effects of the use to perform analytical procedures by developing mod-
ADA occurred in February 1997, when Harrison County, els that describe the various stages of the process. One
Mississippi, gave people who are deaf or hard of hearing such model developed by Hirst and Koonce (1996)
an equal opportunity to serve as jurors. describes the performance of analytical procedures as con-
The Americans with Disabilities Act of 1990 has sisting of five components: expectation development,
been regarded as the most sweeping piece of legislation explanation generation, information search and explana-
since the Civil Rights Act of 1964. More information on tion evaluation, decision making, and documentation.
the ADA is available at (800)514-0301 (voice) or The first step in the analytical procedures process is
(800)514-0383 (TDD). the development of an expected account balance. SAS No.
56 and auditing textbooks (e.g., O’Reilly et al., 1998)
provide some guidance as to the sources of information an
BIBLIOGRAPHY
The Consumer Law Page; Retrieved August 30, 2005, from auditor can use to develop these expectations. Examples of
http://consumerlawpage.com such sources include the following:
Department of Rehabilitation Web Site. Retrieved August 30, • Financial information from comparable prior peri-
2005, from http://www.rehab.cahwnet.gov
ods adjusted for any changes expected to affect the
Indiana University/Purdue University Web Site; Retrieved
August 30, 2005, from http://www.iupui.edu/˜aao/legis.html balances of the current period. For example, an
expectation of sales revenues for the current year
Job Accommodation Network; Retrieved August 30, 2005, from
might be based on the prior year’s sales, adjusted for
http://www.jan.wvu.edu/links/adasummary.htm
factors such as price increases or the known addition
U.S. Department of Justice Web Site; Retrieved August 30,
2005, from http://www.usdoj.gov/crt/ada/adahom1.htm or loss of major customers.
• Expected results based on budgets or forecasts pre-
pared by the client or projections of expected results
Nikole M. Pogeman
prepared by the auditor from interim periods or
prior comparable periods.
• Available information from the company’s industry.
ANALYTICAL For example, changes in sales revenue or gross mar-
gin percentages might be based on available data
PROCEDURES
from industrywide statistics.
Analytical procedures have become increasingly impor-
tant to audit firms and are considered to be an integral • Nonfinancial information. For example, sales rev-
enue for a client from the hotel industry might be
part of the audit process. The importance of analytical
based on available data as to room occupancy rates.
procedures is demonstrated by the fact that the Auditing
Standards Board, which establishes the standards for con- After an auditor has developed an expectation for a
ducting financial statement audits, has required that ana- particular account balance (e.g., sales revenue), the next
lytical procedures be performed during all audits of step in the analytical procedures process is to compare the
financial statements. The Auditing Standards Board did so expected balance to the actual balance. If there is no sig-
through the issuance of Statement on Auditing Standards nificant difference (referred to by auditors as a material
(SAS) No. 56 in 1988, which requires that analytical pro- difference) between the expected and actual balance, this
cedures be used by auditors as they plan the audit and also conclusion provides audit evidence in support of the
in the final review of the financial statements. In addition, account balance being examined. However, if there is a
SAS No. 56 encourages auditors to use analytical proce- material difference between the expected and actual bal-
dures as one of the procedures they use to gather evidence ance, the auditor will investigate this difference further. At
related to account balances (referred to in auditing as a this point the auditor will develop an explanation for the
substantive test). The purpose of this article is to provide difference. Hirst and Koonce (1996) interviewed auditors
the reader with a general understanding of analytical pro- from each of the six largest accounting firms and found
cedures and to describe the process that auditors use in that the source of the explanation usually depends on
applying analytical procedures. what types of analytical procedures are being performed.
SAS No. 56 describes analytical procedures as the If analytical procedures are being performed during the
“evaluation of financial information made by a study of planning phase of the audit, the auditor usually asks the
plausible relationships among both financial and non- client the reason for the unexpected difference. However,

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 29