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CA Ravi Taori
Freight expense as a percentage of sales revenue

• Structural modelling (Correlation, Regression to construct equation and then use it to
Predict Current Year)
A modelling tool constructs a statistical model from financial and/or non-financial data of
prior accounting periods to predict current account balances (e.g., linear regression).

• Reasonableness Tests (Comparison with expected Data, Like Predictive Analysis)
Unlike trend analysis, this analytical procedure does not rely on events of prior periods, but
upon non-financial data for the audit period under consideration (e.g., occupancy rates to
estimate rental income or interest rates to estimate interest income or expense). These tests
are generally more applicable to income statement accounts and certain accrual or
prepayment accounts.
Author’s Note:
Shortcut: TR-SR techniques for SAP
Students may be asked a question on specific part of the answer like the last question of this CNO in
which only Trend analysis is asked. Students should read the question carefully.

QNO Purpose of Comparing P&L Items With Previous Year Old Course -- (M22E/N23R)
520.03.30 #Unique
Tree Limited presented its financial statements for the F.Y. 2021-2022 to its auditor for expressing an
opinion thereon. The auditor while carrying out the audit started comparing various items of profit and

loss account of the year under audit with previous financial years. What is auditor trying to achieve by
carrying out those comparisons?
Answer Purpose of Applying Analytical Procedure: Analytical procedures use comparisons and relationships
to assess whether account balances or other data appear reasonable.
The auditor of Tree Ltd. would achieve the following by carrying out the comparison stated in the
question:
(i) If balances included in the Statement of Profit and Loss of an entity are compared with those
contained in the Statement of Profit and Loss with that of the previous period, it would be
possible to find out the reasons for increase or decrease in the amount of profits of those
years.

(ii) By setting up certain expenses’ ratios on the basis of balances included in the Statement of
Profit and Loss, for the year under audit, comparing them with the same ratios for the
previous year, it is possible to ascertain the extent of increase or decrease in various items of
expenditure in relation to sales and that of trading profit in relation to sales.

(iii) If differences are found to be material, the auditor would ascertain the reasons thereof and
assess whether the accounts have been manipulated to inflate or suppress profits.

(iv) It would be possible to identify the existence of unusual transactions, amounts, ratios and
trends that might indicate matters that have audit implications.

QNO Analytical procedures (Planning phase) Old Course – (SM20/N20R/SM21/N21M)
520.03.50 Bhaskar CNO - SA520.080 New Course -- (SM25)
Explain how a statutory auditor of a company can apply analytical procedures at the planning phase of
audit.
OR
In the planning stage, analytical procedures assist the auditor in understanding the client’s business and
in identifying areas of potential risk. Explain
Answer ➢ Analytical Procedures are required in the planning phase and it is often done during the testing
phase. In addition, these are also required during the completion phase.

➢ Analytical Procedures in Planning the Audit: In the planning stage, analytical procedures assist the
auditor in understanding the client’s business and in identifying areas of potential risk by indicating
aspects of and developments in the entity’s business of which he was previously unaware. This
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