Para 2.1.16 — MSO (Audit)
Original Rule Text
2.1.16 Comparisons involving a single component: There are two types of comparisons. The first type involves comparison of the recorded value of a component with its budgeted value. The second, called trend analysis, involves a comparison of a component’s current value with its value in previous years. This procedure may be used at both the planning and execution stages of audit. It is commonly used to analyse income statement accounts. In attempting a comparison with budget figures, it will be necessary to consider the reasonability and reliability of the budget. The following questions will arise in this context:
(i) Are the budgets of the entity prepared on a reasonable basis, using reliable and adequate information?
(ii) Have the budgets been reliable indicators of actual results in the past?
In trend analysis, it is preferable to compare figures of a few previous years than just the immediately preceding year in order to factor out any anomalies or aberrations specific to a given year.
What This Means
Single-component comparison is an analytical review technique that comes in two forms: comparing a figure against its budget estimate, or comparing it against previous years (trend analysis). It works for both planning and execution stages of audit. When using budget comparisons, the auditor must consider whether the budget was reasonably prepared and has been a reliable predictor in the past. For trend analysis, comparing multiple prior years is better than just the previous year to avoid anomalies specific to one year.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Key Points
- 1Two types: comparison with budget and trend analysis (comparison with prior years)
- 2Useful at both planning and execution stages
- 3Budget comparison requires assessing the budget's reliability and reasonableness
- 4Trend analysis should compare several years, not just the immediately preceding one
- 5Commonly used for income statement (revenue and expenditure) accounts
Practical Example
An auditor reviewing the Department of Posts' revenue notices that stamp sales are Rs 800 crore against a budget of Rs 1,100 crore — a 27% shortfall. Before raising an alarm, the auditor checks whether past budgets were reliable predictors. Finding that budgets were historically inflated by 20-25%, the actual shortfall is more modest. The auditor also checks a 5-year trend to confirm the pattern.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Frequently Asked Questions
Why compare with multiple years instead of just last year?▼
How does the auditor assess budget reliability?▼
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.