Para 2.1.22 — MSO

2.1.22 The steps involved in analytical review are as follows:

(i) Develop an expectation: The basic premise of analytical review is the expectation that there are relationships between different types of data and that these relationships will continue to exist unless conditions to the contrary arise, which may then have to be investigated. For example, based on the quantity of cotton imported and its import price, Audit may develop an expectation that the annual value of cotton imports could be of the order of magnitude of Rs 1,000 crores.

(ii) Define significant differences: Only very rarely will the actual recorded amount equal our expectation. It will perhaps not be worthwhile to investigate all cases of differences between recorded amounts and expectations. Instead, only those that are significant will need to be investigated. For example, Audit may, based on professional judgment, decide in the example given in

(i) above that variations of up to Rs 50 crores from expectations are acceptable.

(iii) Compare the actuals with the expectation: Continuing with the above example, let us assume that Audit discovers that actual value of the annual cotton imports is Rs 910 crores. In this situation, the difference between the expectation of Rs 1,000 crores developed at

(i) above and the actuals is Rs 90 crores, which is significant because the auditor has decided [

(ii) above] that variations above Rs 50 crores between expectations and actuals are significant.

(iv) Investigate any significant differences between actuals and expectation: As the difference of Rs 90 crores is more than Rs 50 crores considered as being significant, Audit will have to investigate the reasons for this significant difference.

(v) Document the first four steps and make an audit conclusion as to whether assurance can be drawn: Assuming that the investigation referred to at

(iv) above has revealed that, of the difference of Rs 90 crores, a sum of Rs 25 crores is attributable to the misclassification of cotton imports as textile imports, an amount of Rs 65 crores will still remain unexplained. This amount being greater than the significant difference of Rs 50 crores defined at

(ii) above, Audit can derive very little or no assurance from the analytical review procedure adopted in this case.