Para 2.1.22 — MSO (Audit)
Original Rule Text
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.
# C. Direct substantive testing of transactions
What This Means
Analytical review follows five steps: (1) develop an expectation of what a figure should be, (2) define what counts as a significant difference from that expectation, (3) compare the actual recorded amount with your expectation, (4) investigate any significant differences, and (5) document everything and conclude whether you can rely on the results. If the unexplained difference remains significant after investigation, the analytical review provides little or no assurance.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Key Points
- 1Five steps: develop expectation, define significance threshold, compare, investigate, conclude
- 2Auditor sets a significance threshold based on professional judgment
- 3Only differences exceeding the threshold are investigated
- 4All steps must be documented
- 5If unexplained differences remain significant, the procedure provides little assurance
- 6Assurance depends on whether differences can be satisfactorily explained
Practical Example
An auditor expects cotton import duty to be Rs 1,000 crore based on trade data and sets Rs 50 crore as the significance threshold. Actual collection is Rs 910 crore — a Rs 90 crore gap (significant). Investigation reveals Rs 25 crore was misclassified as textile duty, but Rs 65 crore remains unexplained. Since Rs 65 crore exceeds the Rs 50 crore threshold, the auditor concludes that analytical review alone cannot provide assurance, and further substantive testing is needed.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Frequently Asked Questions
How does the auditor decide what difference is 'significant'?▼
What if the investigation fully explains the difference?▼
Must all five steps be documented?▼
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.