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All About Analytical procedures

All About Analytical procedures

Analytical Procedures mean the analysis and comparison of financial statements with an intention to identify the potential risk areas of the business.

Financial statements show the income, expenses, assets, liabilities and share capital. When we calculate different ratios by creating relationship of each item in the financial statement with another item, an in-depth analysis can be performed. Then, the company’s data can be compared with another similar company from the same industry.

As a financial auditor, one can use the company related news  in the media, its budget, the different reports generated by various authorities, interim financial statements, prior period statements, board minutes and discussion &/or correspondence with the client at the year-end. However, this list is endless and solely depends on the cognitive and organizational skills of  the auditor involved.

Following inherent risks could be identified with Analytical procedures.

Sr.No.

Inherent Risks

 Analytical Procedures 

1Stocks and bonds are unauthorized and are recorded incorrectly with respect to Account head, amount involved, and the period. Amounts of security type and changes from period to period.Scheduled maturities. Level of purchase and sales activity.
2Accrued and unearned income on stocks and bonds is recorded incorrectly with respect to Account head, amount involved, and the period. Accrued investment income as stocks and bonds as a percentage of stocks and bonds.Accrued investment expense to accrued investment income.Accrued investment income as a percentage of investment income.
3Stocks and bonds are improperly valued and loss in value is not promptly identified and provided for. Relationship of cost and market values by category.Scheduled bond maturities.
4Mortgage loans are unauthorized and are recorded incorrectly as to the account, amount and period. Composition of portfolio regarding loan size (e.g., 50% > Rs.1 million).Scheduled maturities.
5Accrued and unearned income on mortgage loans is recorded incorrectly as to account, amount and period. Accrued income as a percent of total portfolio.Accrued income on mortgage loans as a percent of total investment income.
6Real estate holdings are unauthorized and are improperly recorded as to account, amount and period.Real estate to total investments.
7Accrued and unearned income on real estate holding is recorded incorrectly as to account, amount and period. Accrued expense to accrued income.Accrued income to total real estate portfolio.Accrued income from real estate as a percentage of total investment income.
8Real estate holdings are not protected by insurance and any loss in value is not promptly identified and provided for.Loss to total portfolio – Insurance proceeds from losses to book value – Insurance policy face value to book value.
9Policy loans are unauthorized and are recorded incorrectly as to account, amount and period.Policy loan balances to total investments – Policy loan balance to total cash value of policies in-force.
10Accrued and unearned policy loan income is recorded incorrectly as to account, amount and period. Accrued interest on policy loans to total policy loans.Accrued interest on policy loans to total investment income.
11Policy loans are improperly valued and non-admitted assets are not promptly identified and provided for.Excess of  loans to total policy loans.
12Short-term investments are unauthorized, improperly valued and recorded incorrectly as to account, amount and period. Scheduled maturity dates.Short-term investments to total investments.Composition of short-term investments (e.g., CDs are 50%).
13Accrued and unearned income on short-term investments is improperly recorded as to account, amount and period. Accrued interest on short-term investments to total short-term investments.Accrued interest on short-term investments to total investment income.
14Other assets are improperly valued and recorded incorrectly as to account, amount and period.Amortization/depreciation to asset cost.
15Reinsurance assumed and ceded transactions are unauthorized and recorded incorrectly as to account, amount and period. Reinsurance premiums assumed to premium income.Reinsurance premiums ceded to premium income.Comparison of assumed and ceded in-force in total and by line to total in-force and to prior periods.
16Provisions for income taxes and related assets and liabilities are recorded incorrectly as to account, amount and period.Income tax provision to pre-tax income.
17Due, deferred and advance premiums are calculated incorrectly and not recorded properly as to account, amount and period. Due and deferred premiums to total premiums.Advance premiums to total premiums.
18Life policy benefit reserves are incomplete and are recorded incorrectly as to account, amount and period. Increase in reserves to premium income.Reserves per Rs.1,000 of in-force by line of business.
19Policies with deficiency reserve situations are not identified or properly provided for. Net premiums to gross premiums.Loss ratios and results of operations for credit business.
20Accident and health reserves are calculated and recorded incorrectly as to account, amount and period.Unearned premiums to written premiums.
21Other reserves and policy liabilities are incomplete and are not recorded properly as to account, amount and period. Reserves per Rs.1,000 of in-force.Credit unearned premiums per Rs. 1,000 of life and indemnity in-force.Increase in reserves to premium income.
22Claim liabilities are incomplete and unreasonable and are recorded incorrectly as to account, amount and period. Numbers and total amounts of due and unpaid and in course of settlement claims.Due and unpaid and in course of settlement amount to total claim reserves.Average claim reserves to average benefit payment amount.
23Other liabilities are incomplete and unreasonable and are not recorded properly as to account, amount and period. Accrued salary-to-salary expense.Accrued commission-to-commission expense.Accrued salary per employee.Total other accruals to total other expenses.
24Remittances and unallocated items are unreasonable and not current.Total suspense account to premium income.
25Borrowed money is unauthorized and not recorded properly as to account, amount and period.Interest expense to average borrowing rate by outstanding debt.

 

All About Analytical procedures

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