Wonder Homes Pvt. Ltd. owns a commercial building divided into several apartments that are rented out. During the course of audit, the auditor…

Use of Substantive Analytical Procedures: Substantive analytical procedures refer to analytical procedures used as substantive procedures by auditor. The term “analytical procedures” means evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. Analytical procedures also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount. In the given case, the auditor estimates the total rental income by analysing non-financial information—such as number of apartments, rental rates, and vacancy rates and compares it with the rental income recorded in the books. This approach reflects a logical relationship between rental income (financial data) and property details (non-financial data), and hence constitutes a substantive analytical procedure. If a significant difference arises between the expected and actual rental income, the auditor is required to investigate the reason for the variation, which may involve errors, unrecorded transactions, or incorrect rates. Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time. In this case, since rental income tends to remain consistent and predictable, analytical procedures are particularly useful and efficient. Analytical procedures involving, for example, the prediction of total rental income on a building divided into apartments, taking the rental rates, the number of apartments and vacancy rates into consideration, can provide persuasive evidence and may eliminate the need for further verification by means of tests of details.