What is a limitation of analytical procedures?

Analytical procedures are a key part of the audit process, and while they can provide valuable insights, they also have limitations that auditors must consider. One significant limitation is that they may lack professional scepticism. This is important because analytical procedures often rely on comparing financial data with expected outcomes or industry benchmarks. If an auditor does not apply sufficient professional scepticism while interpreting the results, they may overlook anomalous trends or inconsistencies that could indicate potential misstatements or errors in financial reporting.

The application of professional scepticism means that auditors should not just accept the results of analytical procedures at face value. Instead, they should critically evaluate the assumptions behind the analyses and consider the broader context of the financial statements. Without this critical approach, auditors risk missing potential issues, making their reliance on analytical procedures less effective.

In contrast, the other options present inaccuracies regarding analytical procedures. For instance, they do require a good understanding of the business to interpret results properly. Additionally, while analytical procedures can reveal trends, they fundamentally rely on reliable data for accurate analysis. Moreover, they are not universally effective across all business sizes, as their effectiveness can vary based on the nature and complexity of the business involved.