What is the first step in the analytical procedures process?

Understanding the business is crucial as the first step in the analytical procedures process because it provides the context necessary for interpreting financial information correctly. By gaining a deep understanding of the business, including its environment, industry dynamics, and operational processes, an auditor can form a basis for analyzing financial performance and conditions.

This foundational knowledge enables the auditor to make informed assumptions and expectations when evaluating the financial statements. It informs the development of expectations, which is pivotal for effective analysis in subsequent steps. Without this understanding, the comparisons and evaluations made in later stages, such as developing expectations or identifying variations, could lead to misinterpretations. Therefore, grasping the intricacies of the business is essential for accurate and relevant analytical procedures.