To Be Effective Analytical Procedures in the Overall Review Stage of an Audit

In November 2017, the American Institute of Certified Public Accountants (AICPA) published an updated audit and accounting guide on belittling procedures. The employ of audit analytics can help during the planning and review stages of the inspect. But analytics can accept an fifty-fifty bigger bear upon when these procedures are used to supplement substantive testing during fieldwork. Here's how your accountant uses belittling procedures to brand your audit more efficient and effective — and why information technology'due south disquisitional for y'all to tell your auditor about major changes during the bookkeeping period.

What are analytics?

The AICPA'south auditing standards define analytical procedures as "evaluations of fiscal information through assay of plausible relationships among both financial and nonfinancial data. Belittling procedures also comprehend such investigation, as is necessary, of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values past a significant amount."

Examples of belittling tests include:

• Trend analysis
• Ratio assay
• Reasonableness testing
• Regression analysis

Auditors use analytics to empathise or examination financial argument relationships or balances. Significant fluctuations or relationships that are materially inconsistent with other relevant data or that differ from expected values require additional investigation.

How exercise auditors utilize belittling procedures?

Experienced auditors use analytical procedures in all stages of the audit. For case, belittling procedures may help the accountant during the planning stage to determine the nature, timing and extent of auditing procedures that will be used to obtain inspect show for specific business relationship balances or classes of transactions.

Analytics also come into play at the terminate of the inspect. Before delivering financial statements to the visitor being audited, auditors evaluate whether the overall financial statement presentation appears reasonable in light of financial and nonfinancial data.

During fieldwork, auditors can use belittling procedures to obtain evidence, sometimes in combination with other substantive testing procedures, to place misstatements in account balances. This tin help reduce the take a chance that misstatements will remain undetected. Analytical procedures are oftentimes more efficient than traditional, transmission inspect testing procedures, which tend to crave the company being audited to produce meaning paperwork. Traditional procedures also typically require substantial time to verify account balances and transactions.

When using analytical procedures, information technology's critical for the auditor to constitute a threshold that tin can be accepted without farther investigation. This threshold is influenced primarily by the concept of materiality and the desired level of assurance. The threshold is typically lower when using analytics to perform substantive testing (where the risk of material misstatement is higher) than when using analytics in planning or final review.

Establishing the threshold for analytical procedures is a affair of the auditor's professional judgment. The threshold should cistron in the possibility that a combination of misstatements could aggregate to an unacceptable amount. For instance, when analyzing expense accounts, an auditor may decide that it's necessary to investigate the difference between what's expected and what's reported simply if it exceeds the auditor'southward expectation by 10% and/or $ten,000. These amounts may vary from visitor to visitor and from year to year.

What are the four phases of the belittling audit process?

Performing belittling procedures more often than not follows this four-step process:

1. Form an expectation . Here, the auditor develops an expectation of an account residuum or financial relationship. Developing an independent expectation helps the auditor use professional skepticism when evaluating reported amounts. Expectations are formed by identifying relationships based on the accountant's understanding of the company and its manufacture. Examples of information that auditors utilize to develop their expectations include prior-period information (adjusted for expected changes), management's budgets or forecasts, and ratios published in trade journals.

2. Identify differences between expected and reported amounts . The accountant must compare his or her expectation with the amount recorded in the company'due south bookkeeping system. And then any divergence is compared to the auditor's threshold for analytical testing. If the difference is less than the threshold, the accountant generally accepts the recorded amount without further investigation and the analytical procedure is complete. If the deviation is greater than the threshold, the next step is to investigate the source of the discrepancy.

3. Investigate the reason . The auditor brainstorms all possible causes and then determines the about likely cause(s) for the discrepancy. Sometimes, the analytical test or the data itself is problematic, and the accountant needs to apply boosted analytical procedures with more than precise data. Other times, the discrepancy has a "plausible" explanation, usually related to unusual transactions or events or bookkeeping or business organisation changes. For example, if a retail concern reports higher-than-expected revenues, it could be explained by a change in the product mix or the opening of a new store.

4. Evaluate differences . The auditor evaluates the likelihood of fabric misstatement and and then determines the nature and extent of any additional auditing procedures. Plausible explanations crave corroborating inspect testify. For example, if a manufacturer's gross margin seems off, the accounting department might explicate that its supplier increased the toll of raw materials. To corroborate that caption, the accountant might confirm the price increase with its top supplier. Or, if an increase in price of sales in one calendar month was attributed to an unusually large sales contract, the auditor might examine supporting documentation, such as the sales contract and delivery dockets.

For differences that are due to misstatement (rather than a plausible explanation), the auditor must decide whether the misstatement is material (individually or in the aggregate). Material misstatements typically require adjustments to the corporeality reported and may likewise necessitate additional audit procedures to decide the scope of the misstatement.

The visitor beingness audited is probable to notice when an analytical process unearths a major difference between expected and reported results. How? First, the auditor will ask direction to explain the discrepancy. Then the auditor might ask for supporting evidence to approve direction'southward response. In some cases, the auditor will conduct more in-depth testing than in previous years when analytical procedures reveal a major discrepancy.

Anticipate inspect inquiries and requests

Done right, analytical procedures tin help make your audit less time-consuming, less expensive and more effective at detecting errors and omissions. But, to avoid surprises in the coming audit flavor, notify your accountant about any major changes to your operations, accounting methods or market conditions that occurred in 2017.

This insight tin help auditors develop more reliable expectations for belittling testing and identify plausible explanations for significant changes from the balance reported in prior periods. Moreover, now that y'all understand the part belittling procedures play in an audit, you can anticipate audit inquiries, prepare explanations and compile supporting documents earlier fieldwork starts.

If y'all take questions about belittling procedures and how yous should prepare for them, Weaver tin can assistance. Contact us to speak with i of our audit professionals.

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