How to Conduct Analytical Review of Financial Audit

In November 2017, the American Institute of Certified Public Accountants (AICPA) published an updated audit and accounting guide on analytical procedures. The utilise of audit analytics tin can assist during the planning and review stages of the audit. Simply analytics can have an even bigger impact when these procedures are used to supplement noun testing during fieldwork. Here'southward how your auditor uses belittling procedures to make your inspect more than efficient and effective — and why it'due south disquisitional for you to tell your auditor about major changes during the bookkeeping period.

What are analytics?

The AICPA's auditing standards define analytical procedures as "evaluations of fiscal information through analysis of plausible relationships among both financial and nonfinancial 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 past a significant amount."

Examples of belittling tests include:

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

Auditors use analytics to sympathize or test financial statement relationships or balances. Significant fluctuations or relationships that are materially inconsistent with other relevant information or that differ from expected values crave boosted investigation.

How do auditors use belittling procedures?

Experienced auditors use analytical procedures in all stages of the inspect. For instance, analytical procedures may help the auditor during the planning stage to determine the nature, timing and extent of auditing procedures that will be used to obtain audit evidence for specific account balances or classes of transactions.

Analytics also come into play at the finish of the audit. Before delivering financial statements to the company beingness audited, auditors evaluate whether the overall financial statement presentation appears reasonable in light of financial and nonfinancial data.

During fieldwork, auditors can employ analytical procedures to obtain evidence, sometimes in combination with other substantive testing procedures, to identify misstatements in account balances. This can help reduce the risk that misstatements will remain undetected. Analytical procedures are ofttimes more than efficient than traditional, manual audit testing procedures, which tend to require the company being audited to produce significant paperwork. Traditional procedures also typically crave substantial time to verify account balances and transactions.

When using analytical procedures, it's critical for the auditor to establish a threshold that can be accustomed 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 terminal review.

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

What are the four phases of the analytical audit process?

Performing analytical procedures mostly follows this four-stride process:

1. Course an expectation . Here, the auditor develops an expectation of an account residual or financial relationship. Developing an independent expectation helps the auditor employ professional skepticism when evaluating reported amounts. Expectations are formed by identifying relationships based on the auditor'south understanding of the visitor and its industry. Examples of data that auditors use to develop their expectations include prior-period information (adjusted for expected changes), direction's budgets or forecasts, and ratios published in merchandise journals.

two. Place differences betwixt expected and reported amounts . The auditor must compare his or her expectation with the corporeality recorded in the company's bookkeeping organization. Then any difference is compared to the auditor's threshold for analytical testing. If the difference is less than the threshold, the auditor generally accepts the recorded amount without further investigation and the belittling procedure is complete. If the deviation is greater than the threshold, the next step is to investigate the source of the discrepancy.

three. Investigate the reason . The auditor brainstorms all possible causes and and then determines the most likely crusade(south) for the discrepancy. Sometimes, the analytical test or the information itself is problematic, and the auditor needs to apply additional analytical procedures with more precise data. Other times, the discrepancy has a "plausible" explanation, normally related to unusual transactions or events or bookkeeping or business concern changes. For example, if a retail business reports higher-than-expected revenues, information technology could be explained past a change in the product mix or the opening of a new store.

4. Evaluate differences . The accountant evaluates the likelihood of textile misstatement and then determines the nature and extent of any additional auditing procedures. Plausible explanations crave corroborating inspect evidence. For example, if a manufacturer'southward gross margin seems off, the accounting section might explain that its supplier increased the toll of raw materials. To corroborate that caption, the auditor might ostend the price increment with its top supplier. Or, if an increase in cost of sales in one month was attributed to an unusually large sales contract, the accountant might examine supporting documentation, such equally the sales contract and commitment dockets.

For differences that are due to misstatement (rather than a plausible explanation), the accountant must decide whether the misstatement is cloth (individually or in the amass). Cloth misstatements typically require adjustments to the amount reported and may also necessitate additional audit procedures to make up one's mind the scope of the misstatement.

The company being audited is likely to detect when an analytical process unearths a major difference between expected and reported results. How? First, the accountant volition ask management to explain the discrepancy. Then the auditor might ask for supporting evidence to corroborate management'southward response. In some cases, the auditor will conduct more in-depth testing than in previous years when analytical procedures reveal a major discrepancy.

Conceptualize audit inquiries and requests

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

This insight can help auditors develop more reliable expectations for analytical testing and identify plausible explanations for significant changes from the residue reported in prior periods. Moreover, now that you lot empathise the part analytical procedures play in an audit, you can conceptualize audit inquiries, prepare explanations and compile supporting documents before fieldwork starts.

If you accept questions about belittling procedures and how yous should prepare for them, Weaver tin assistance. Contact usa to speak with i of our inspect professionals.

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