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Analytical Review

CHAPTER 13 The Use of Automated Working Papers and Analysis During the Audit of the Sales and Collection Cycle. Analytical Review.

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Analytical Review

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  1. CHAPTER 13The Use of Automated Working Papers and Analysis During the Audit of the Sales and Collection Cycle

  2. Analytical Review Analytical Review Procedures were introduced in Chapter 6. What follows is a discussion of the twelve - step approach for applying analytical Review, followed by a repeat of the Chapter 6 slides related to Analytical Review Procedures.

  3. Twelve-Step Approach for Applying Analytical Review 1. Define results to be examined and relationship. - comparison should be operation- ally independent - e.g. Cost of sales as a fixed percentage of sales

  4. Twelve-Step Approach for Applying Analytical Review 2. State objectives of the review. - assertions being tested are described - e.g. completeness and accuracy of recorded sales and cost of sales

  5. Twelve-Step Approach for Applying Analytical Review 3. Decide on examination methods. - low audit assurance (experience method) - medium audit assurance (trend extrapolation method) - high audit assurance (statistical method)

  6. Twelve-Step Approach for Applying Analytical Review 4. Define significant fluctuations. - relate fluctuations to overall materiality - aggregate monthly figure fluctuations to an annual material error comparison

  7. Twelve-Step Approach for Applying Analytical Review 5. Specify intended reliance. - based, in part, on primary assessed inherent risk, assessed control risk and desired audit assurance - also based on evidence gathered from other procedures

  8. Twelve-Step Approach for Applying Analytical Review 6. Select the method of computation. - choose software to complete the calculations: audit firm’s internally-developed software, “packaged software” such as Lotus 1-2-3, Excel, etc.

  9. Twelve-Step Approach for Applying Analytical Review 7. Control nonsampling risk. - adequate training of auditors - proper supervision

  10. Twelve-Step Approach for Applying Analytical Review 8. Ensure audit control. - take control over audit process - minimize use of “client staff”

  11. Twelve-Step Approach for Applying Analytical Review 9. Make the comparison. - compare results determined in previous steps

  12. Twelve-Step Approach for Applying Analytical Review 10. Identify significant fluctuations. - note changes relative to anticipated results - absence of anticipated fluctuations (e.g. from seasonal changes in sales) also require further investigation

  13. Twelve-Step Approach for Applying Analytical Review 11. Investigate significant fluctuations. - document fluctuations found in step #10 in the working papers - follow up on documented fluctuations - record management’s explanations - document corroborating evidence related to those explanations

  14. Twelve-Step Approach for Applying Analytical Review 11. State conclusions. - indicate whether intended reliance was achieved - incorporate findings in overall audit plan

  15. Analytical Review Procedure Overview - from Chap. 6 Analytical procedures should be used during the planning and completion phases of the audit...

  16. Analytical procedures should be used during the planning and completion phases of the audit... but they may also be beneficial at other times during the audit.

  17. Purposes of Analytical Procedures - facilitate understanding of client’s business and industry

  18. Purposes of Analytical Procedures - facilitate understanding of client’s business and industry - may indicate financial difficulty and the cli- ent’s ability to con- tinue as a going concern Bert’s Boutique Going Out of Business Sale!

  19. Purposes of Analytical Procedures - facilitate understanding of client’s business and industry - may indicate financial difficulty and the client’s ability to continue as a going concern - may indicate misstatements in the financial statements

  20. Purposes of Analytical Procedures - facilitate understanding of client’s business and industry - may indicate financial difficulty and the client’s ability to continue as a going concern - may indicate misstatements in the financial statements - may result in a reduction of detailed audit tests

  21. How do the client’s financial ratios compare with those of the industry? Types of Analytical Procedures - industry comparisons

  22. Ace Company 2003 financial statements Ace Company 2004 financial statements Types of Analytical Procedures - industry comparisons - comparisons with prior years

  23. Ace Company 2003 financial statements Ace Company 2004 financial statements Types of Analytical Procedures - industry comparisons - comparisons with prior years Conclusions from a 2-year analy- sis may be erroneous. WHY?

  24. Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results, e.g., budgets

  25. Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results, examples: accountcan be calculated from sales commissions ?????????????????

  26. Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results, examples: accountcan be calculated from sales commissions sales depreciation expense ??????????????????

  27. Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results, examples: accountcan be calculated from sales commissions sales depreciation expense fixed assets interest expense ??????????????????

  28. Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results, examples: accountcan be calculated from sales commissions sales depreciation expense fixed assets interest expense notes/bonds payable

  29. Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results - comparisons with expected results, using non-financial data, example: accountcan be calculated from equipment maintenance expense ?????????????????

  30. Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results - comparisons with expected results, using nonfinancial data, example: accountcan be calculated from equipment maintenance expense production

  31. Analytical proce- dures are often facilitated by audit software.

  32. If analytical procedures disclose unusual fluc-tuations or variances, the auditor should in-vestigate by gathering additional evidence.

  33. If analytical procedures disclose unusual fluc-tuations or variances, the auditor should investigate by gathering additional evidence. The auditor should con-sider whether fluctua- tions or variances are material and whether they may be reasonably justifiable.

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