Storyboard for

1. Analytical Review – Getting it Right Storyboard for

2. …clear thinking

3. By completing this module you will be able to: Make better use of analytical review techniques in your audit work Comply with Clarified International Standard on Auditing (UK and Ireland) 520 ‘Analytical Procedures’ At the end, you can visit useful Internet sites on a “Web Ride” Lecturer: John McCarthy Learning time: approx. 20 min How to use this learning module? - Click on "Help" in the Table of Contents (TOC) Analytical review – getting it right Graphic: [presenter or standard graphic]

4. ISA (UK and Ireland) 520 ‘Analytical Procedures’ is effective for audits of financial statements for periods ending on or after 15 Dec 2010 Effective use of analytical review techniques Poor use of analytical procedures Assessing results of analytical procedures Investigating results of analytical procedures Background Graphic: [cover page of ISA 520]

5. To obtain relevant and reliable audit evidence when using substantive analytical procedures; and To design and perform analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of the entity Key objectives of analytical review Graphic: [rugby goalposts]

6. Occurrence Completeness Accuracy Cut-off Classification Profit and Loss Account assertions Graphic: [ Infinity symbol]

7. Balance sheet Existence Rights and obligations Completeness Valuation and allocation Presentation and disclosure Occurrence/ rights/ obligations Completeness Classification and understandability Accuracy and valuation Balance sheet/ Presentation & disclosure assertions Graphic: [ Scales]

8. Analytical procedures are one of many substantive procedures Applied to transactions/ balances with suitable characteristics If great volatility – may not be suitable ISA 330 para A10: ‘If an assessed risk is lower because of the particular characteristics of a class of transactions without consideration of the related controls, then the auditor may determine that substantive analytical procedures alone provide sufficient appropriate audit evidence’ Guidance on application of Analytical Review Graphic: [spirit level ]

9. Compare with information for prior periods Anticipate results of the entity, such as budgets or forecasts, or expectations of the auditor, such as an estimation of depreciation Use similar industry information, such as a comparison of the entity’s ratio of sales to accounts receivable with industry averages or with other entities of comparable size in the same industry Good use of Analytical Review Graphic: [factory]

10. Impairment of intangibles Review additions and disposals during the period Investigate/ verify any large or unusual items Verify that all additions/ disposals have been scrutinized for impairment Review the reasonableness of the impairment charges and the estimations made supporting the impairment and value in use calculations Example of use of analytical procedures Graphic: [Licence]

11. Among elements of financial information that would be expected to conform to a predictable pattern based on the entity’s experience e.g. gross margin percentages Between financial information and relevant non-financial information e.g. payroll costs to number of employees Consider relationships Graphic: [calculator and a big question mark]

12. Evaluate the reliability of data from which the auditor’s expectation of recorded amounts or ratios is developed, taking account of source, comparability, and nature and relevance of information available, and controls over preparation Ref: ISA 520 Para. A12-A14 Requirements for reliable Analytical Review Graphic: [gold hallmark symbol]

13. Source of the information available e.g. information may be more reliable when it is obtained from independent sources outside the entity Comparability of the information available e.g. broad industry data may need to be supplemented to be comparable to that of an entity that produces and sells specialized products Nature and relevance of the information available e.g. whether budgets have been established as results to be expected, rather than as goals to be achieved Assessing reliability of data Graphic: [ Pic of Whitehall]

14. Plausible relationships among both financial and non-financial data e.g. an increase in sales staff travel costs should result in increased sales Investigate identified fluctuations or relationships that are inconsistent with other relevant information e.g. insurance claim when there has been no record of the reported incident Investigate identified fluctuations or relationships that differ from expected values by a significant amount e.g. increase in salaries/ wages costs when no new staff have been hired See ISA 520 Para. A1-A3 Look for Graphic: [Microsccope]

15. Develop an expectation of recorded amounts or ratios Evaluate whether the expectation is sufficiently precise to identify a misstatement that, individually or when aggregated with other misstatements, may cause the financial statements to be materially misstated e.g. bed occupancy ratio in hotel trade – see www.hotstats.comfor their2013 report on UK hotel sector performance e.g. in the public house trade, it is industry standard that one should expect a yield of 88 pints in a keg of beer Ref: ISA 520 Para. A15 Making Analytical Review more reliable Graphic: [hotel]

16. Determine the amount of any difference of recorded amounts from expected values that is acceptable without further investigation as required by paragraph 7 of ISA 520 If industry is volatile, effective analytical review may be much more difficult e.g. steel industry in recent years with massive consumption in China Ref: ISA 520 Para. A16 Valid Analytical Review Graphic: [melting steel]

17. Controls over the preparation of the information that are designed to ensure its completeness, accuracy and validity e.g. Controls over the preparation, review and maintenance of budgets Prior year knowledge and understanding e.g. knowledge gained during previous audits the auditor’s understanding of the effectiveness of the accounting and internal control systems the types of problems that in prior periods have given rise to accounting adjustments Assess reliability of results Graphic: [a tape measure]

18. The accuracy with which the expected results of substantive analytical procedures can be predicted e.g. the auditor may expect greater consistency in comparing gross profit margins from one period to another than in comparing discretionary expenses, such as research or advertising The degree to which information can be disaggregated/ analysed e.g. substantive analytical procedures may be more effective when applied to financial information on individual sections of an operation or to financial statements of components of a diversified entity, than when applied to the financial statements of the entity as a whole Assessing reliability of results (cont) Graphic: [Olympic symbol]

19. Payroll where an entity has a known number of employees at fixed rates of pay throughout the period possible for the auditor to use this data to estimate the total payroll costs for the period with a high degree of accuracy providing audit evidence for a significant item in the financial statements and reducing the need to perform tests of details on the payroll Trade ratios The use of widely recognized trade ratios (such as profit margins for different types of retail entities) can often be used effectively in substantive analytical procedures to provide evidence to support the reasonableness of recorded amounts Analytical Review in action Graphic: [Payslip]

20. Rental income The prediction of total rental income on a building divided into apartments, taking the rental rates, the number of apartments and vacancy rates into consideration, can provide persuasive evidence and may eliminate the need for further verification by means of tests of details - provided the elements are appropriately verified Analytical Review in action (cont) Graphic: [a luxury apartment block]

21. Calculation and comparison of gross margin percentages as a means of confirming a revenue figure Gross margins may be like a self-fulfilling prophecy May provide less persuasive evidence, but may provide useful corroboration if used in combination with other audit procedures Word of caution Graphic: [ hazard sign]

22. Whether the financial statements adequately reflect the information and explanations previously obtained and conclusions previously reached during the course of the audit Whether the procedures reveal any new factors which may affect the presentation of, or disclosures in, the financial statements Whether analytical procedures applied when completing the audit, such as comparing the information in the financial statements with other pertinent data, produce results which assist in arriving at the overall conclusion as to whether the financial statements as a whole are consistent with the auditor’s knowledge of the entity's business Conclusions based on Analytical Review Graphic: [a partially competed Rubik‘s cube]

23. Analytical Review is a very useful audit technique It must be used with care as it can produce unreliable results in certain circumstances Based on data that has been produced reliably Based on systems controls that are known to be trustworthy and reliable Summary Graphic: [standard summary graphic]

24. Web Ride

25. …clear thinking

26. Please select the correct answer(s) and then click on “Submit” There are five audit assertions regarding the profit and loss account that analytical review may be used to test. Which of the following is not one of the five assertions? Occurrence Existence Accuracy Cut-off Classification Question 1

27. Please select the correct answer(s) and then click on “Submit” Analytical review is one of the main areas to focus on during the audit of intangibles. Is this true or false? True False Question 2

28. Please select the correct answer(s) and then click on “Submit”. Is the following statement true or false? The auditor may expect less consistency in comparing gross profit margins from one period to another than in comparing discretionary expenses, such as research or advertising. True False Question 3

29. Now you have finished this module and acquired basic knowledge on the application of analytical review techniques If you answered all the questions in the Quiz correctly, you can print out your personal certificate by clicking on the link Thank you for your attention! Finish Graphic: [standard finish graphic]