Which Is Performed During the Final Review Stage of the Audit? Answer Analytical Procedures
In November 2017, the American Establish of Certified Public Accountants (AICPA) published an updated audit and accounting guide on belittling procedures. The use of audit analytics can aid during the planning and review stages of the inspect. But analytics tin can have an even bigger bear upon when these procedures are used to supplement substantive testing during fieldwork. Hither's how your auditor uses analytical procedures to make your audit more efficient and effective — and why it's critical for yous to tell your auditor near major changes during the accounting period.
What are analytics?
The AICPA's auditing standards define analytical procedures equally "evaluations of financial 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 by a significant amount."
Examples of analytical tests include:
- Trend analysis
- Ratio assay
- Reasonableness testing
- Regression analysis
Auditors utilise analytics to sympathize or test financial statement relationships or balances. Pregnant fluctuations or relationships that are materially inconsistent with other relevant information or that differ from expected values require additional investigation.
How do auditors utilise analytical procedures?
Experienced auditors utilize analytical procedures in all stages of the audit. For example, analytical procedures may help the auditor during the planning stage to determine the nature, timing and extent of auditing procedures that will exist used to obtain audit evidence for specific account balances or classes of transactions.
Analytics also come into play at the end of the audit. Before delivering financial statements to the company 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 can aid reduce the risk that misstatements will remain undetected. Belittling procedures are ofttimes more than efficient than traditional, manual inspect testing procedures, which tend to require the company being audited to produce significant paperwork. Traditional procedures also typically require substantial time to verify account balances and transactions.
When using analytical procedures, it's critical for the auditor to found a threshold that can be accustomed without further 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 gamble of textile misstatement is higher) than when using analytics in planning or final review.
Establishing the threshold for analytical procedures is a matter of the accountant'southward professional judgment. The threshold should gene in the possibility that a combination of misstatements could amass to an unacceptable amount. For example, when analyzing expense accounts, an auditor may decide that it'south necessary to investigate the departure between what's expected and what'southward reported merely if it exceeds the accountant's expectation by ten% and/or $10,000. These amounts may vary from company to company and from year to twelvemonth.
What are the four phases of the analytical inspect process?
Performing analytical procedures generally follows this four-step process:
ane. Form an expectation . Hither, the auditor develops an expectation of an account rest or financial relationship. Developing an independent expectation helps the auditor apply professional skepticism when evaluating reported amounts. Expectations are formed by identifying relationships based on the auditor's understanding of the company and its industry. Examples of data that auditors apply to develop their expectations include prior-period information (adjusted for expected changes), management's budgets or forecasts, and ratios published in merchandise journals.
ii. Identify differences between expected and reported amounts . The accountant must compare his or her expectation with the amount recorded in the visitor'south accounting system. Then whatsoever difference is compared to the auditor'south threshold for analytical testing. If the deviation is less than the threshold, the accountant by and large accepts the recorded corporeality without further investigation and the analytical process is complete. If the difference 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 then determines the most probable cause(southward) for the discrepancy. Sometimes, the analytical test or the data itself is problematic, and the accountant needs to apply additional belittling procedures with more precise data. Other times, the discrepancy has a "plausible" explanation, normally related to unusual transactions or events or accounting or business changes. For instance, if a retail concern reports college-than-expected revenues, it could be explained by a change in the product mix or the opening of a new shop.
4. Evaluate differences . The accountant evaluates the likelihood of textile misstatement and so determines the nature and extent of any additional auditing procedures. Plausible explanations require corroborating audit evidence. For example, if a manufacturer's gross margin seems off, the accounting department might explicate that its supplier increased the price of raw materials. To corroborate that explanation, the accountant might confirm the price increase with its top supplier. Or, if an increase in cost of sales in i month was attributed to an unusually large sales contract, the auditor might examine supporting documentation, such as the sales contract and commitment dockets.
For differences that are due to misstatement (rather than a plausible explanation), the auditor must decide whether the misstatement is textile (individually or in the aggregate). Cloth misstatements typically require adjustments to the corporeality reported and may too necessitate additional audit procedures to determine the scope of the misstatement.
The company existence audited is probable to notice when an analytical procedure unearths a major difference between expected and reported results. How? First, the accountant will ask management to explain the discrepancy. And so the accountant might ask for supporting bear witness to corroborate direction'southward response. In some cases, the auditor will conduct more than in-depth testing than in previous years when analytical procedures reveal a major discrepancy.
Conceptualize audit inquiries and requests
Done right, belittling procedures can help make your inspect less time-consuming, less expensive and more effective at detecting errors and omissions. Merely, to avoid surprises in the coming inspect flavor, notify your auditor about any major changes to your operations, accounting methods or market conditions that occurred in 2017.
This insight tin aid auditors develop more than reliable expectations for belittling testing and place plausible explanations for significant changes from the balance reported in prior periods. Moreover, at present that you sympathize the role analytical procedures play in an audit, yous can anticipate audit inquiries, ready explanations and compile supporting documents before fieldwork starts.
If y'all have questions almost analytical procedures and how y'all should prepare for them, Weaver can help. Contact u.s.a. to speak with one of our inspect professionals.
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