Copyright 2003 Pearson Education Canada Inc. CHAPTER 13 The Use of Automated Working Papers and Analysis During the Audit of the Sales and Collection Cycle
Copyright 2003 Pearson Education Canada Inc. 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. Analytical Review
Copyright 2003 Pearson Education Canada Inc. Twelve-Step Approach for Applying Analytical Review 1. Define results to be examined and relationship. and relationship. -comparison should be operation- -comparison should be operation- ally independent ally independent -e.g. Cost of sales as a fixed -e.g. Cost of sales as a fixed percentage of sales percentage of sales
Copyright 2003 Pearson Education Canada Inc. Twelve-Step Approach for Applying Analytical Review 2. State objectives of the review. -assertions being tested are -assertions being tested aredescribed -e.g.completeness and accuracy -e.g.completeness and accuracy of recorded sales and cost of sales
Copyright 2003 Pearson Education Canada Inc. Twelve-Step Approach for Applying Analytical Review 3. Decide on examination methods. - low audit assurance (experience method) - medium audit assurance - medium audit assurance (trend extrapolation method) - high audit assurance (statistical method)
Copyright 2003 Pearson Education Canada Inc. Twelve-Step Approach for Applying Analytical Review 4. Define significant fluctuations. - relate fluctuations to overall materiality materiality - aggregate monthly figure - aggregate monthly figure fluctuations to an annual fluctuations to an annual material error comparison material error comparison
Copyright 2003 Pearson Education Canada Inc. 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 - also based on evidence gathered from other procedures
Copyright 2003 Pearson Education Canada Inc. 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. -choose software to complete the calculations: audit firm’s internally-developed software, “packaged software” such as Lotus 1-2-3, Excel, etc.
Copyright 2003 Pearson Education Canada Inc. Twelve-Step Approach for Applying Analytical Review 7. Control nonsampling risk. -adequate training of auditors -adequate training of auditors -proper supervision -proper supervision
Copyright 2003 Pearson Education Canada Inc. Twelve-Step Approach for Applying Analytical Review 8. Ensure audit control. -take control over audit process -take control over audit process -minimize use of “client staff” -minimize use of “client staff”
Copyright 2003 Pearson Education Canada Inc. Twelve-Step Approach for Applying Analytical Review 9. Make the comparison. -compare results determined in previous steps -compare results determined in previous steps
Copyright 2003 Pearson Education Canada Inc. Twelve-Step Approach for Applying Analytical Review 10. Identify significant fluctuations. -note changes relative to anticipated results -note changes relative to anticipated results -absence of anticipated fluctuations (e.g. from seasonal changes in sales) also require further investigation -absence of anticipated fluctuations (e.g. from seasonal changes in sales) also require further investigation
Copyright 2003 Pearson Education Canada Inc. Twelve-Step Approach for Applying Analytical Review 11. Investigate significant fluctuations. -document fluctuations found in step #10 in the working papers -document fluctuations found in step #10 in the working papers -follow up on documented fluctuations -follow up on documented fluctuations -record management’s explanations -record management’s explanations - document corroborating evidence related to those explanations - document corroborating evidence related to those explanations
Copyright 2003 Pearson Education Canada Inc. Twelve-Step Approach for Applying Analytical Review 11. State conclusions. -indicate whether intended reliance was achieved -indicate whether intended reliance was achieved -incorporate findings in overall audit plan -incorporate findings in overall audit plan
Copyright 2003 Pearson Education Canada Inc. Analytical procedures should be used during the planning and completion phases of the audit... Analytical Review Procedure Overview - from Chap. 6
Copyright 2003 Pearson Education Canada Inc. 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.
Copyright 2003 Pearson Education Canada Inc. Purposes of Analytical Procedures - facilitate understanding of client’s business and industry
Copyright 2003 Pearson Education Canada Inc. 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!
Copyright 2003 Pearson Education Canada Inc. 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
Copyright 2003 Pearson Education Canada Inc. 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
Copyright 2003 Pearson Education Canada Inc. - industry comparisons Types of Analytical Procedures How do the client’s financial ratios compare with those of the industry?
Copyright 2003 Pearson Education Canada Inc. - industry comparisons - comparisons with prior years Ace Company 2003 financial statements Types of Analytical Procedures Ace Company 2004 financial statements
Copyright 2003 Pearson Education Canada Inc. - industry comparisons - comparisons with prior years Ace Company 2003 financial statements Conclusions from a 2-year analy- sis may be erroneous. WHY? Types of Analytical Procedures Ace Company 2004 financial statements
Copyright 2003 Pearson Education Canada Inc. - industry comparisons - comparisons with prior years - comparisons with client-determined expected results, e.g., budgets Types of Analytical Procedures
Copyright 2003 Pearson Education Canada Inc. account can be calculated from sales commissions ????????????????? Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results, examples:
Copyright 2003 Pearson Education Canada Inc. account can be calculated from sales commissions sales depreciation expense ?????????????????? Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results, examples:
Copyright 2003 Pearson Education Canada Inc. account can be calculated from sales commissions sales depreciation expense fixed assets interest expense ?????????????????? Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results, examples:
Copyright 2003 Pearson Education Canada Inc. account can be calculated from sales commissions sales depreciation expense fixed assets interest expense notes/bonds payable Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results, examples:
Copyright 2003 Pearson Education Canada Inc. 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: account can be calculated from equipment maintenance expense ?????????????????
Copyright 2003 Pearson Education Canada Inc. 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: account can be calculated from equipment maintenance expense production
Copyright 2003 Pearson Education Canada Inc. Analytical proce- dures are often facilitated by audit software.
Copyright 2003 Pearson Education Canada Inc. If analytical procedures disclose unusual fluc- tuations or variances, the auditor should in- vestigate by gathering additional evidence.
Copyright 2003 Pearson Education Canada Inc. 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.