Often, analytical procedures are thought to be used during the planning and review stages of an audit. While using analytical procedures during this phase is helpful, utilizing them to supplement substantive testing during fieldwork can be even more effective.
What are audit analytics?
Some examples of analytical procedures include trend, ratio, and regression analysis. According to AICPA auditing standards, analytical procedures are “evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data.” The AICPA expands this definition by stating that analytical procedures also investigate “identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.”
How do audit analytics work?
Audit analytics are often more efficient than traditional, manual audit testing procedures. By using audit analytics in conjunction with other substantive testing procedures, misstatements in account balances can be found without requiring an audit.
Analytical procedures require a set threshold to be accepted without investigation. This threshold is identified using the concept of materiality and the desired level of assurance. Though, the identification of the threshold is ultimately up to the professional judgment of the auditor.
Analytical procedures are generally broken down into five steps:
- Form an independent expectation about an account balance or financial relationship.
- Identify differences between expected and reported amounts.
- Investigate the most probable cause(s) of any discrepancies.
- Evaluate the likelihood of material misstatement.
- Determine the nature and extent of any additional auditing procedures needed.
If a difference is identified due to misstatement (rather than a plausible explanation), it must be determined if the misstatement was material (individually or in the aggregate). Generally, a material misstatement requires adjustments to the amount reported; sometimes, it will also need additional audit procedures. These steps work to identify the scope of the misstatement.
How can you use audit analytics?
It’s important to communicate with your auditor about any significant changes in your business. Audit analytics can be much more efficient than traditional methods, but only if your auditor knows about the operations, accounting methods, and market conditions of your business. Understanding these features of your business will help auditors to create more reliable expectations for your analytical testing. It also helps them to identify some possible explanations for significant differences in balance in comparison to prior periods.
When audit analytics are used correctly, time and money will be saved, and accuracy will be improved when detecting errors and omissions. Using audit analytics correctly requires your understanding of the role analytical procedures play in an audit. You should anticipate audit inquiries, have explanations prepared, and supporting documents compiled before fieldwork starts.
We can help to answer any questions about audit analytics, and how to apply them to your company. Contact us at 818-334-8623 or click here and we will contact you.