13 - 1Copyright 2003 Pearson Education Canada Inc.

CHAPTER 13

The Use of Automated Working Papers and Analysis During the Audit of the Sales

and Collection Cycle

13 - 2Copyright 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 Analytical Review

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Twelve-Step Approach for Twelve-Step Approach for Applying Analytical ReviewApplying Analytical Review

1. 1. Define results to be examinedDefine results to be examined and relationshipand relationship.. -- comparison should be operation-comparison should be operation- ally independentally independent -- e.g. Cost of sales as a fixed e.g. Cost of sales as a fixed percentage of salespercentage of sales

13 - 4Copyright 2003 Pearson Education Canada Inc.

Twelve-Step Approach for Twelve-Step Approach for Applying Analytical ReviewApplying Analytical Review

2. 2. State objectives of the reviewState objectives of the review.. -- assertions being tested areassertions being tested are

describeddescribed -- e.g.e.g. completenesscompleteness and and accuracyaccuracy

of recorded sales and cost ofof recorded sales and cost ofsalessales

13 - 5Copyright 2003 Pearson Education Canada Inc.

Twelve-Step Approach for Twelve-Step Approach for Applying Analytical ReviewApplying Analytical Review

3. 3. Decide on examination methodsDecide on examination methods. . - low audit assurance- low audit assurance

(experience method)(experience method) - medium audit assurance- medium audit assurance

(trend extrapolation method)(trend extrapolation method)- high audit assurance- high audit assurance

(statistical method)(statistical method)

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Twelve-Step Approach for Twelve-Step Approach for Applying Analytical ReviewApplying Analytical Review

4. 4. Define significant fluctuationsDefine significant fluctuations. . - relate fluctuations to overall- relate fluctuations to overall materialitymateriality

- aggregate monthly figure - aggregate monthly figure fluctuations to an annualfluctuations to an annual

material error comparisonmaterial error comparison

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Twelve-Step Approach for Twelve-Step Approach for Applying Analytical ReviewApplying Analytical Review

5. 5. Specify intended relianceSpecify intended reliance. . - based, in part, on primary - based, in part, on primary assessed inherent risk, assessed assessed inherent risk, assessed control risk and desired audit control risk and desired audit assurance assurance

- also based on evidence gathered - also based on evidence gathered from other procedures from other procedures

13 - 8Copyright 2003 Pearson Education Canada Inc.

Twelve-Step Approach for Twelve-Step Approach for Applying Analytical ReviewApplying Analytical Review

6. 6. Select the method of computationSelect the method of computation. . -- choose software to complete the choose software to complete the

calculations: audit firm’s calculations: audit firm’s internally-developed software, internally-developed software, “packaged software” such as “packaged software” such as Lotus 1-2-3, Excel, etc.Lotus 1-2-3, Excel, etc.

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Twelve-Step Approach for Twelve-Step Approach for Applying Analytical ReviewApplying Analytical Review

7. 7. Control nonsampling riskControl nonsampling risk. .

-- adequate training of auditorsadequate training of auditors

-- proper supervisionproper supervision

13 - 10Copyright 2003 Pearson Education Canada Inc.

Twelve-Step Approach for Twelve-Step Approach for Applying Analytical ReviewApplying Analytical Review

8. 8. Ensure audit controlEnsure audit control. . -- take control over audit processtake control over audit process -- minimize use of “client staff”minimize use of “client staff”

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Twelve-Step Approach for Twelve-Step Approach for Applying Analytical ReviewApplying Analytical Review

9. 9. Make the comparisonMake the comparison. . -- compare results determined in compare results determined in

previous steps previous steps

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Twelve-Step Approach for Twelve-Step Approach for Applying Analytical ReviewApplying Analytical Review

10. 10. Identify significant fluctuationsIdentify significant fluctuations. . -- note changes relative to note changes relative to

anticipated resultsanticipated results -- absence of anticipated absence of anticipated

fluctuations (e.g. from seasonal fluctuations (e.g. from seasonal changes in sales) also require changes in sales) also require further investigation further investigation

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Twelve-Step Approach for Twelve-Step Approach for Applying Analytical ReviewApplying Analytical Review

11. 11. Investigate significant fluctuationsInvestigate significant fluctuations. . -- document fluctuations found in step document fluctuations found in step #10 in the working papers#10 in the working papers -- follow up on documented follow up on documented fluctuationsfluctuations -- record management’s explanationsrecord management’s explanations - document corroborating evidence - document corroborating evidence related to those explanationsrelated to those explanations

13 - 14Copyright 2003 Pearson Education Canada Inc.

Twelve-Step Approach for Twelve-Step Approach for Applying Analytical ReviewApplying Analytical Review

11. 11. State conclusionsState conclusions. . -- indicate whether intended reliance indicate whether intended reliance

was achievedwas achieved -- incorporate findings in overall incorporate findings in overall

audit planaudit plan

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Analytical procedures Analytical procedures should be used during should be used during the the planningplanning and and completioncompletion phases of phases of the audit...the audit...

Analytical Review ProcedureOverview - from Chap. 6

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Analytical procedures Analytical procedures should be used during the should be used during the planningplanning and and completioncompletion phases of the audit...phases of the audit...butbut they may they may alsoalso be bebeneficial at otherbeneficial at othertimes during the audit.times during the audit.

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

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Purposes of Analytical ProceduresPurposes 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!

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Purposes of Analytical ProceduresPurposes 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

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Purposes of Analytical ProceduresPurposes 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

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- industry comparisonsTypes of Analytical ProceduresTypes of Analytical Procedures

How do theclient’s financial ratios

compare with thoseof the industry?

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- industry comparisons - comparisons with prior years

AceCompany

2003financial

statements

Types of Analytical ProceduresTypes of Analytical Procedures

AceCompany

2004financial

statements

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- industry comparisons - comparisons with prior years

AceCompany

2003financial

statementsConclusions from a 2-year analy-Conclusions from a 2-year analy-

sis may be erroneous. sis may be erroneous. WHYWHY??

Types of Analytical ProceduresTypes of Analytical Procedures

AceCompany

2004financial

statements

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- industry comparisons - comparisons with prior years- comparisons with client-determined expected results, e.g.,

budgetsbudgets

Types of Analytical ProceduresTypes of Analytical Procedures

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account can be calculated from sales commissions ?????????????????

Types of Analytical ProceduresTypes of Analytical Procedures- industry comparisons - comparisons with prior years- comparisons with client-determined expected results- comparisons with auditor-determined expected results, examples:

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account can be calculated from sales commissions sales depreciation expense ??????????????????

Types of Analytical ProceduresTypes of Analytical Procedures- industry comparisons - comparisons with prior years- comparisons with client-determined expected results- comparisons with auditor-determined expected results, examples:

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account can be calculated from sales commissions sales depreciation expense fixed assets interest expense ??????????????????

Types of Analytical ProceduresTypes of Analytical Procedures- industry comparisons - comparisons with prior years- comparisons with client-determined expected results- comparisons with auditor-determined expected results, examples:

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account can be calculated from sales commissions sales depreciation expense fixed assets interest expense notes/bonds payable

Types of Analytical ProceduresTypes of Analytical Procedures- industry comparisons - comparisons with prior years- comparisons with client-determined expected results- comparisons with auditor-determined expected results, examples:

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Types of Analytical ProceduresTypes 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 fromequipment maintenance expense ?????????????????

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Types of Analytical ProceduresTypes 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 fromequipment maintenance expense production

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Analytical proce-dures are oftenfacilitated by

audit software.

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

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If analytical procedures If analytical procedures disclose unusual fluc-disclose unusual fluc-

tuations or variances, the tuations or variances, the auditor should auditor should investigateinvestigate

by gathering additional by gathering additional evidence.evidence.

The auditor should con-The auditor should con-sider whether fluctua-sider whether fluctua-

tions or variances are tions or variances are materialmaterial and whether they and whether they

may be may be reasonablyreasonablyjustifiablejustifiable..