CHAPTER 13 The Use of Automated Working Papers

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. 13 - 1

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. Copyright 2003 Pearson Education Canada Inc. 13 - 2

Twelve-Step Approach for Applying Analytical Review 1. Define results to be examined and relationship. - comparison should be operationally independent - e. g. Cost of sales as a fixed percentage of sales Copyright 2003 Pearson Education Canada Inc. 13 - 3

Twelve-Step Approach for Applying Analytical Review 2. State objectives of the review. - assertions being tested are described - e. g. completeness and accuracy of recorded sales and cost of sales Copyright 2003 Pearson Education Canada Inc. 13 - 4

Twelve-Step Approach for Applying Analytical Review 3. Decide on examination methods. - low audit assurance (experience method) - medium audit assurance (trend extrapolation method) - high audit assurance (statistical method) Copyright 2003 Pearson Education Canada Inc. 13 - 5

Twelve-Step Approach for Applying Analytical Review 4. Define significant fluctuations. - relate fluctuations to overall materiality - aggregate monthly figure fluctuations to an annual material error comparison Copyright 2003 Pearson Education Canada Inc. 13 - 6

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 Copyright 2003 Pearson Education Canada Inc. 13 - 7

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. Copyright 2003 Pearson Education Canada Inc. 13 - 8

Twelve-Step Approach for Applying Analytical Review 7. Control nonsampling risk. - adequate training of auditors - proper supervision Copyright 2003 Pearson Education Canada Inc. 13 - 9

Twelve-Step Approach for Applying Analytical Review 8. Ensure audit control. - take control over audit process - minimize use of “client staff” Copyright 2003 Pearson Education Canada Inc. 13 - 10

Twelve-Step Approach for Applying Analytical Review 9. Make the comparison. - compare results determined in previous steps Copyright 2003 Pearson Education Canada Inc. 13 - 11

Twelve-Step Approach for Applying Analytical Review 10. Identify significant fluctuations. - note changes relative to anticipated results - absence of anticipated fluctuations (e. g. from seasonal changes in sales) also require further investigation Copyright 2003 Pearson Education Canada Inc. 13 - 12

Twelve-Step Approach for Applying Analytical Review 11. Investigate significant fluctuations. - document fluctuations found in step #10 in the working papers - follow up on documented fluctuations - record management’s explanations - document corroborating evidence related to those explanations Copyright 2003 Pearson Education Canada Inc. 13 - 13

Twelve-Step Approach for Applying Analytical Review 11. State conclusions. - indicate whether intended reliance was achieved - incorporate findings in overall audit plan Copyright 2003 Pearson Education Canada Inc. 13 - 14

Analytical Review Procedure Overview - from Chap. 6 Analytical procedures should be used during the planning and completion phases of the audit. . . Copyright 2003 Pearson Education Canada Inc. 13 - 15

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. 13 - 16

Purposes of Analytical Procedures - facilitate understanding of client’s business and industry Copyright 2003 Pearson Education Canada Inc. 13 - 17

Purposes of Analytical Procedures - facilitate understanding of client’s business and industry - may indicate financial difficulty and the cli. Bert’s Boutique ent’s ability to con! e l Sa s es tinue as a going n i us B of concern t Ou g n i o G Copyright 2003 Pearson Education Canada Inc. 13 - 18

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. 13 - 19

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. 13 - 20

Types of Analytical Procedures - industry comparisons How do the client’s financial ratios compare with those of the industry? Copyright 2003 Pearson Education Canada Inc. 13 - 21

Types of Analytical Procedures - industry comparisons - comparisons with prior years Ace Company 2003 financial statements 2004 financial statements Copyright 2003 Pearson Education Canada Inc. 13 - 22

Types of Analytical Procedures - industry comparisons - comparisons with prior years Ace Company 2003 financial statements 2004 financial statements Conclusions from a 2 -year analysis may be erroneous. WHY? Copyright 2003 Pearson Education Canada Inc. 13 - 23

Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results, e. g. , budgets Copyright 2003 Pearson Education Canada Inc. 13 - 24

Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results, examples: account sales commissions can be calculated from ? ? ? ? ? Copyright 2003 Pearson Education Canada Inc. 13 - 25

Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results, examples: account sales commissions depreciation expense can be calculated from sales ? ? ? ? ? Copyright 2003 Pearson Education Canada Inc. 13 - 26

Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results, examples: account can be calculated from sales commissions sales depreciation expense fixed assets interest expense ? ? ? ? ? Copyright 2003 Pearson Education Canada Inc. 13 - 27

Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results, examples: account can be calculated from sales commissions sales depreciation expense fixed assets interest expense notes/bonds payable Copyright 2003 Pearson Education Canada Inc. 13 - 28

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. 13 - 29

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. 13 - 30

Analytical procedures are often facilitated by audit software. Copyright 2003 Pearson Education Canada Inc. 13 - 31

If analytical procedures disclose unusual fluctuations or variances, the auditor should investigate by gathering additional evidence. Copyright 2003 Pearson Education Canada Inc. 13 - 32

If analytical procedures disclose unusual fluctuations or variances, the auditor should investigate by gathering additional evidence. The auditor should consider whether fluctuations or variances are material and whether they may be reasonably justifiable. Copyright 2003 Pearson Education Canada Inc. 13 - 33