Analytical Procedures for Small Business Engagements

• Chapter 0 - Overview
  • Course Objectives
  • Introduction
  • Organization
  • Conclusion
• Chapter 1 - Background Information
  • Learning Objectives
  • Introduction
  • Definition of Analytical Procedures
    • Key Concepts
    • Methodology
  • Steps in Performing Analytical Procedures
  • Sources of Information for Analytical Procedures
  • Common Uses of Analytical Procedures
    • Reviews of Financial Statements
    • Audits of Financial Statements
    • Tests of Reasonableness
    • Other Uses
    • A View to the Future
  • Summary
  • Questions
• Chapter 2 - Types of Analytical Procedures
  • Learning Objectives
  • Introduction
  • Comparison with Amounts from Prior Periods
  • Trend Analysis
  • Techniques for Trend Analysis
    • The Period-to-Period Change Method
    • The Graphic Method
    • The Algebraic Method
    • Advanced Techniques
  • Ratio Analysis
    • Techniques for Ratio Analysis
    • Effective Use of Ratio Analysis
  • Comparisons with Budgets or Forecasts
  • Predictable Relationships among Elements of Financial Data within the Current Period
  • Comparisons with Industry Data
    • Industry Data Sources - General
    • Industry Data Sources - Specific
    • Industry Data Sources - Trade Organizations
    • Internet
    • Comparability
  • Comparisons with Nonfinancial Data
  • Scanning Schedules and Records
  • Reasonableness Testing
  • Regression Analysis
  • Multiple Regression Analysis
  • When Should Regression Analysis Be Used?
  • Altman Model
    • Computerized Calculations
  • Microcomputer Analysis
    • Efficiency
    • Types of Audit Software
  • Selection of Analysis
  • Questions and Cases
    • Case 2-1 - Davis Company
    • Case 2-2 - Collins Manufacturing Company
• Chapter 3 - Analytical Procedures in Review Engagements
  • Learning Objectives
  • Introduction
  • Review Engagement Requirements under SSARS No. 1
    • Understanding of the Engagement
    • Knowledge of Client's Industry
    • Knowledge of Client's Business
  • Review Engagement Procedures
    • Inquiries
    • Analytical Procedures
    • Other Procedures
  • Using Analytical Procedures
    • Analytical Procedures in a Review Engagement
    • Selection of Procedure
    • Limitations
    • Fluctuations
    • Evidence
  • Documentation Procedures
  • Special Circumstances
  • Questions and Cases
    • Case 3-1 - The Texas Candy Co.
• Chapter 4 - Planning the Audit
  • Learning Objectives
  • Introduction
  • Analytical Procedures in Planning Stage
    • SAS No. 109 Requirements
    • Relationship with Knowledge of Client
    • Material Misstatements Due to Fraud
  • Types of Analytical Procedures Used in Planning
    • Small Businesses
    • Audit Process
  • Investigation of Fluctuations
  • Documentation Procedures
    • Small Businesses
  • Questions
• Chapter 5 - Using Analytical Procedures as Substantive Tests
  • Learning Objectives
  • Introduction
  • Financial Statement Assertions
    • Risk Categories
    • Client Internal Control
  • Procedures to Address the Risk of Management Fraud
    • Examining Journal Entries and Other Adjustments
    • Business Rationale for Significant Unusual Transactions
    • Retrospective Review of Accounting Estimates
    • Assurance Level
  • Substantive Analytical Procedures
    • Nature of the Assertion
    • Plausibility and Predictability of the Relationship
    • Reliability of the Data
    • Precision of the Expectation
  • Significant Differences
    • Definition
    • Investigating a Significant Difference
  • Application to Audits of Small Businesses
    • Steps in Performing Substantive Analytical Procedures
    • Scanning Techniques
    • Are Analytical Procedures Sufficient?
  • Combining Procedures
    • Sample Sizes
    • Analytical Procedures in Combination
  • Documentation Procedures
    • Sample Documentation
  • Questions
• Chapter 6 - Overall Review
  • Learning Objectives
  • Introduction
  • Overall Review Objectives
  • An Approach to Overall Review
  • Aggregate of Misstatements
  • Documentation Procedures
  • Questions
• Chapter 7 - Evaluating the Client as a Going Concern
  • Learning Objectives
  • Introduction
  • SAS No. 59's Requirements
    • Auditor's Report
  • Documentation Procedures
  • Questions and Cases
    • Case 7-1
• Chapter 8 - Ethics Focus: Accounting and Auditing
  • Ethics Overview
  • Recent Developments
  • Spotlight on Independence
  • Key Ethical Dilemmas
  • Addressing Ethical Dilemmas
  • Available Resources
• Chapter 9 - Latest Developments
• Appendix A - Analytical Procedures for Review Engagements
• Appendix B - Accounting and Review Services Committee - Analytical Procedures in a Review Engagement
• Value Aid
• Auditing Practice Release - Analytical Procedures

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Overview

Course Objectives

• Understand the professional requirements regarding the use of analytical procedures in review and audit engagements.
• Apply analytical procedures in review engagements.
• Use analytical procedures to improve audit efficiency.
• Apply analytical procedures in unusual circumstances.
• Document analytical procedures appropriately.

Introduction

A thorough understanding of analytical procedures is becoming more and more important to the effective and efficient performance of audit and review engagements:

• Analytical procedures have always been a required part of reviews of financial statements under SSARS No. 1, Compilation and Review of Financial Statements, SAS No. 100, and PCAOB Standards.
• SAS No. 56 (as amended), Analytical Procedures, requires an auditor to apply analytical procedures during the planning and overall review phases of an audit.
• SAS No. 56 (as amended) also states that analytical procedures may be the most effective or efficient substantive procedures for obtaining evidence about certain financial statement assertions.
• SAS No. 99 contains requirements for the use of analytical procedures for the detection of fraud.
• Finally, the results of analytical procedures are important to fulfilling the auditor’s responsibility to evaluate an entity as a going concern under SAS No. 59, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern.

Even with all of this emphasis on the application of analytical procedures, professional standards provide little specific guidance on the application of analytical procedures to particular engagements.

Organization

The course is divided into seven sections:

• Section 1 provides background information on analytical procedures.
• Section 2 reviews and explains the common types of analytical procedures.
• Section 3 describes the application of analytical procedures in a review engagement.
• Section 4 discusses the use of analytical procedures in planning an audit.
• Section 5 describes the use of analytical procedures as substantive tests.
• Section 6 discusses the use of analytical procedures in the overall review phase of an audit.
• Section 7 describes the role of analytical procedures in evaluating an entity as a going concern.

Each section begins with a statement of learning objectives and an introduction that previews the section. The body of material in each section is then presented.

At the end of each section are questions. In some sections there are more comprehensive examples in the form of case studies. These questions and case studies are based on actual practice situations.

Numerous practice aids have also been included in the course materials. This workbook also will therefore serve as a technical reference for you after the course is completed.

Conclusion

The manual is designed to be a permanent reference tool. We hope your reading of this manual enriches your professional learning experience.

Background Information

Learning Objectives

• Define analytical procedures.
• Enumerate the steps in performing analytical procedures.
• Enumerate and make use of common sources of the information necessary for performing analytical procedures.
• Explain the common uses of analytical procedures.

Introduction

Auditors have long realized the importance of analytical procedures to the performance of an audit. Such procedures are excellent for identifying audit areas of high risk. The need for a material audit adjustment is identified by analytical procedures more often than by the performance of any other type of procedure. The Auditing Standards Board felt that a requirement for the use of such procedures was needed to help ensure the effective performance of audits. The requirement contained in SAS No. 56 (as amended) was part of the "expectation gap" standards that were intended to improve audit performance. In addition, the report of Panel on Effectiveness had a number of recommendations regarding analytical procedures that have been adopted by the Auditing Standards Board.

Definition of Analytical Procedures

SAS No. 56 (as amended) defines analytical procedures as evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. A basic premise underlying the application of analytical procedures is that plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary.

Key Concepts

The definition implies three key concepts:

1. The evaluations of financial information suggest that analytical procedures will be used to understand and/or test financial statement relationships or balances.
2. The study of plausible relationships suggests an understanding of what can reasonably be expected and involves comparison of recorded book values with an auditor’s expectations.
3. Relationships among financial and nonfinancial data suggest that both types of data can be useful in understanding relationships and, therefore, in developing an expectation.

Methodology

In performing analytical procedures, the practitioner is simply using various data to predict a current-period amount in the financial statements. If the predicted amount is close to the current amount, evidence is provided about the fairness of that amount.

A significant difference between the predicted amount and the current amount may be caused by specific unusual transactions or events, accounting changes, business changes, random fluctuations, or misstatements (errors or fraud).

If there is a significant difference between the expectation and the current-year amount, the accountant will typically recheck, reassess, or refine the analytical techniques used to develop the expectation. This is not the process of investigating the difference, but simply verifying that the final difference is appropriately determined.

Steps in Performing Analytical Procedures

Normally, there are five steps involved in using analytical procedures. They are

• Expectation-formation – Develop an expectation about a current-year financial statement amount from sources such as prior-year amounts or budgets.
• Identification – Determine the amount of difference from the expectation that should lead to investigation or other action.
• Investigation – Compare the expectation with the current-year amount.
• Evaluation – Take action with respect to a significant variation between the expectation and the current-year amount, i.e., investigate the difference.
• Documentation of the work that is performed.

Sources of Information for Analytical Procedures

Analytical procedures involve comparisons of financial statement amounts or ratios with expectations that you develop. Sources of information for the development of the expectations include

• Financial information for comparable prior periods, adjusted for any changes in conditions, such as significant events and accounting changes.
• Anticipated results, including budgets, forecasts, and estimates of annual results from interim data.
• Relationships among elements of financial information within the period.
• Information regarding the industry in which the client operates, such as gross margin information, and any other industry or economic factors.
• Relationships between financial information and relevant nonfinancial data, such as number of employees, square footage of selling space, volume of goods produced, and similar information.

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