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What are analytical procedures and their benefits?

Posted by Sageworks
What are analytical procedures and their benefits?

By Jackie McLaughlin, CPA

Jackie McLaughlin

Analytical procedures are beginning to become more prevalent in the audit world. They provide auditors with many benefits. But are those benefits known?

According to the AICPA, analytical procedures consist of reviewing financial information by studying plausible relationships between data and evaluating it for consistency. Analytics can range from simple comparisons (for example prior year’s ending balances vs current year ending balances, square footage of retail space available vs sales ) to the use of complex models involving many relationships, regression analysis and components of data.

Learn how to streamline analytical procedures here

Analytical procedures typically start with a bottom-up approach: 

  •  What does the data suggest? 

  •   Does the data suggest errors were made? 

  •   Where do the risks appear to be? 

  •   Are there indications of potential fraud? 

  •   What areas of the financials should be investigated based on the assertions?

Analytical procedures can then move to a more top-down approach that deals with audit objectives and assertions: 

   •   Is the content consistent with the auditor’s expectations? 

   •   Are there deviations that are individually significant or that form a pattern? 

The basic premise of any analytical procedure is that plausible relationships DO exist and may be reasonably expected to continue unless conditions are known to the contrary. Simply stated, analytical procedures compare recorded amounts or ratios developed from client data to EXPECTATIONS developed by the auditor. It is these auditor developed expectations that are the cornerstone to success.
Analytics are evolving to become such an important tool that Journal of Accountancy stated, “…mastery of data analytics can help businesses generate a higher profit margin and gain a meaningful competitive advantage. Some experts even predict that companies ignoring data analytics may be forced out of business in the long run.”
Another blog post, How to get referrals and grow your firm, stresses the importance of referrals with client acquisitions and provides advice for generating referrals from satisfied clients or others in your professional network. A post from the AICPA, The New Realities of Referral Marketing for CPAs, identified how the process of client referrals has grown more complex through time with the surfacing of the consumer decision journey. 

Technology Can Help 

Today, technology can help with something called technology enabled analytics. They can: 

 •   Improve the quality of the analytics. Audit regulators have sometimes expressed concerns that when substantive analytical procedures are used, auditors do not always properly establish precise expectations or vet the reliability of the data. Technology enabled analytics address this. 

 •   Ensure that variances are properly investigated. Regulators have shown that variances are not always investigated as they should be. But technology enabled analytics highlight unusual variances or those that are in excess of prescribed tolerable levels. This can focus the auditors attention on areas that require in-depth investigation. 

 •   Reduce the use of statistical sampling because they often enable the efficient and effective examination of 100% of the items in a population. 

 •   Minimize disruption to the client. If the auditor has access to the client’s data and can analyze using technology enabled tools, the client will not be consulted as much as is generally required in detailed tests. 

 •   Improve communications with those charged with governance. Auditors are required to communicate to those charged with governance specific matters as well as other matters that in our professional judgment are significant to the oversight of the financial reporting process. The use of analytics may provide insights into such findings that might not otherwise come to light using other means. Also, matters of concern may be relatively easily explained through graphs, charts or other visual formats. 

 The simple fact is with bigger and better technology, data is available and can be analyzed at a much more granular level. And the more detailed the data, the more auditors can do to draw meaningful and better conclusions for our audits.

About the Author. Jackie McLaughlin, CPA, started her career in a Big 4 public accounting firm. Since leaving public accounting, she has been an internal auditor, a tax preparer and a Controller. She's also done forensic accounting and she's written various articles for Intuit. Currently, in addition to being the Controller for a small private college, she instructs all 4 parts of the Becker CPA exam review and she's a course reviewer for National Association of State Boards of Accountancy..

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