[IMGCAP(1)]By definition, analytical procedures involve a process of analytically detecting ways to decrease time and increase efficiency.
This process can appear daunting at times because of the numerous comparisons of financial information that must be made when working on a client’s statements. The overall goal for an auditor is to identify unusual or unexpected balances as well as areas of discrepancy that could jeopardize the financial health of a client.
While performing analytical procedures auditors can fall into two different types of error:
1) Poor time management: Not approving financially sound information or spending too much time mulling over correct statements;
2) Exposed liability: Approving financially incorrect information due to the pressure of deadlines, which then exposes the firm to liability.
Auditors are metaphorical adventurers traveling into sometimes uncharted financial territory. One either side of the path are different types of obstacles waiting should they slip too far in one direction or the other. To combat these threats, auditors have identified ways to avoid these pitfalls and produce consistent and timely audits. Additionally, an auditor should identify his or her personal tendencies toward conservative or liberal pre-audit planning and adjust accordingly. In this post we will look methods that auditors can use to avoid these errors.
Using thresholds that are common to the company and industry is one of the most generally used techniques when investigating audits. One study reportedly shows that the most widely used decision rule in planning an audit was to investigate if the account balance had changed by more than 10 percent from the previous year.
Having working knowledge and benchmarks of how most businesses in the industry are performing will increase your ability to identify areas of concern. Additionally, compiling a pool of common-size financial statements can eliminate time spent researching from outside sources.
After identifying deviations from set thresholds, the next step for assessing risk is identifying those within the business being audited who can provide insight about the discrepancy. Here an accountant’s knowledge of and relationship with the organization can come into play by helping to identify who should be contacted and how to work with difficult individuals within the company.
Clearly communicating the risks and seriousness of the discrepancy to the appropriate individuals should lead to timely answers. Knowing how to explain the discrepancy to the firm’s decision makers in an easy-to-understand language is a strength in and of itself. Navigating communication about discrepancies with clarity and precision will allow you to return to audit processes.
Narrowing the risks to access can also be done by performing reviews of cash flow forecasting or other procedures to determine the movement of capital within the company. Having additional procedures like these in place can help to identify which balances are materially misstated and those that are correct. Recognizing when financials prove an initial suspicion incorrect can redirect you to the pressing risks facing a client.
Developing these steps can help standardize the road map your firm uses to navigate pre-auditing hazards. Redirecting your tendency to over-analyze or under-analyze will produce timely and accurate audits that will grow your business and prevent the approval of misstated financials. For more on information on analytical procedures read, “What are analytical procedures and when are they used?”
Zach Meyer is a consultant at the financial information company Sageworks.
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