PROBLEM
The firm was looking to update its analytical review process for its audit and review engagements in response to the increased attention on this area stemming from new standards and pronouncements. New standards have placed additional emphasis on developing and documenting the auditor’s expectations when performing analytical procedures. The firm needed better documentation of the calculation of expectations used in planning analytics and the underlying assumptions used as well. The firm required a solution that would help increase the effectiveness of these planning procedures without sacrificing efficiency on the engagement. The solution also needed to integrate well with the firms existing audit procedures and ideally would help streamline those procedures.
SOLUTION
The firm implemented ProfitCents Analytical Procedures into their audit and review engagements. In performing each engagement, the client’s financial statements were input from the trial balance into ProfitCents. The firm performed the analysis at the financial statement level providing a high level analysis of the client’s operations. The firm concluded that a high level analysis better corresponds with the specific audit work program areas and so is more appropriate in the planning process than a more detailed analysis at the general ledger account balance level. The Analytical Procedures report was then exported into the Excel based “Analytical Procedures Worksheet”. This approach integrated with the firm’s existing procedures and further enhanced the preliminary analytical review by providing additional metrics for documenting variances. The expected values generated by ProfitCents Analytical Procedures combine both historical regression analysis and an expert system that applies a projection model to the expected account balances. The result is a systematic and objective calculation of the current periods expected value based on historical trends and relationships that the auditor typically expects to see in the financial statements. For any unexpected variances noted during preliminary analytical review, the firm followed up with management inquiries and then tailored the audit programs to respond to the noted risks appropriately. In one instance, the value for inventory was much higher than the expected value calculated within ProfitCents Analytical Procedures. Upon further inquiry and testing of accounts payable, the firm noted improper treatment of purchases that had been dropped shipped to a customer and that had been recorded as inventory at year-end. The sale had been recorded, but the cost of the purchase had not been relieved from inventory into cost of goods sold and a material adjustment was required to record this correctly.
RESULT
ProfitCents Analytical Procedures enabled the auditors to apply a more comprehensive analysis to the analytical review in an efficient manner. The planning process also benefited from a more consistent audit approach being applied from one engagement to the next. Trends and relationships that may not have been identified through more traditional analytical review procedures were noted in planning resulting in a more effective audit with overall lower audit risk for the firm. The new approach to analytical review incorporating the trend analysis resulted in the audit team having a much deeper understanding of the relationships between different elements of the financial statements. This in turn also provided a better understanding of the client’s operations which further improved the audit quality and the firm’s ability to provide the highest level of client service.