Avoiding the pitfalls of analytical procedures
By definition, analytical procedures is 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:
- Poor time management: Not approving financially sound
information or spending too much time mulling over correct statements
- Exposed liability: Approving financially incorrect
information due to the pressure of deadlines, which then exposes the firm to
Auditors are metaphorical adventurers traveling into
sometimes unchartered financial territory. On 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 at 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 tools 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
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
- After identifying deviations from set thresholds, the next
step for assessing risk is identifying those within the business being audited
that 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 and adequate 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
- Narrowing the risks to assess 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.