The
substantive analytical procedures (SAP) are one of the weakest points in audit
program when it is come to execution. The authorities both in USA and UK when
conducting review of audit work like to point on inappropriateness of evidence
gained from analytical procedures.
Generally, the mistakes made when performing analytical procedures are as follows:
1. Insufficient reliability of data used in analytical procedures. For example, the data of average sales per employee taken from not independent source, a client representative. The information should be checked before used in our calculations.
2. Expectations regarding tendencies are not well elaborated and/or not based on understanding of client business. For example, very often for PL analytics general expectation is used that sales/expenses are expected to grow same level as prior year or to be on the same level as prior year, which is not correct by default.
3. Analytical procedures might be performed well, but insufficient on it is own. Usually the procedures could be limited to SAP in case test of controls (TOC) are effective. But in real life the situation may be different:
1. Insufficient reliability of data used in analytical procedures. For example, the data of average sales per employee taken from not independent source, a client representative. The information should be checked before used in our calculations.
2. Expectations regarding tendencies are not well elaborated and/or not based on understanding of client business. For example, very often for PL analytics general expectation is used that sales/expenses are expected to grow same level as prior year or to be on the same level as prior year, which is not correct by default.
3. Analytical procedures might be performed well, but insufficient on it is own. Usually the procedures could be limited to SAP in case test of controls (TOC) are effective. But in real life the situation may be different:
- TOCs are effective but there are some material items within account, that may change picture completely and, hence, need to be tested;
- The account balance has significant risk, which means that SAP is not sufficient on its own and should be accompanied by test of details.
- When TOCs are ineffective, then we might talk only about application of SAP for the areas of audit where test of details were performed as well
My special
comment to an audit firm new joiners: please, be aware when you are questioning
client regarding changes in the account balance and then document explanations.
I am sure you have a good guidance in your firm on how to perform inquiries and
SAP. Moreover, there are a lot of instructions in internet on this issue. Please, do not write comments like this,
which might be then published in Thomas Houck book*: “Sales increased because
the client sold more goods”. He refers sarcastically about these type of
explanation as “stellar analytical explanation”. The focus of analytics should
be real business reason of change in figures.
*Thomas P.
Cook. Why and How Audits Must Change:
Practical guidance