ACC3175 AUDITING

Unit C11
Doing the work - Part 2
Analytical Reviews
 Objectives

Explain and be able to perform Analytical Reviews as

part of an audit (and familiarise ourselves with ISA520
Analytical Procedures)

• Preliminary analytical review (PAR)

• Substantive analytical review (SAR)
• Final/Financial statements analytical review (FAR)
 Analytical Review (AR)
So the best evidence you can get?

Auditor generated evidence that is uses trends and

ratio analysis and building expectations to examine
against the client records.

It is used at three stages of the audit:

• Preliminary planning/risk assessment (PAR)
• Substantive testing (SAR)
• Final review of financial statements (FAR)
 St Mary’s Governing Body

• Welcome to the team

• You need to plan and execute the audit
ANY QUESTIONS?
St Mary’s Governing Body
Units of work

A Introduction to
auditing
Legislation and
Regulation
Professional
Ethics
Risk /
Evidence

B Planning and
Engagement
Letters
Internal
Controls
(Management view)
Tests of
Controls
(Auditors view)
Substantive
testing

C
Subsequent
Audit Substantive Test Analytical Events and
Sampling of Detail Reviews
Final Matters

D Internal
audit
Audit
reports
Fraud /
Going concern
Liability /
Governance
Regulation
Exemption from preparing full accounts and
audit

Small companies Group subsidiaries

~ meet any 2: ~ meet all:

Turnover Parent
< £10.2m guarantee

Net assets Consolidated

< £5.1m accounts

< 50 employees Not listed

 Audit risk
AR = IR x CR x DR
inherent risk control risk detection risk

Financial
statements
 Preliminary Analytical Review

When: at planning stage

By whom: senior staff

Why: to understand the entity and its financial

position; to ID risks and plan focus areas of testing
ANY QUESTIONS?
St Mary's Governing Body accounts

2011/12 2010/11
INCOME Unrestricted Restricted Total

Maintenance Fund £ 884.50 £ 884.50 £ 768.66

Donations £ 15,000.00 £ 15,000.00 £ -
School Lettings £ 37,543.88 £ 37,543.88 £ 28,800.00
School House Lettings (net) £ 7,336.95 £ 7,336.95 £ 14,406.00

Caretaker House Lettings £ 480.00 £ 480.00 £ 480.00

Other Lettings £ 1,867.69 £ 1,867.69 £ 1,367.32
Bank Interest £ - £ 20.00
£ 48,113.02 £ 15,000.00 £ 63,113.02 £ 45,841.98

EXPENSES

LDBS £ (20,501.91) £ (20,501.91) £ (17,412.19)

Donations £ - £ (500.00)

Minibus Lease £ (8,769.62) £ (8,769.62) £ -

Caretaker and other lettings costs £ (30,428.02) £ (30,428.02) £ (21,189.86)
Clerk Salary £ - £ (3,500.00)
Other £ - £ (88.00)
£ (59,699.55) £ - £ (59,699.55) £ (42,690.06)

Not movement in funds £ (11,586.53) £ 15,000.00 £ 3,413.47 £ 3,151.92

Cash at the beginning of period £ 14,218.71 £ 11,066.79

Net movement in funds £ 3,413.47 £ 3,151.92
Cash at the end of period £ 17,632.18 £ 14,218.71
ANY QUESTIONS?
The audit of internal controls
ASCERTAIN SYSTEMS

IDENTIFY CONTROLS/
WEAKNESSES

WEAKNESSES? TEST CONTROLS

FULL SUBSTANTIVE TESTS LIMIT SUBSTANTIVE TESTS

REVIEW FINANCIAL
STATEMENTS
 Substantive Analytical Review

When: at substantive testing stage (checking the

numbers)

By whom: anyone on the team, particularly those

testing P&L items

Why: to gather evidence in support of the opinion in

respect of specific balances and assertions
 Financial Statement Assertions
(“potential errors”)
The directors of the company
are responsible in law for
producing financial
statements that show a true
and fair view (free from
material misstatement). In
so doing, they make implied
and express assertions in
relation to transaction
classes, account balances
and disclosures.
make the assertions
(“there are no errors”)
The audit process is the
search for sufficient and
appropriate evidence, giving
the auditor reasonable
assurance that the financial
statements are free from
material misstatement. That
process involves seeking
evidence in relation to each
and every financial
statement assertion.
check the assertion
(test for potential errors)
Financial Statement Assertions

existence/occurrence/validity/rights and
obligations

completeness
accuracy of recording
valuation
cut-off
presentation, classification and disclosure
 Substantive Analytical Review (SAR)
Identify the amounts and
assertions to be tested

Develop an expectation

Determine the tolerable

difference range (+/- threshold)

Identify differences (expectation –

actual) for further investigation

Obtain, quantify, and Evaluate results

corroborate explanations
 Substantive Analytical Review (SAR) –
step 1
So very efficient?
Identify the amounts and
All? (except Presentation & Disclosure)
assertions to be tested
 Substantive Analytical Review (SAR) –
step 2
Identify the amounts and
All? (except P&D)
assertions to be tested

Develop an expectation
 Substantive Analytical Review (SAR)
Identify the amounts and
All? (except P&D)
assertions to be tested

Caretaker house rent should be

Develop an expectation 12m @£40 = £480

How do you develop an expectation?

How do you know your expectation is reasonable (precise)?

 Substantive Analytical Review (SAR)
Identify the amounts and
All? (except P&D)
assertions to be tested

Caretaker house rent should be

Develop an expectation 12m @£40 = £480

How do you develop an expectation?

- look at company data (internal)
- look at other data (external)

How do you know your expectation is reasonable (precise)?

- reliability of data
- predictability of relationships
 Substantive Analytical Review (SAR) –
step 3
Identify the amounts and
All? (except P&D)
assertions to be tested

Caretaker house rent should be

Develop an expectation 12m @£40 = £480

Determine the tolerable

+/- 5% of the balance?
difference range (+/- threshold)
+/-5% of materiality?
ANY QUESTIONS?
 Substantive Analytical Review (SAR)
Identify the amounts and
All? (except P&D)
assertions to be tested

School House Lettings?

Develop an expectation
PREDICTABLE?

Determine the tolerable

+/- 5%?
difference range (+/- threshold)
 Substantive Analytical Review (SAR)
Identify the amounts and
All? (except P&D)
assertions to be tested

Donations?
Develop an expectation
UNPREDICTABLE?
Determine the tolerable
+/- 5%?
difference range (+/- threshold)

If so – substantive test of details

 Substantive Analytical Review (SAR)
Identify the amounts and
All? (except P&D)
assertions to be tested

Balance Sheet itmes (e.g. Receivables)

Develop an expectation
UNPREDICTABLE?

Determine the tolerable

+/- 5%?
difference range (+/- threshold)

If so – substantive test of details

 DOG eats CUS(CUS) - recap

Auditors test debit items for Auditors test credit items for
overstatement from general understatement from
ledger (records) to supporting supporting documentation
documentation to general ledger (records)
 DOG eats CUS(CUS)

Vouching Tracing
to back
 Direction of testing
• A test for overstatement of receivables
Customer Order
Order

Take a sample of
Approve
credit balances from the
ledger (client
Despatch Goods out records) and
goods note
confirm balances or
Invoice Sales Day agree to supporting
customer Book
documents
(evidence)
Record General
sale ledger
 Direction of testing
• A test for understatement of payables
Customer Order
Order

Take a sample of
Approve
credit customer orders/
goods out notes
Despatch Goods out (the evidence) and
goods note
trace to the general
Invoice Sales Day ledger (client
customer Book
records)
Record General
sale ledger
 Back to Substantive Analytical Review
(SAR) – step 4
Identify the amounts and
assertions to be tested

Develop an expectation

Determine the tolerable

difference range (+/- threshold)

Identify differences for further

investigation
 Substantive Analytical Review (SAR)
Identify the amounts and
All? (except P&D)
assertions to be tested

School Lettings?
Develop an expectation

Determine the tolerable

+/- 5%?
difference range (+/- threshold)
 Substantive Analytical Review (SAR) –
steps 5 &6
Identify the amounts and
assertions to be tested

School Lettings?
Develop an expectation

Determine the tolerable

+/- 5%?
difference range (+/- threshold)

Identify differences for further

investigation

Can difference
Obtain, quantify, and be explained by Evaluate results
corroborate explanations management?
OK?
 Substantive Analytical Review (SAR)
Identify the amounts and
assertions to be tested

School Lettings?
Develop an expectation

Determine the tolerable

+/- 5%?
difference range (+/- threshold)

Identify differences for further

investigation

Can difference
Obtain, quantify, and be explained by Evaluate results
corroborate explanations management? Substantive test of
detail?
 Substantive procedures - steps
Analytical review tests Tests of detail

Identify the item and the Identify the item and the
related assertion related assertion

Develop an expectation Decide on test (and direction)

Determine a tolerable
Calculate sample size
difference

Identify differences Select sample for testing

Explain, quantify and

Examine the evidence
corroborate

Evaluate results Evaluate results

 Substantive Tests of detail
Identify the amounts and
assertions to be tested

Decide on direction of test

Determine the population and

sample size

Select the sample

Examine the evidence Evaluate results

 Audit evidence
Ways to collect evidence (audit procedures)
 Substantive Analytical Review (SAR)
Identify the amounts and
assertions to be tested

LDBS subscription?
Develop an expectation

Determine the tolerable

+/- 5%?
difference range (+/- threshold)

Identify differences for further

investigation

Can difference
Obtain, quantify, and be explained by Evaluate results
corroborate explanations management? Substantive test of
detail?
 Substantive Analytical Review (SAR)
Identify the amounts and
assertions to be tested

Minibus Lease?
Develop an expectation

Determine the tolerable

+/- 5%?
difference range (+/- threshold)

Identify differences for further

investigation

Can difference
Obtain, quantify, and be explained by Evaluate results
corroborate explanations management? Substantive test of
detail?
 Substantive Analytical Review (SAR)
Identify the amounts and
assertions to be tested

Caretaker costs?
Develop an expectation

Determine the tolerable

+/- 5%?
difference range (+/- threshold)

Identify differences for further

investigation

Can difference
Obtain, quantify, and be explained by Evaluate results
corroborate explanations management? Substantive test of
detail?
 Substantive Analytical Review
Analytical review is cheap and easy but not always possible.
It is used when:
• balances can be predicted with reasonable
precision
• it is more efficient than applying tests of details,
for example, when performing dual-purpose
procedures
• when identified risk is less than high
• if there are no professional, statutory or regulatory
requirements to test details, e.g. remuneration
 Analytical review - Disaggregation
Identify the amounts and
All? (except P,C&D) of payroll costs
assertions to be tested

Develop an expectation

Determine the tolerable

difference range (+/- threshold)

Identify differences (expectation –

actual) for further investigation

Obtain, quantify, and Evaluate results

corroborate explanations
 Analytical review
Identify the amounts and
All? (except P,C&D) of payroll costs
assertions to be tested

Payroll costs should be

Develop an expectation £1.2m

Determine the tolerable

difference range (+/- threshold)

Identify differences for further

investigation

Obtain, quantify, and Evaluate results

corroborate explanations
 Analytical review
Identify the amounts and
All? (except P,C&D) of payroll costs
assertions to be tested

Payroll costs should be

Develop an expectation £1.2m

How do you develop an expectation?

How do you know your expectation is reasonable (precise)?

 Analytical review
Identify the amounts and
All? (except P,C&D) of payroll costs
assertions to be tested

Payroll costs should be

Develop an expectation £1.2m

How do you develop an expectation?

- look at company data (internal)
- look at other data (external)

How do you know your expectation is reasonable (precise)?

- reliability of data
- predictability of relationships
 Analytical review
Identify the amounts and
All? (except P,C&D) of payroll costs
assertions to be tested

Payroll costs should be

Develop an expectation £1.2m

Determine the tolerable

+/- £120,000
difference range (+/- threshold)

Identify differences for further

investigation

Obtain, quantify, and Evaluate results

corroborate explanations
 Analytical review
Identify the amounts and
All? (except P,C&D) of payroll costs
assertions to be tested

Payroll costs should be

Develop an expectation £1.2m

Determine the tolerable

+/- £120,000
difference range (+/- threshold)

Identify differences for further Payroll costs are actually

investigation £1.3m

Can increase be
Obtain, quantify, and explained by Evaluate results
corroborate explanations management?
OK?
 Analytical review
Identify the amounts and
All? (except P,C&D) of payroll costs
assertions to be tested

Payroll costs should be

Develop an expectation £1.2m

Determine the tolerable

+/- £120,000
difference range (+/- threshold)

Identify differences for further Payroll costs are actually

investigation £1.6m

Can increase be
Obtain, quantify, and explained by Evaluate results
corroborate explanations management? Substantive test of
detail?
Substantive Analytical Review (SAR)
 Substantive Analytical Review (SAR):
Disaggregation

salary band

product

period
location

other?
 Substantive Analytical Review:
Disaggregation
Identify the amounts and
All? (except P&D) of payroll costs
assertions to be tested

Payroll costs should be

Develop an expectation £1.2m in London and 9*£50k in the new Paris
office = (opened in April)
Determine the tolerable
+/- £120,000
difference range (+/- threshold)

Identify differences for further Payroll costs are actually

investigation £1.6m. Difference is £50k,
can now be tolerated
Can increase be
Obtain, quantify, and explained by Evaluate results
corroborate explanations management? Substantive test of
detail?
 Final Analytical Review

When: at concluding stage

By whom: senior staff/partner

Why: Does this make sense? (in its entirety?

Relationships between balances? Obvious omissions?)
FINAL REVIEW

Final review procedures enable the auditor to:

• Corroborate conclusions formed during the

course of the audit

• Confirm that financial statements as a whole are

consistent with work done and knowledge of
entity

• Assist in arriving at correct opinion

1
ISA 520 Analytical Procedures
St Mary's Governing Body accounts

2011/12 2010/11
INCOME Unrestricted Restricted Total

Maintenance Fund £ 884.50 £ 884.50 £ 768.66

Donations £ 15,000.00 £ 15,000.00 £ -
School Lettings £ 37,543.88 £ 37,543.88 £ 28,800.00
School House Lettings (net) £ 7,336.95 £ 7,336.95 £ 14,406.00

Caretaker House Lettings £ 480.00 £ 480.00 £ 480.00

Other Lettings £ 1,867.69 £ 1,867.69 £ 1,367.32
Bank Interest £ - £ 20.00
£ 48,113.02 £ 15,000.00 £ 63,113.02 £ 45,841.98

EXPENSES

LDBS £ (20,501.91) £ (20,501.91) £ (17,412.19)

Donations £ - £ (500.00)

Minibus Lease £ (8,769.62) £ (8,769.62) £ -

Caretaker and other lettings costs £ (30,428.02) £ (30,428.02) £ (21,189.86)
Clerk Salary £ - £ (3,500.00)
Other £ - £ (88.00)
£ (59,699.55) £ - £ (59,699.55) £ (42,690.06)

Not movement in funds £ (11,586.53) £ 15,000.00 £ 3,413.47 £ 3,151.92

Cash at the beginning of period £ 14,218.71 £ 11,066.79

Net movement in funds £ 3,413.47 £ 3,151.92
Cash at the end of period £ 17,632.18 £ 14,218.71
ANY QUESTIONS?