A&A Playbook - Virtual-4 - De-Vries - Good-Analytics-Bad-Analytics-Lessons-for-Audits-and-Reviews

4 - De-Vries - Good-Analytics-Bad-Analytics-Lessons-for-Audits-and-Reviews

Pdf Summary

The presentation explains how to design, perform, and document effective analytical procedures in audits and reviews. Audits provide reasonable assurance and may use analytics for risk assessment, substantive testing, and overall evaluation. Reviews provide limited assurance and use analytics, inquiry, and other procedures as needed.

A sound analytical procedure has four phases:

1. <strong>Form an expectation:</strong> Decide whether analytics suit the account and assertion, assess the reliability and relevance of the data, and develop a reasonable expectation. Methods include trend, ratio, reasonableness, and regression analysis.
2. <strong>Identify differences:</strong> Compare the recorded amount with the expectation and set an acceptable difference. The threshold should reflect the procedure’s precision, predictability, materiality, risk, desired assurance, and other planned procedures—not be chosen arbitrarily.
3. <strong>Investigate:</strong> For audits, investigate differences outside the acceptable range and obtain corroborating evidence. For reviews, inquire of management and perform other procedures when warranted, evaluating whether responses are plausible, consistent, and sufficient.
4. <strong>Evaluate and document:</strong> Record how the expectation was developed, the comparison and acceptable range, and any investigation performed.

Precision determines which misstatements a procedure can detect. It is generally stronger when relationships are predictable, data is disaggregated and independent, and processes and controls are reliable. No single factor is decisive.

Common failures include relying on uncorroborated inquiry, unsupported expectations or thresholds, overly broad ranges, aggregation without predictive relationships, dismissing contradictory evidence, and using circular or dependent inputs. A basic comparison of current and prior-period balances—a “flux” analysis—does not, by itself, establish a reliable expectation or provide sufficiently precise evidence.

When results fall outside expectations, teams should reconsider assumptions, data, calculations, and the procedure’s suitability, then modify testing as needed. Documentation and revisions should be evidence-driven, avoiding hindsight bias.

Keywords

analytical procedures

audit

review

reasonable assurance

limited assurance

expectation

precision

threshold

investigation

documentation