The Research On The Theory And Application Of Analytical Procedures In CPA Audit

Analytical procedures are defined as “evaluations of financial information throughanalysis of plausible relationships among both financial and nonfinancial data” and theyare an integral part of the audit process. Preliminary or planning APs are now part of theauditor’s risk assessment process. APs are also used as a substantive procedure (i.e., asubstantive analytical procedure) to evaluate account balances and as a final quality controlcheck of the audited financial statements.In this paper, the author first provides an overview of the fundamental concepts of anaudit and background information on the current auditing standards. The author frames thereview around five phases of the analytical procedure process: identify the attribute to besubject to analysis, develop an expectation, establish a tolerable difference, compare theexpectation to the recorded amount and investigate significant differences. Step1is toidentify the attribute that the auditor wishes to evaluate. Then the auditor develops anexpectation of the account balance (or some other amount, such as a ratio). According toAICPA guidance (2008,5),“Forming an expectation is the most important phase of theanalytical procedure process.” Phase3involves establishing a tolerable difference. Thestandard states,“the amount of difference from the expectation that can be acceptedwithout further investigation is influenced by materiality and the desired level ofassurance”. Next the auditor compares the expectation to the client’s recorded amount anddecides whether there is the significant difference between the expectation and therecorded amount. The last step involves the investigation of significant differences. Thestandard requires that the auditor inquire of management and obtain corroborative evidenceto assess management’s explanations of the cause of the difference. Audit practice indicatesthat, prior to inquiry of management, the auditor should generate a list of plausiblehypotheses to explain the cause(s) for the significant difference.The paper then discusses different factors that can impact auditors’ behavior in eachof these phases. Along with the limited behavioral research in the first phase, I find that anauditor’s ability to identify the attribute can be affected by his experience and expertise. Auditors assess an expectation to be more precise when it was based on disaggregated data.In phase3, the auditor’s ability to generate effective hypotheses may also be affected byexternal influences including firm preferences, review processes, and exposure tohypothesis justifications. Given that a significant difference could be due to fraud, the needfor auditors to consider fraudulent causes for a significant difference when generatinghypotheses is critical. Auditors have a natural tendency to ask management to provide anexplanation for any unusual fluctuations observed while performing analytical procedures,in this phase auditor must be careful not to be overly swayed by management’sexplanations, the auditor should obtain independent corroboration of the explanation ifpossible.Finally, the author conducts a survey of the performance of analytical procedures inChina. The analysis of survey data will help identify areas where research has citeddeficiencies and suggested ways to overcome those problems.