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Start your audit off right with data analytics

When planning an audit, how do you approach your preliminary analytics? Many auditors perform a variance analysis. They compare current year account balances to the prior year to identify any unexpected fluctuations. While this procedure often yields relevant insights, did you know performing audit data analytics (ADAs) can be even more effective at identifying potential problem areas? ADAs can be quick and painless, and you probably already have the tools on hand to perform them.

Let’s say you’re auditing a small manufacturing company. While gaining an understanding of the entity, you talk to management and learn that there were no major changes in operations or the business environment. As such, you expect widget and doodad sales will be consistent with the prior year within +/- 10%.

You do your variance analysis and see that the company had $2M in widget sales and $1M in doodad sales, which is consistent with the $1.95M in widget sales and $1.02M in doodad sales they did last year.

Using the variance analysis alone, you wouldn’t notice any unexpected fluctuations associated with these accounts. But some quick calculations and data visualization in Excel may give you greater insights to help you plan the audit.

You decide that your next step is to perform an ADA to determine average sales prices for widgets and doodads for the past 10 years (sales $ / # sold). You put this information on a line graph for visualization:

ADA chart
The visual representation helps you see that the average sales price of widgets increased from $20 last year to $30 this year, and the price of doodads increased from $5 to $10. Given the information you obtained from management, you expected little change, so there is a risk that these accounts have been overstated. You use this knowledge to build your risk assessment, which helps guide the procedures you perform during the audit.

This example shows how ADAs can be used during preliminary risk assessment, but keep in mind that ADAs can be used throughout the entire audit process – providing greater insights for both you and your client. Interested in learning more? The AICPA’s new Guide to Audit Data Analytics, shows how you might use ADAs in performing substantive analytical procedures and tests of details, as well as other areas of audit planning.

Also, be sure to check out the AICPA’s ADA resources webpage for information on audit data standards, talking to your clients about increased use of ADAs, and opportunities for integrating more extensive use of data analytics into the audit of financial statements.

Carl Mayes, CPA, Senior Manager–Special Projects, Association of International Certified Professional Accountants

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