How do you create audit planning analytics for first-year businesses? We commonly compare current year numbers to the prior period, but, in this case, there are no prior year numbers. What other options are available?
Audit standards don’t require the use of any particular analytics, so let’s think outside the box (of comparing current and prior year numbers). There are at least four alternatives:
How can we use nonfinancial information?
AU-C 315, paragraph .A7 states:
Analytical procedures performed as risk assessment procedures may include both financial and nonfinancial information (for example, the relationship between sales and square footage of selling space or volume of goods sold).
So one option is to compute expected numbers using nonfinancial information. Then compare the calculated numbers to the general ledger to search for unexpected variances.
A second option is to calculate ratios common to the entity’s industry and compare the results to industry benchmarks. While industry analytics can be computed, I’m not sure how useful they are. An infant company often will not generate numbers comparable to more mature entities. But we’ll keep this choice in our quiver, just in case.
A more useful option is the third–comparing intraperiod numbers. First, discuss the expected monthly or quarterly revenue trends with the client before you examine the accounting records. The warehouse foreman might say, “We shipped almost nothing the first six months. Then things caught fire. My head was spinning the last half of the year.” Does the general ledger reflect this story? Did revenues and costs of goods sold significantly increase in the latter half of the year?
The last option we’ve listed is a review of the budgetary comparisons. Some entities, such as governments, lend themselves to this alternative; others, not so–those that don’t adopt budgets.
So, yes, it is possible to create useful risk assessment analytics–even for the first year of operation.
Remember: planning analytics are for the purpose of detecting risk. If the numbers don’t line up as expected, then you have a risk indicator. It is here that you may need to respond with substantive procedures.
What planning analytics do you perform for first-year audit clients?
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Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses.He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events.Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.
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