9021 Perform overall conclusion analytics
Jun-2020

Overview

This topic explains:

  • Auditor’s objectives in relation to overall conclusion analytics
  • Definitions related to analytical procedures
  • Objectives, types and performance of analytical procedures
  • Designing and performing overall conclusion analytical procedures
  • Investigating and corroborating significant differences
  • Documentation of overall conclusion analytics
Introduction

CAS Objective

The objective of the auditor is (CAS 520.3(b)): To design and perform analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of the entity.

CAS Guidance

For purposes of the CASs, the term “analytical procedures” means evaluations of financial information through analysis of plausible relationships among both financial and non‑financial data. Analytical procedures also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount. (CAS 520.4)

For further guidance on definitions related to analytical procedures see OAG Audit 7031.

OAG Guidance

Analytical procedures are used in various phases of the audit process. Overall conclusion analytics are one category of analytical procedures is performed during an audit.

Overall conclusion analytics are performed near the end of the audit with the objective of considering whether information presented in the financial statements is consistent with our understanding of the entity.

This section provides requirements and guidance related to performing overall conclusion analytics.

Objectives, types and performance of analytical procedures

OAG Guidance

Analytical procedures are used throughout the audit process and are divided into:

  • Risk assessment analytical procedures (see OAG Audit 5012.2).
  • Substantive analytical procedures (see OAG Audit 7030).
  • Overall conclusion analytical procedures (see further in this subsection of OAG Audit).

The objectives of the analytical procedure will dictate the type of analytical procedure used and the techniques involved in investigating a significant difference.

The risk assessment and overall conclusion analytics are similar in nature as they are designed to assist the auditor in evaluating financial information principally at the financial statement level, however have different objectives. Risk assessment analytics are designed to assist in planning the nature, timing and extent of audit procedures that will be used to obtain sufficient appropriate audit evidence for significant accounts or classes of transactions. Overall conclusion analytics are designed to assist us in considering whether information presented in the financial statements is consistent with our understanding of the entity.

Design and perform overall conclusion analytical procedures

CAS Requirement

The auditor shall design and perform analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of the entity. (CAS 520.6)

CAS Guidance

The conclusions drawn from the results of analytical procedures designed and performed in accordance with paragraph 6 are intended to corroborate conclusions formed during the audit of individual components or elements of the financial statements. This assists the auditor to draw reasonable conclusions on which to base the auditor’s opinion. (CAS 520.A17)

The results of such analytical procedures may identify a previously unrecognized risk of material misstatement. In such circumstances, CAS 315, requires the auditor to revise the auditor’s assessment of the risks of material misstatement and modify the further planned audit procedures accordingly. (CAS 520.A18)

The analytical procedures performed in accordance with paragraph 6 may be similar to those that would be used as risk assessment procedures. (CAS 520.A19)

OAG Guidance

Overall conclusion analytical procedures are typically performed at the financial statement level, not disaggregated. They include reading the financial statements and notes and considering (a) the adequacy of evidence gathered in response to unusual or unexpected balances identified in planning the audit or in the course of the audit, and (b) unusual or unexpected balances or relationships that were not previously identified.

The conclusions drawn from the results of the overall conclusion analytics are intended to verify that:

  • All significant differences and other unusual items have been adequately explained;
  • We have gained a comprehensive understanding of the financial statements, including the inter-relationships between items;
  • The overall financial statement presentation makes sense based on the audit results, performance of the entity’s underlying businesses and our knowledge of the business and industry.

As the overall conclusion analytics may be similar to the risk assessment analytics, an efficient and effective approach could include leveraging our risk assessment analytics as a starting point for overall conclusion analytics.

For example, in situations where there have not been significant changes since the planning of the audit, the risk assessment analytics could be leveraged and updated to incorporate additional explanations that demonstrate our understanding and assessment of identified fluctuations or relationships that are inconsistent with other relevant information.

Performing Overall Conclusion Analytical Procedures

The purpose of overall conclusion analytical procedures is not to obtain additional audit evidence for significant accounts; therefore, they do not need to be performed with the same level of rigor as substantive analytical procedures. Overall conclusion analytical procedures do not normally require consideration of information that is more disaggregated than the financial statements presentation. Apply the procedures to key items, trends and ratios in considering whether the assertions contained in the financial statements are consistent with our understanding of the entity and our audit procedures performed. The overall conclusion analytical procedures are typically performed or reviewed by senior members of the engagement team.

Develop an Independent Expectation

Our focus in performing overall conclusion analytical procedures is on identifying unusual relationships or balances in the financial statements taken as a whole and our expectation is based on the results of audit work already performed (e.g., we may consider that revenues and operating expenses as reported in the financial statements are consistent with the results of other audit procedures and as such no additional work is needed).

Data Used for Overall Conclusion Analytical Procedures

Assess the reliability of the information obtained to perform the analysis (for example, if using the entity’s balance sheet and income statement, check that the information agrees or reconciles to the trial balance or general ledger).

Define a Significant Difference or Threshold

Overall conclusion analytical procedures help assess the reasonableness of audit conclusions reached about the sufficiency of audit evidence obtained in the audit and to assess the financial statement presentation at the financial statement level, not disaggregated. The threshold used for overall conclusion analytical procedures will generally be overall materiality. However, based on the existence or absence of risk factors, we may adjust our threshold accordingly.

For overall conclusion analytical procedures, the consideration of the threshold can be documented by the addition or inclusion of a column titled “Unusual or Unexpected” to our documentation that evidences the decision as to whether the actual result is in line with our judgmental expectation from the audit work we have performed and reviewed, or not. The threshold is implied by the judgmental designation of a difference or ratio as unusual or unexpected in relation to our expectations.

Considering the Results

If any unusual or unexpected items are noted then explanations need to be provided and be sufficient to enable an experienced auditor independent of the audit to understand the basis for our conclusion.

When investigating unusual patterns and differences identified by our overall conclusion analytical procedures, evaluate whether the work performed provides sufficient assurance that the financial statements are fairly stated, and whether the financial statements appropriately reflect the entity’s performance, based on our audit. If overall conclusion analytical procedures identify a need for additional assurance, perform further audit procedures.

Investigating and corroborating significant differences

CAS Requirement

If analytical procedures performed in accordance with this CAS identify fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount, the auditor shall investigate such differences by (CAS 520.7):

(a) Inquiring of management and obtaining appropriate audit evidence relevant to management’s responses; and

(b) Performing other audit procedures as necessary in the circumstances.

CAS Guidance

Audit evidence relevant to management’s responses may be obtained by evaluating those responses taking into account the auditor’s understanding of the entity and its environment, and with other audit evidence obtained during the course of the audit. (CAS 520.A20)

The need to perform other audit procedures may arise when, for example, management is unable to provide an explanation, or the explanation, together with the audit evidence obtained relevant to management’s response, is not considered adequate. (CAS 520.A21)

OAG Guidance

The investigation of unusual or unexpected differences or relationships identified in our overall conclusion analytical procedures involves first ascertaining whether we have already performed audit work on the unexpected balance or relationship that is adequately documented. When a material portion of a significant difference from expectation cannot be explained by audit work previously performed, we may need to obtain additional evidence.

Similar to risk assessment analytics, if we use the “Unusual or Unexpected” column to illustrate the consideration of the threshold, and we determine that there is no unusual or unexpected relationship, no further explanation is required to be documented. However, for the more significant amounts, explanations can help to show our understanding and assist a reviewer when considering the rationale for the conclusions.

In conducting overall conclusion analytical procedures, it is important to step back from the detail and consider whether the overall relationships and trends make sense given the industry and competitor and/or peer company benchmarks, entity history, audit test results, and prior audit experience. There may be instances where individual significant differences appear to be explained by our audit work, but overall financial statement relationships or trends seem unusual (e.g., entity’s performance is well outside industry norm). In these instances, the financial statements may contain misclassifications or other problems or the financial statements may be correct but the unusual pattern may signal an underlying business issue. We gain an understanding of unusual business relationships and trends and perform additional audit work, if necessary.

If there are no unusual or unexpected changes, we do not need to provide explanations unless the engagement leader has determined that more explanations are necessary to facilitate financial statement review, or if the changes are not adequately explained in the expectation.

Comparative or common size financial statement analysis (see OAG Audit 7032) may be a useful tool for considering trends and the internal structure of the financial statements. These analyses can be further improved by performing comparisons to industry and competitor and/or peer companies.

Documentation

OAG Guidance

Document:

  • Our assessment of the reliability of the data used for the overall conclusion analytics.
  • Relevant quantitative or qualitative analysis of the recorded amounts in the financial statements, trends and ratios. This might include, comparison of key ratios, for example, inventory turnover between the current and prior year.
  • Identification of trends and ratios which we believe are inconsistent with the results of our audit work.
  • Results of further investigation of any such inconsistent trends or ratios and our conclusions.
Considerations Specific to Smaller Entities

For smaller engagements, it is permissible to use the calculations from the risk assessment analytics if the balances have not changed during the course of the audit. However, the conclusions reached by the team should reflect the objectives of overall conclusion analytics as described above.