posted by September 22, 2015

Using Analytical Procedures to Identify Fraud

by Anthony St. George, CPA, Senior Associate

The phrase analytical procedures is most commonly associated with audit testwork during the annual audit. Your external auditors may request explanations for variances in certain accounts in order to enhance their audit documentation. However, have you ever thought about using analytical procedures internally to investigate account balances? Let’s say for instance that there has been some concern of cash being deposited intact at a bookstore at one of your District’s schools. Analytical procedures might be able to help you identify what month of the year to concentrate on during your investigation which could save time and resources.

Clarified Statements of Auditing Standards AU Section 520 defines analytical procedures as “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.” In the example noted above, analytical procedures could be used to compare the amount of cash deposits made per month for a given fiscal year to the same month of the prior fiscal year. Assuming that there were no changes made to the amount of fees collected or the types of payments that flow through the bookstore, the amount deposited should be comparable with that of the prior year. If a certain month in the current year received substantially less than that same month of the prior year, it could be an indication that that month has a higher risk of fraud occurring than the other months. This would give the individual investigating the concern a month to begin with as there is a higher risk of cash collected not being deposited in that given month.

Section 520 also states that “a basic premise underlying the application of analytical procedures is that plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary.” If there are conditions to the contrary, it is important to adjust expectations given those conditions. Let’s say that the same school in the example above has stopped accepting cash payments for athletic fees and that the fees are all required to be made online (via credit card) in the current year. In this case, it would be expected that cash collected in a given month would be less, equal to the amount of the athletic fees, than the prior year’s same month. If these expectations are not adjusted for any new conditions, the expectation may be incorrect and assumptions made from the procedures may lead to wasted time investigating the wrong month.

In any case, it is important to remember that these procedures don’t only have to be performed during the annual external audit. They can also be beneficial to your District if performed with the right expectations and under the right circumstances.

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