Issues paper: analytical procedures in a review engagement.

By the AICPA Accounting and Review Services Committee

NOTICE TO READERS

This Issues Paper is intended to provide accountants with information that may help them understand certain requirements related to the use of analytical procedures in review engagements and how the use of analytical procedures should be documented in those engagements. This publication is an Other Compilation and Review Publication as defined in Statement on Standards for Accounting and Review Services (SSARS) No. 11, Standards for Accounting and Review Services. Other Compilation and Review Publications have no authoritative status; however, they may help accountants to understand and apply the SSARS. If accountants apply the guidance included in an Other Compilation and Review Publication, they should be satisfied that, in their judgment, it is both appropriate and relevant to the circumstances of the subject engagement. This publication was reviewed by the AICPA Audit and Attest Standards staff and published by the AICPA, and is presumed to be appropriate.

During the process of reviewing comment letters with respect to the Exposure Draft that eventually became SSARS No. 10, Performance of Review Engagements, the Accounting and Review Services Committee (ARSC) determined that additional guidance was needed with respect to the formation of expectations in the performance of analytical procedures. This Issues Paper is intended to provide additional guidance to accountants related to the use of analytical procedures and documentation requirements associated with those procedures.

Expectations

Forming an expectation is the most important phase of the analytical procedure process. Expectations are the accountant's predictions of recorded accounts or ratios. In performing analytical procedures, the accountant develops the expectation in such a way that a significant difference between it and the recorded amount is indicative of a misstatement, unless he or she can obtain explanations for the difference (for example, an unusual event occurred). Expectations are developed by identifying plausible relationships (for example, store square footage and retail sales) that are reasonably expected to exist based on the accountant's understanding of the client and the industry in which the client operates. The accountant selects from a variety of data sources to form expectations. For example, the accountant may use prior-period information (adjusted for expected changes)...