Final analytical review and forming the overall conclusion

In this lesson you will

Design the final analytical procedures AU-C 520.06 requires
Investigate unexpected results under AU-C 520.07
Apply the AU-C 330.27 through .29 evaluation of evidence
Connect the final review to the AU-C 700.13 opinion decision

The required procedure

AU-C 520.06 requires you to design and perform analytical procedures near the end of the audit that assist you in forming an overall conclusion about whether the financial statements are consistent with your understanding of the entity. It is required on every audit, whether or not you used analytics as substantive procedures.

The question differs from a substantive analytic. You are not testing an assertion to a threshold. You are asking whether the final statements, after all adjustments, tell the story you understand. AU-C 520.A25 describes the work as reading the financial statements and considering whether the evidence gathered for unusual balances found earlier is adequate, and whether there are unusual balances or relationships not previously identified.

How to run it

Use the final, adjusted statements and notes, not the trial balance from fieldwork. A practical approach:

Compare each line to the prior year and, if the client prepares one, to budget. Record the expected direction and rough size from what you learned.
Compute the ratios that matter for the entity: gross margin, receivable days, inventory days, payable days, debt to equity, interest coverage. The financial ratio calculator handles the arithmetic.
Read the notes against the numbers. A new loan in the debt note should show up in interest expense and cash flows.
Compare the results to the audit evidence already in the file. Where the file explains the movement, reference it. Where it does not, investigate.

The AU-C 520 page covers expectation setting for substantive analytics; the same discipline of writing an expectation first applies here.

Investigating what does not fit

AU-C 520.07 requires you to investigate fluctuations or relationships that are inconsistent with other information or that differ from expected values by a significant amount. You inquire of management and obtain evidence for the response, and perform other procedures as needed. AU-C 520.A26 notes the review may identify a previously unrecognized risk, and AU-C 315 then requires you to revise the risk assessment and planned procedures.

AU-C 240 also requires you to evaluate, at or near the end of the audit, whether accumulated results, including analytics performed when forming an overall conclusion, change the fraud risk assessment. A margin that improved in the last month of the year, with no operational explanation, is a fraud question as well as an analytics question.

Pulling it together

AU-C 330.27 requires you to evaluate, before the conclusion of the audit, whether the assessed risks at the assertion level remain appropriate. AU-C 330.28 requires you to conclude whether sufficient appropriate evidence has been obtained, considering all evidence whether it corroborates or contradicts the assertions. If evidence for a relevant assertion about a significant class, balance or disclosure is still short, AU-C 330.29 requires you to try to obtain more; failing that, the opinion is qualified or disclaimed.

AU-C 700.13 then frames the opinion decision. You conclude whether you have reasonable assurance, taking into account the AU-C 330 conclusion on evidence, the AU-C 450 conclusion on uncorrected misstatements, and the AU-C 700.14 through .17 evaluations of the framework, accounting policies, estimates, disclosures and fair presentation, including indicators of possible management bias.

A completion memo that holds up

A completion memo should show each of those pieces with a reference: the final analytical review and its follow-up, the evidence conclusion, the misstatement conclusion, the going concern conclusion, the subsequent events conclusion and the bias evaluation. The audit completion and partner review memo is organized that way.

Typical findings: the final analytics were run on the pre-adjustment trial balance; a 30% change was explained as "per client" with no corroboration; a new risk surfaced and nobody updated the risk assessment or the procedures.

Worked example

Silver Creek Coffee Roasters, LLC: one ratio that did not fit

Silver Creek Coffee Roasters, LLC, final adjusted statements. Revenue: $8,400,000 (prior year $7,900,000). Gross margin: 38.0% (prior year 31.0%). Receivables: $1,150,000 (prior year $860,000).

Expectation from the file: green coffee prices rose about 15% and the company did not raise its prices until October, so the team expected margin to fall, not rise.

Receivable days = $1,150,000 / $8,400,000 x 365 = 50 days, against $860,000 / $7,900,000 x 365 = 40 days in the prior year.

Two signals point the same way: margin up 7 points against an expectation of decline, and collection slowing by 10 days. Together they suggest revenue recognized early or inventory costs understated.

Investigation under AU-C 520.07: management explains a large December wholesale order. The team inspects the contract and shipping records and finds $420,000 of product shipped January 6. Revenue and the related receivable are overstated by $420,000. The company also relieved inventory at its 62% cost ratio, so cost of sales includes $420,000 x 0.62 = $260,400 for goods that were still on hand at year end; reversing the sale removes that cost and restores the inventory.

Pretax effect = $420,000 - $260,400 = $159,600 overstatement, which management books. The team then revisits the revenue fraud risk under AU-C 240 and extends cutoff testing.

Self-check

Answer each question before you open the answer.

Is the final analytical review optional when you did no substantive analytics?
Show answer
No. AU-C 520.06 requires analytical procedures near the end of the audit on every engagement, to help form the overall conclusion.
Which trial balance do you use for the final review, and why?
Show answer
The final adjusted statements. The purpose is to test whether the statements you will report on are consistent with your understanding, and pre-adjustment numbers are not those statements.
The final review surfaces a risk you did not assess. What standards apply?
Show answer
AU-C 520.A26 points to AU-C 315, which requires revising the risk assessment and planned procedures; AU-C 330.27 requires confirming risk assessments remain appropriate; and AU-C 240 requires considering whether it signals fraud risk.

Sources

AICPA Statements on Auditing Standards (AU-C sections), currently effective

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error