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The Arizona Society of Certified Public Accountants
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Alli Byrne, Andrea Levy, Ashlea Perron Becky Pusch, Jennifer Greening
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AZ CPA is published by the Arizona Society of Certified Public Accountants (ASCPA) to provide information, news and trends to the accounting profession. It is distributed six times a year as a benefit to ASCPA members. The ASCPA, its members, board of directors and administrative staff assume no responsibility for advertisements herein. The ASCPA and the above people also assume no liability for business decisions made by readers in reference to statements and/or claims in articles or advertisements within this publication. Opinions expressed by contributors are not necessarily those of the ASCPA.
Arizona Society of CPAs
410 N. 44th St. Ste 205 Phoenix, AZ 85008
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Ryan DeMenna
Eugene Park, CPA Chair, Arizona Society of CPAs
Consulting Partner
Heinfeld, Meech & Co., P.C.
This past May I had the incredible opportunity to visit Washington, D.C. and speak directly with legislators about issues that matter deeply to our profession. Let me tell you – it was an eye-opening experience that reminded me just how vital advocacy is to all of us.
Most days, we’re busy with numbers, taxes, audits, deadlines – and advocacy work often happens quietly behind the scenes. But thanks to organizations like the Arizona Society of CPAs (ASCPA), our profession’s voice is heard loud and clear in the halls of government. They’re out there educating lawmakers, making sure our profession is understood and protected.
I’ll never forget an experience from a few years back when mandatory audit firm rotations for a specific industry almost made their way into the state budget. It might sound like a technical issue, but it could have caused real disruption. Luckily, the profession jumped in fast. ASCPA members and other key stakeholders came together to explain why this mandate wasn’t the right path – and their efforts made a difference.
I remember watching the committee meetings unfold. Honestly, it felt like watching a playoff game where we were the underdogs – heart pounding, cheering from the sidelines, hoping legislators would hear what we had to say. What stood out to me was how respectful and professional the discussions were. Smart questions, thoughtful answers – the kind of conversation that makes you proud to be part of this profession.
Fast forward to this May in D.C., and I found myself right in the middle of similar advocacy efforts. Alongside hundreds of fellow CPAs, our team spoke with lawmakers about challenges like the pipeline shortage, expanding accounting’s role in STEM education, opening up 529 plans for CPA exam expenses, and important tax legislation that affects both our profession and the clients we serve. It was empowering to see CPAs from all walks of life working together across political lines for a common goal.
If you’ve ever felt like one voice can’t make a difference, I’m here to tell you it absolutely can – especially when we unite. Advocacy isn’t flashy and you might not see it every day, but when issues arise, the CPA profession steps up. Organizations like the ASCPA help lead the charge, making sure our profession’s integrity and future remain strong.
So, whether you’re actively involved in advocacy or just learning about it, know this: your membership, your voice and your presence matter. Because when we show up together, we make a difference. l
Warm Regards, Eugene Park
John Leach joins the ASCPA as the new Events Manager.
Heidi Frei joins Wallace, Plese + Dreher as Director of Business Development and Marketing.
After 25 incredible years with the Arizona Society of CPAs, Heidi Frei, senior director of marketing & membership, is closing this chapter and stepping into a new opportunity. Heidi has been a driving force behind some of the ASCPA’s most impactful initiatives – building Connect, leading a successful rebrand, launching student outreach programs with her team and mentoring countless team members along the way. Her leadership, creativity and unwavering commitment to the CPA community have left a lasting legacy. Heidi will be deeply missed, but we thank her for 25 years of passion and service. You can connect with Heidi at www.linkedin.com/in/heidifrei
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By Ryan DeMenna
When it comes to deadlines, educators will tell you there are three types of students: those who complete the assignment early, those who do it late and those who ask to have the deadline extended.
The Arizona Legislature’s annual assignment is an important one: to produce a budget for the coming fiscal year. And you probably won’t be surprised that the legislature almost always struggles to complete this task on time.
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Interestingly enough, it’s a common misperception that the Arizona State Constitution requires lawmakers to produce a state budget by July 1. While there’s no direct mandate, the concept is embedded within several related provisions and statutes. These statutes – in conjunction with the constitution, create a framework whereby the legislature is responsible for appropriating the funds necessary for the operation of state government.
Regardless, it’s a task that needs to be completed by July 1 to avoid a government shutdown. And this year a shutdown looked inevitable.
Lawmakers in the Arizona State Senate and House of Representatives typically come to an agreement on shared budget priorities and then negotiate with the governor. This session though, the House and Senate couldn’t come to terms on how best to spend a $270 million surplus, so the Senate negotiated with the governor instead.
In the final days of June, when the Senate seemed poised to advance the negotiated proposal, House Republicans plowed ahead with their own version of the budget.
Governor Katie Hobbs declared that budget dead on arrival and voiced her support for the spending plan crafted with the Senate.
So, the House pivoted to a deadline extension.
House leaders announced they would pass a continuation budget to avoid a government shutdown and allow them to continue negotiating beyond July 1.
However, Governor Hobbs said she would veto that budget as well and reiterated her support for the Senate’s spending plan.
The Senate ultimately agreed to advance both of the House’s budget proposals, and both were promptly vetoed by the Governor (who shattered her previous veto record in the process.)
With only one spending plan remaining and a government shutdown looming, the House advanced the Senate’s budget, which was approved by a bipartisan supermajority of House members and signed by the governor – just days before the deadline.
There have also been instances where this critical assignment was completed after its deadline.
In 2009, the Republican-led legislature grappled with Governor Jan Brewer over how to make massive budget cuts during the Great Recession. The budget battle pushed their work late into the night on June 30, with a final budget vote likely to occur after midnight.
So, what did lawmakers do? They “stopped time”. Former Speaker Kirk Adams ordered the clocks on the House floor to be covered or taken off the wall. This same tactic was deployed years earlier by former House Speaker Jeff Groscost.
In each instance, the state government kept humming along, and aside from those who closely watched the policymaking process, no one knew the difference.
The Arizona Society of Certified Public Accountants (ASCPA) also has an annual legislative assignment: income tax conformity. The ASCPA works year-round to complete this assignment as far in advance of its deadline (Tax Day) as legislatively possible.
As tax practitioners know, if the state’s tax statutes aren’t updated and aligned with federal tax code changes made in the preceding year, then taxpayers are forced to make assumptions when filing their state taxes. This leads to uncertainty and confusion which results in higher costs, needless complexity and amended returns.
To help ensure swift legislative action, the ASCPA enlists the help of the chairs of the House Ways & Means Committee and Senate Finance Committee to introduce identical versions of the conformity legislation.
After both bills advance out of committee, the ASCPA coordinates with legislative leaders to deploy a rarely used parliamentary procedure that allows a bill in one chamber to be substituted for an identical bill in the other chamber. In other words, the ASCPA engineers a scenario in which the conformity bill is permitted to circumvent half of the legislative process.
The ASCPA’s record for getting conformity signed into law falls on Valentine’s Day 2011. And in an effort to beat that record, the ASCPA had some fun with the holiday theme by asking lawmakers to pass the bill with a Valentine poem:
Before hearts & roses take center stage, Let’s pass tax conformity, turn a new page,
No more confusion, no tangled mess, Just simpler filings –what a sweet success!
So, on this day, my valentine true, Here’s a wish for a smoother tax season for you.
Let’s make it law, let’s make it right,
A Valentine’s gift, in tax conformity’s light.
The legislature ultimately passed this year’s conformity bill in late February, making it the first bill of the session signed by the governor and the second fastest conformity bill to be signed into law.
Completing this critical legislative assignment in record time reinforced the ASCPA as the gold standard for advocacy. With the recent passage of the One Big Beautiful Bill, state lawmakers will be relying on the ASCPA and its members more than ever to tackle next year’s conformity assignment.
Every year, the ASCPA – led by its President and CEO, Oliver Yandle, and its Director of Government Relations, Emily Webb – works tirelessly to ensure that Arizona CPAs are represented and heard in the legislative process. ASCPA annual events like CPA Day at the Capitol provide an opportunity for members to meet with lawmakers and advocate for their profession do just that.
The dedicated volunteers who serve on the ASCPA’s Tax Legislation Review Committee (TLRC), scrub every tax-related bill to ensure the mechanics are in order – helping to avoid unintended consequences if it becomes operational as law. This year alone, the TLRC tracked and scrubbed over 130 bills.
The ASCPA and its government relations team are already preparing to tackle one of the most important legislative assignments to date: CPA Pathways.
For years, the CPA profession has been navigating workforce shortages and the current licensure framework has not kept pace with the evolving landscape of financial and audit standards. In 2026, the ASCPA will partner with state lawmakers to expand the pathways to obtain a CPA license, broaden mobility, and work to preserve a flexible and accessible profession.
The ASCPAs unwavering advocacy efforts have positioned the organization and its members as trusted experts and advisors to legislators and their staff. They know the Arizona Society of CPAs supports good policy and will assist lawmakers with tackling any legislative assignment – well before its deadline.
Ryan DeMenna is a partner at DeMenna Public Affairs which has been supporting the ASCPAs’ advocacy efforts for more than 20 years. To learn more about how you can support our advocacy efforts, visit www.ascpa.com/advocacy
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By Dan Evans & Laura Haffner
Preparing for an annual external audit is often daunting and time-consuming. Whether your entity is large with years of experience with external auditors or preparing for its first external audit, the preparation challenges can be similar. This article will explore auditor responsibilities and what entities can do in anticipation of an audit.
Auditors are required to be independent of the entity they audit, as well as possess knowledge, skills and abilities to perform their duties. Auditors are also expected to act with reasonable care and diligence and exercise professional judgment.
When conducting an audit of financial statements, auditors must obtain reasonable assurance about whether financial statements are free of material misstatement due to error or fraud. Note that the entity’s management is responsible for financial statement preparation while the auditor is responsible for expressing an opinion on the statements.
In addition, an auditor must prepare audit documentation that provides written evidence supporting the auditor’s conclusions. In preparation for an audit, here are tips to help entities improve the efficiency and accuracy of the process.
In addition to typical revenue and expenses, entities may enter into agreements – such as long-term debt and leases, throughout the year. The accounting and finance department should receive the documentation (agreements and relevant supporting emails, etc.) when it is executed, rather than at the end of the year in preparation for the audit. The accounting department can review the documents to help ensure proper accounting is implemented at the front end. For example, it will need to consider any covenants or any other special accounting treatment that may apply.
If this review is performed throughout the year, there is significantly less year-end audit prep work related to these transactions and agreements. In addition, the accounting department has access to all supporting documents that the auditors may request, and any questions or missing documents will be researched while the contract is still current.
In preparing for an annual financial audit, analytics play a pivotal role in ensuring accuracy, transparency and efficiency across every stage of the process. By leveraging data analytics, entities can proactively identify anomalies, assess trends and validate account balances long before auditors arrive. This not only streamlines documentation but also strengthens internal controls and highlights areas of potential risk. The use of predictive and diagnostic tools empowers finance teams to drill into variances, trace transaction histories and support key judgments with evidence-based insights. Ultimately, analytics transform audit preparation from a reactive scramble into a strategic exercise in data-driven clarity.
The auditor’s request list will ask for balance sheet rollforwards, such as schedules that show beginning balance, detailed activity during the year and ending balance. Often, entities will create the rollforward at the end of the year in preparation for the audit. However, if an entity updates the rollforwards each month and reconciles with general ledger detail and supporting documentation, then the year-end rollforward will be nearly complete for audit prep. This can save time during the year-end crunch and help catch and correct any issues in a timely manner.
Typical rollforwards include fixed assets – particularly if there is a construction project, many additions or disposals during the year, leases and long-term debt.
During an audit, an entity will provide a host of documents to the external auditor for their review. It’s common for audit support to be requested over many months, beginning before the year-end until audit issuance. It can be helpful for an entity to maintain a repository such as an electronic folder, of the documents provided to the auditor. Consider indexing or naming the files to match the auditor’s request list. Referencing this file during the following year’s preparation may help save time and confusion of what to provide the auditors. Sometimes the auditor’s request list will refer to a file by an unfamiliar name, but this method will allow the accounting team to reference what was provided last year and prepare a file with consistent formatting and relevant information.
A thorough audit preparation will include a review of expenses and the period in which they are recorded. One method to achieve this is to review a report of payments after year-end and identify any invoices for services or goods received prior to year-end. Those invoices identified should be accrued in accounts payable at year-end or recorded in another liabilities account. This review will likely require reviewing physical invoices to determine the proper period. Common accruals to watch for are payroll – including payroll taxes and benefits, professional services, utilities and unreimbursed employee travel expenses. A similar exercise should be
performed for prepaid expenses. To do this, review a detail of expenses during the year and identify any that relate to services or goods received after year-end. A separate schedule of prepaid expenses should be maintained and will likely be an audit request. Common prepaids are rent, insurance and some utilities.
It’s not uncommon to feel unsure of the next steps during any part of the audit process. It’s particularly ambiguous during the period after auditors performed on-site work but have not finalized the audit report. It is critical to agree on a timeline with the auditors, starting from planning all the way through audit issuance. The timeline should – at a minimum, lay out the following steps
1. Planning fieldwork.
2. Audit fieldwork.
3. Audit report draft.
4. Audit issuance target date. At each of these milestones, confirm with the auditor that they are still on track with the timeline or if any modifications are needed. In addition, it may help to have periodic check-in meetings with the auditor to set aside time to answer questions and ensure everyone is in agreement.
Audit preparation for an entity can be intimidating and arduous, especially if it’s your first. Thoughtful planning and project management can help alleviate many of the annual challenges and make the process easier for the entity and the auditor.
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The information set forth in this article contains the analysis and conclusions of the author(s) based upon his/her/their research and analysis of industry information and legal authorities. Such analysis and conclusions should not be deemed opinions or conclusions by Forvis Mazars or the author(s) as to any individual situation as situations are fact-specific. The reader should perform their own analysis and form their own conclusions regarding any specific situation. Further, the author(s)’ conclusions may be revised without notice with or without changes in industry information and legal authorities.
By Andrea Beth Levy, CPA, CFE, CGMA, MBA
Conflict at work can produce stress and contain stressors. Distinguishing the differences between these two concepts is important and valuable in navigating your career mindset. Nick Wignall from the friendly mind provides this guidance, “if you’re chronically stressed out at work, you might need to get a lot more assertive about setting boundaries and saying no to other people’s request of you.”
Stress can be defined as a response to real or imagined danger. While a stressor is the thing causing the stress response. Although stress management techniques like calming breaths and walking away help initially in dialing down the intensity of an interaction, stress management does not necessarily assist with addressing the actual stressors. Long-term denial of root cause conflict can lead to chronic stress. Therefore, we should not only manage our stress but pay constant attention to the stressors in our lives.
Let’s unfold a couple of situations with response options.
Background: The financial close is a marathon, but your finance team has implemented improvements to simplify the financial reporting process. Clear due dates are communicated to the entire team including department heads. Per the schedule, data for journal entries must be received by department heads by the fourth business day of the month.
Issue: Even though this due date has been communicated numerous times, there seems to be data delays and data arriving after the due date. When this happens, your team works late into the evening. Sometimes your team misses vacation because of this issue.
Here is how the fifth business day unfolds.
Sales Department Head: “Just received that paperwork on the ABC corporation contract. Let’s add the sale to this month’s financial statements. The board will want to see it on the statements.”
Response Option One – Agree. “Okay, we’ll record the revenue right away in this months’ financials.” This option does not address the stressor because the due date was missed and your team assumes the extra work without recourse.
Response Option Two – Agree this time, but counteroffer for next time.
“It’s great to hear about this new revenue. Our team conducts a variety of inquiries before we can record the revenue. Since this is arriving on day five instead of day four, we can work on recording it in our financials this one time. Next time, we’ll need your team to provide this data by day four”. This option addresses the stressor but not the root cause of the issue.
Response Option Three – Do not agree but collaborate with the stakeholder to identify the root cause of the issue.
“It’s great to hear about this new revenue. Our team conducts a variety of inquiries before we can record the revenue. It looks like this is arriving to our team on day five and that’s one day after the fourth day due date. Since our team must perform additional testing and we’re at capacity at this time, our team will plan on recording this revenue in next month’s financials. I wonder what the root cause is for the delay with the information, any thoughts? I’ll reach out to your administrative assistant to set up a time for us to meet and learn more about the reasons for delayed data. Let’s work together to see if we can receive this data earlier in the month, to ensure a seamless inclusion in our financial statements.” This option addresses the stressor and the root cause of the issue.
Situation Two: Recording a material unexpected expense accrual right before year-end
Background: Financial statements are audited by external auditors on an annual basis. As the controller, you report directly to the CFO. You just started the position six months ago and the auditors arrive in three weeks. Last year, there was an expense accrual of $500K which was not recorded in the annual financial statements. The CFO mentioned the auditors passed on recording the accrual last year. The CFO mentioned this was important for the financial statements because the agency looked better than expected. This year, that same expense accrual calculation equals $560K, exceeding the materiality threshold for the agency.
Issue: You’ve tried to connect with the CFO on this topic, but it’s been hard to find the right time. You are planning to record the $560K expense accrual but you’re not sure how to communicate this to the CFO. This journal entry will increase annual expenses and decrease net income for the year. You know the CFO will be unhappy because of the financial impact.
Response Option One – Record the expense accrual last minute. You plan to record the material expense accrual one day before the auditors arrive. This option does not address the stressor.
During your check-in meeting with the CFO you mention, “Letting you know, we are recording that expense that we didn’t have to record last year. Yes, this year it’s now $560K and last year it was $500K. I’ll record it today since the auditors come tomorrow.”
Response Option Two – Record the material expense accrual with immediate notice to the CFO (three weeks before the auditor arrives.)
Explain to the CFO the reasons for recording the expense accrual. Make a recommendation about reviewing current processes to keep an eye on this accrual. Perhaps you can record an estimate of this accrual during the year, thereby not having to record this expense all at once right before yearend. Since this expense accrual may be unexpected, how can the finance team support communication with the C-suite? This option addresses the stressor and tries to address the root cause of the issue.
Sometimes our work challenges include unproductive feedback, and interactions can include unhelpful judgment. Examples may include a coworker’s comment, “Why does it take so long for a bill to be paid? Is anyone working on your team?”
In this situation, try avoiding an immediate response in front of your coworkers. Avoid confrontation during the meeting because this almost always heightens emotions and raises the stakes. The most effective way to respond in this situation includes a request to speak about the topic another date and time. Do not engage, personalize or defend your point of view at a time when the stakes are high. Helpful responses in this situation may include, “Let’s review our accounts payable process at our next scheduled meeting.”
In situations when a coworker starts an email war where someone is frustrated by a situation and fires off a message with many recipients copied on the message. Try diffusing this situation by taking the issue off of email. Call or send a chat message to help resolve the situation. As mentioned in a recent Forbes article, “By taking the high road, you’ll be more likely to foster a team atmosphere that supports transparency and constructive feedback.”
There is a difference between experiencing stress and noticing a stressor. Identifying and addressing the root cause of conflict is your best bet to reduce unnecessary stress responses and feeling more balanced.
l
Andrea Beth Levy, CPA, CFE, CGMA, MBA is the head of finance & operations with the Greater Phoenix Chamber. Levy currently serves on the ASCPA’s editorial committee and is an audit committee member of the Institute of Internal Auditors Phoenix Chapter. You can connect with her at linkedin.com/in/andrealevyfinance.
References:
“Manage your stressors not your stress”, Dr. Nick Wignall
“Passive Aggression in the Workplace”, Psychology Today, Jessica Schrader
“Five days to deal with passive-aggressive behavior at work”, Forbes, Caroline Castrillon
“The DEEP technique” YouTube, Dr. Ramani Durvasula
Want to grow your network and share your story?
Sign up to be featured in the ASCPA’s Member Monday social media series! It’s a simple way to promote yourself and connect with fellow CPAs – just answer a few quick questions and we’ll take care of the rest. Whether you’re early in your career or a seasoned pro, your insights can inspire others in the profession. To participate, reach out to Rosa Hernandez at rhernandez@ascpa.com or scan the QR code below!
The ASCPA PAC is a well-respected voice at the Arizona Capitol, renowned for providing guidance and expertise in accounting, finance, business and tax matters.
A political action committee (PAC) is a fundraising entity that pools contributions from individuals and donates those funds to campaigns for or against candidates, ballot initiatives or other PACs. The ASCPA’s PAC exists to ensure CPAs and the CPA profession have a seat at the policymaking table. It ensures CPAs can focus on accounting, while we monitor changes in policy and oversight for you.
Without active participation in the political process, we risk CPAs and the CPA profession being overlooked or otherwise adversely affected by legislation. Thank you to our top donors in the 2024-25 fiscal year who have donated $100 or more to the ASCPA PAC.
If you have donated to the PAC, but do not see your name listed please contact Emily Webb at advocacy@ascpa.com.
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By Emily Webb
The Arizona Society of CPAs (ASCPA) had a successful legislative session on behalf of Arizona CPAs.
No matter the year or the issue, the ASCPA has your back at the legislature.
In December, newly elected and incumbent legislators heard from Arizona CPAs about changes made to the Internal Revenue Code. This event reiterated the importance of income tax conformity and encouraged lawmakers to get the ball rolling early. Income tax conformity legislation (HB 2688) was the first bill signed by Governor Hobbs on February 28 after the House and Senate expedited mirror bills through the legislative process. This is the second fastest income tax conformity that has been signed in the past 25 years.
The fourth annual CPA Day at the Capitol was held in February. In addition to building a stronger connection between state policymakers and the ASCPA, attendees advocated for early income tax conformity, maintaining the gold standard of licensure mobility and reciprocity, and a willingness to engage as nonpartisan resources to legislators.
The ASCPA Tax Legislation Review Committee (TLRC) collaborated with various stakeholders to provide insight on bill language. The TLRC worked with the Arizona Department of Revenue (ADOR) to address an issue brought forth by ASCPA members regarding withholding for contract workers.
Thank you to the volunteers of the ASCPA’s Tax Legislation Review Committee, who serve Arizona and the profession by providing nonpartisan technical expertise on all tax legislation: Caron Mitchell, Chris Hallstrom, David Walser, Ed Zollars, Elizabeth Dennis, Gary Williams, James Busby, Michael Lemme, and Michael Martin.
This year, ASCPA staff and key members visited Arizona’s congressional representatives to discuss important issues affecting the profession. Topics included expanding the uses of 529 plans, protecting the PTET SALT deduction, enhancing disaster relief and advocating for overall good tax policy.
Whether it’s local or on Capitol Hill, the ASCPA continues to be a voice for Arizona CPAs through its’ advocacy program and volunteers with policymakers, and legislators continue to seek feedback and review from the ASCPA and our expert members. Together, we will continue to advocate for the profession and the legislation that affect our members day-to-day.
Emily Webb is the director of government relations at the Arizona Society of CPAs. You can contact her at ewebb@ascpa.com.
The ASCPA PAC acts as the collective, cohesive voice of the entire CPA profession in Arizona politics.
In supporting Republican and Democrat candidates who align with the profession and the ASCPA’s goals and priorities, the PAC serves as the “CPA Party,” ensuring CPAs have a seat at the decision-making table when it matters.
Donate via www.ascpa.com/pac or scanning the QR code below.
www.ascpa.com/converge
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By Jaclyn M. Veno, CPA (licensed in NC and SC)
Auditors have long struggled with detecting fraud. According to the 2024 Association of Certified Fraud Examiners (ACFE) Report to the Nations, only 3% of occupational fraud cases are initially detected by external auditors. Even more startling is the fact that 5% of fraud is discovered by accident. In other words, fraud is statistically more likely to be uncovered unintentionally than by the procedures of a trained audit team. This is a troubling reality that raises important questions: Why is fraud so difficult to detect through audit procedures, and what role do analytical procedures play in addressing this challenge?
Under Generally Accepted Auditing Standards (GAAS), AU-C Section 520 defines analytical procedures as the evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data. These procedures also encompass investigation – when necessary, of fluctuations or relationships that appear inconsistent with other relevant information or deviate from expected values by a significant amount.
Analytical procedures are required at three points in the audit process: during the planning and risk assessment phase, substantive testing and the final review phase. Preliminary analytics help identify unusual trends early in the engagement while substantive analytics may serve as evidence in support of specific account balances. Final analytical procedures are used to form an overall conclusion from the financial statements.
The methods used to perform analytical procedures vary widely, ranging from straightforward comparisons to complex analyses using advanced statistical techniques. These procedures can be applied to consolidated financial statements, individual components or specific elements of financial information. The most common forms of analytical procedures include trend analysis, ratio analysis, reasonableness testing and regression analysis.
1. Trend analysis involves evaluating how account balances change over time, such as reviewing several periods of sales revenue for unusual fluctuations.
2. Ratio analysis focuses on comparing relationships between financial accounts or between financial and nonfinancial data, such as comparing gross margin percentages across periods or industry benchmarks.
3. Reasonableness testing involves developing expectations for account balances based on both financial and nonfinancial inputs. For example, the number of employees might be used to estimate expected payroll or accrued vacation balances.
4. Regression analysis is a more advanced technique, employing statistical modeling to quantify expectations with measurable precision. This approach is most effective when using disaggregated data from systems with strong internal controls.
Despite the technical value and flexibility of these procedures, audits often fall short in their application particularly in areas where fraud risk is higher, such as revenue recognition.
There are several common deficiencies in the performance of analytical procedures that reduce their effectiveness and in turn diminish their usefulness in detecting fraud.
One of the most frequently observed deficiencies is the inappropriate use of analytical procedures as the sole form of substantive testing –especially in relation to revenue. Relying exclusively on analytics to test revenue can be risky because revenue is often complex and highly susceptible to manipulation. Analytical procedures provide an overview of trends and relationships but may not reveal detailed transaction-level discrepancies that other substantive tests – like tests of details, are designed to uncover. As a result, auditors who do not incorporate different forms of testing risk missing something.
Another common issue is the use of imprecise or vague expectations. For instance, when auditors base their expectations simply on the assumption that account balances will remain consistent with the prior year they risk weakening the reliability of their analysis. A general expectation without a well-supported quantitative basis does little to help identify anomalies. Not only does this approach fail to identify significant discrepancies, but it can also lead to unnecessary explanations for immaterial variances which would result in the waste of valuable audit resources.
A third deficiency relates to the failure to test the completeness and accuracy of the data used to perform analytical procedures. The conclusions drawn from analytics are only as strong as the underlying data. If auditors rely on unverified, incomplete or inaccurate data when designing analytical procedures they may reach incorrect conclusions. For example, using unsupported budget data or managementprepared schedules without verifying them against the general ledger undermines the reliability of the analysis. To address this, auditors should perform recalculations, agree figures to underlying support, and reconcile data with source systems or the trial balance.
Additionally, auditors sometimes fail to properly investigate unexpected differences that arise during analytical procedures. When fluctuations or deviations exceed the auditor’s threshold for acceptable variance and remain unexplained the auditor must evaluate the nature and cause of the difference. Failure to do so may lead to missed red flags or unaddressed risks of material misstatement. Investigations should be documented and based on a clear audit response. Dismissing a variance without sufficient inquiry or follow-up jeopardizes the integrity of the audit.
The final common deficiency is a lack of corroborating evidence for management’s explanations. Auditors may document that management has provided an explanation for a difference, but without additional audit procedures this explanation remains unverified. Simply stating that “management said the difference is due to seasonality” or “management expects growth in this area” does not meet audit standards. Instead, auditors should critically assess management’s explanation, quantify the impact of the difference and determine its significance. Where appropriate auditors should obtain corroborating evidence such as industry data, external confirmations or more detailed testing of the underlying accounts. Inquiry alone is rarely sufficient. Additional procedures such as recalculation, inspection or reperformance should be used to validate the explanation.
To strengthen the use of analytical procedures and increase their potential in detecting fraud, auditors must be deliberate in determining whether such procedures are appropriate for the assertion being tested. The effectiveness and efficiency of analytical procedures in identifying misstatements depend on several factors.
One is the nature of the assertion itself. Certain assertions are often better suited to analytical procedures than others particularly when there are strong predictable relationships present.
Another important factor is the plausibility and predictability of the relationships used in the analysis. For example, income statement accounts which represent activity over a period of time tend to be more predictable than balance sheet accounts which reflect a snapshot in time.
Auditors should also consider the availability and reliability of the data used to develop expectations. Information derived from IT systems with effective IT controls is more reliable especially when it is subject to other audit procedures or comes from independent third parties. A good example is interest expense: if the related debt balances have been confirmed and agreed upon supporting documentation, the expectation for interest expense becomes more precise and reliable. Lastly, the precision of the auditor’s expectation plays a critical role in the quality of the procedure. More precise expectations enable the auditor to establish tighter thresholds for identifying variances and responding appropriately. Vague or loosely defined expectations may result in meaningless comparisons that fail to uncover fraud or material errors.
In conclusion, while analytical procedures are a powerful tool under GAAS, they are frequently underutilized or improperly executed. To maximize their effectiveness auditors must go beyond surface-level comparisons and apply professional judgment, develop high-quality expectations, verify the reliability of data and diligently investigate variances. When performed correctly, they can help auditors detect misstatements and identify fraud risks earlier in the engagement. l
With an extensive background in accounting, auditing and adult learning theory, Jaclyn Veno oversees the development of Level Training programs for Galasso Learning Solutions, one of the ASCPA’s preferred CPE providers. To see a list of their ASCPA course offerings, go to www.ascpa.com/galasso.
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