Question

Which would more likely be audited using an analytical procedure model: sales person commissions or legal fee expense? Explain

Answer 1

Background : What are analytical procedures?

Analytical procedures refer to the procedures which involve interrelating and comparing two sets of financial or non-financial information, developing expectations and then analyzing the differences between the expectations and the actual results.

It is a type of audit evidence that is used by the auditor for areas where predictable trends and patterns can be developed by using industry information or by co-relating two areas in the financial statements itself such as depreciation, bad debt expenses, comparing current ratio etc.

Answer : Analytical procedure model on sales person commission or legal fee expense?

An auditor is more likely to use analytical procedure model for sales person commissions rather than legal fee expense because of the following :

-> Sales person commission is something that can be co-related with the previous year figures or can be calculated using the current sales figure and a ratio analysis could be performed as an analytical procedure.

-> Legal fee expense is one area for which it is not practical to develop expectations based on the past trends or the industry trends because there's a possibility that a huge litigation case might have developed in the current year only due to which the legal expense might vary tremendously from the last year or from the normal industry trend. There's also a possibility that a major litigation case was resolved in the previous year due to which legal expenses were towards a higher note and in the current year they would be on a lower note.

-> Also analytical procedures does not involve vouching the expenses or testing the underlying data. It compares 2 interrelated data and forms conclusions. However in case of legal expense, it is very important to vouch the legal expenses like lawyer bills and getting lawyer confirmations in order to be able to understand the background of the case and likely potential of the company losing the case.