How does external auditor perform fluctuation analysis? 3282

  • This is not really necessarily a SOX-related question, but I thought I’d try asking here anyway, since some of you might be ex external auditors. I am in public accounting and have been tasked with performing variance analysis on accounts that have significant fluctuations.
    My question is how does one go about determining why the accounts have fluctuated? My guess is that there is not much that I can do on my own since I do not have enough knowledge of the business nor the appropriate financial information, and that I will have to discuss each fluctuation individually with management to determine the reasons for the fluctuation. Would I be correct in this assumption?
    Would I be able to simply identify all the significant fluctuations that require an explanation and simply email someone from management to write up explanations for each, review their explanations for reasonableness, and then simply incorporate it into my workpaper? That seems to be the easiest approach to me…

  • Once you determine which accounts you want to review, you should ask management for explanations. You would want to consider the specific audit risks for each account to determine how deep of a dive you take with management in understanding the fluxes. You want to be able to get comfortable with management’s explanations. That may mean reviewing account transactions or reconciliations (in the case of balance sheet accounts).
    Remember, that as an auditor, it is your job to understand the financial statements and how transactions impact the various accounts. Inquiry only will not be sufficient in most cases, especially since you are not familiar with the business or the financials.

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