Use the systematic process for conducting analytical procedures provided in Figure \(9-8\) to design an approach for developing an expectation for the commissions expense account for an electronics retailer that pays its employees based in part on preestablished commission rates.

Figure 9-8

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PURPOSE: To use analytical evidence to identify accounts, risks, or process attributes where observed outcomes are inconsistent with the auditors' expectations, requiring further investigation during the course of the audit. STEP 1: Identify a process attribute, risk, or account to be subject to analysis: The focus of the analysis needs to be specified. An account balance can be examined to determine if it may contain material misstatement, a specific risk can be measured to determine if it was significant, or nonfinancial process attributes can be examined to see if they are consistent with reported financial results. STEP 2: Gather facts relevant to the analysis: Identify key events, situations, or other facts that may have an impact on the interpretation of performance indicators. STEP 3: Identify relevant performance measures: The auditor must decide what attributes to measure. The selection may be self-evident in the case of accounts, but less obvious for risks or process performance indicators. STEP 4: Obtain data and perform computations: Performance measures should be based on reliable data and computational procedures. Hence, steps must be taken to examine controls over data collection and computation prior to carrying out substantive analytical procedures. STEP 5: Impose structure: Organize the numerical data into logical segments or audit areas that can be separately analyzed for unusual results, events, or patterns.4 STEP 6: Analyze: Analyze each performance measure for deviations from expectations. Reactions to unexpected deviations depend on the nature of the measure and the size of the deviation (i.e., quantitative and qualitative materiality). STEP 7: Conclude: Construct a cohesive explanation of the numerical data, which incorporates all of the data, facts, and circumstances that are known about the company and determine the implications for the conduct of the audit.