Performance Measurement Enhances Analytical Procedures

By Waddington, Barbara A.; Moreland, Keith A. et al. | The CPA Journal, May 2001 | Go to article overview

Performance Measurement Enhances Analytical Procedures


Waddington, Barbara A., Moreland, Keith A., Lillie, Thomas, The CPA Journal


Performance measurement requires an understanding of a company's goals, objectives, strategies, and operations in order to identify and evaluate measures that inform management about issues necessary to align its future activities with its strategies. The level of sophistication of the current management information system affects the design and implementation of performance measurement. This focus on developing, improving, and assuring the relevance and reliability of financial and nonfinancial measurements will contribute to the success of the business. These measures often constitute relevant nonfinancial information, an important source for developing analytical expectations according to SAS No. 56, Analytical Procedures. Often, such nonfinancial information provides alternative, independent measures of business or economic events that will be reflected in the financial statements.

The attention to detail given to creating hierarchical, or cascading, performance measures fosters a high level of precision in analytical procedures conducted at a later date. In cascading systems, measures at any level are support ed by the aggregation of measures at the next level of detail. Familiarity with this system enhances projections for analytical review.

Audit Planning

Performance measurement promotes a thorough understanding of the business by identifying aspects of its operations that drive performance: purchasing, inve tory management, production, sales and marketing, product or service quality and delivery, customer satisfaction, cash management, credit and collections, capital asset acquisition and maintenance, financing, and product and process development. This analysis reveals measurable activities and results, such as customer satisfaction rates, defect rates, productivity per unit of scarce resource, and sales backlog.

During the audit planning stage, focus on these measurable activities provides a systematic framework to identify specific audit risk areas. Measures of warranty claims, past-due customer accounts, machine down-time, value of inventory, and accounts receivable can identify areas of high audit risk.

Substantive Testing

Many of the measurable activities and results handled in performance measurement are closely related to financial statement amounts. Performance measurement provides an additional source for precise estimates of expected of financial statement amounts. SAS No. 56 makes clear that the effectiveness of analytical procedures its detecting existing misstatements improves with knowledge of the business and precise analytical expectations.

Moreover, the information used for developing analytical expectations increases in validity with direct knowledge of the performance measurement system's reliability. A more reliable performance measurement system will provide more assurance that the information generated for analytical review is reliable. The result will be greater confidence in analytical review procedures, more precise analytical expectations, and increased likelihood of detecting existing misstatements. …

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