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CHAPTER THREE. The Data Analysis Cycle

THE DATA ANALYS IS CYCLE is a three-stage cycle that is constantly changing, and which must be adjusted to in order to be effective. The stages are evaluation and analysis, software and technology, and the audit and investigation stage.

EVALUATION AND ANALYSIS

To start the cycle one must understand the whole business well and, specifically, the subsidiary, division, or business unit being reviewed. A good understanding of the industry in general, along with the business environment, will give you a baseline for comparison purposes.

This cycle includes evaluating areas of potential fraud and identifying symptoms or red flags for frauds. This knowledge allows you to tailor your evaluation strategies to the organization. You cannot apply all the same steps and procedures universally to every business, as business practices in different industries, as well as within the same industries, differ greatly.

With this knowledge, the next step is to identify weaknesses or areas where potential fraud may exist within the business systems. It would be impossible to perform this task on the business organization as a whole. You need to break down the organization to at least the business-unit level to be able to focus on a more detailed level. Each area has different elements and risks. For instance, one area may be dealing with cash or payments and another with access controls and authorities. The risk assessments discussed earlier need to be tailored specifically to the function under review.

The audit team should employ the requirements of the Statement on Auditing Standards No. 99 (SAS 99) from the American Institute of Certified Public Accountants. As all transactions contribute toward the financial statements, team members should participate in "an exchange of ideas or 'brainstorming' among the audit team members, including the auditor with final responsibility for the audit, about how and where they believe the entity's financial statements might be susceptible to material misstatement due to fraud" as outlined in the AU 316.14 section of the professional standards.1 The brainstorming exercise combines the experiences and thoughts of team members to identify risk areas.

The collaboration will also assist with the third step of listing red flags and symptoms of possible fraud in the functional or business unit being audited. Once completed as discussed in "Recognizing Fraud" in Chapter 2, you can move on to the Software and Technology segment of the data analysis cycle.

 
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