During the comparison of 2010 revenues and expenses with the prior year, an auditor investigates all changes exceeding 10%. This procedure would most likely reveal which issue?

• A. The client changed its capitalization policy for small tools in 2010.
• B. An increase in property tax rates has not been recognized in the client's accrual.
• C. The 2010 provision for uncollectible accounts is inadequate, because of worsening economic conditions.
• D. Fourth quarter payroll taxes were not paid.

Answer: (A)

The key idea is using year-over-year comparisons to catch unusual or nonrecurring effects that change how expenses are recognized. If the company changes its capitalization policy for small tools in the current year, items that used to be expensed would now be capitalized and depreciated. That shifts cost away from the income statement and onto the balance sheet, producing a sizable drop in current-year expenses compared with the prior year—likely exceeding that 10% threshold. This kind of policy shift creates a noticeable, material difference in the reported expenses from one year to the next, which is exactly what this analytical procedure is designed to uncover and prompt the auditor to investigate further.

Other issues could also affect variances, but they don’t align as directly with a single-year policy change that would cause a substantial, identifiable swing in expenses reported for the year.