Definition
Analytical review is an audit technique used to examine financial information through analysis of plausible relationships among both financial and non-financial data. This process provides evidence regarding the completeness, accuracy, and validity of accounting records and financial statements. It involves comparing figures from different periods or entities to identify significant discrepancies or anomalies that warrant further investigation.
Analytical review is a type of substantive test performed during the planning and execution phases of an audit, employing procedures that range from simple period-over-period comparisons to advanced statistical methods, such as multiple regression analysis, often utilizing specialized audit software.
Examples
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Year-Over-Year Comparison: Auditors might compare the current year’s revenue with that of the previous years to identify any unexpected increases or decreases requiring explanation.
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Ratio Analysis: Auditors might analyze ratios such as profit margin, current ratio, and return on assets to assess a company’s financial health. Abnormal fluctuations might signal areas that need further examination.
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Trend Analysis: Performing trend analysis on sales patterns to discern seasonal variations and underlying trends can help auditors predict future performance and spot irregularities.
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External Comparison: Comparing a company’s financial performance metrics to industry benchmarks to identify deviations that require investigation.
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Regression Analysis: Utilizing regression analysis to predict financial statement amounts based on relationships with non-financial data, like sales volumes or staff numbers.
Frequently Asked Questions (FAQs)
What is the purpose of an analytical review in auditing?
The primary purpose is to provide evidence that the financial statements are reasonable and free from material misstatement by identifying areas that need further detailed examination.
How does analytical review differ from other substantive tests?
Analytical review focuses on evaluating the reasonableness of financial data through comparisons and statistical analysis, whereas other substantive tests might involve detailed testing of transactions and account balances.
When should an analytical review be conducted during an audit?
It should be conducted during both the planning phase (to identify areas of risk and focus the audit approach) and the execution phase (to gather substantive evidence).
Can analytical review procedures replace detailed balance or transaction testing?
No, analytical review procedures supplement but do not replace detailed testing. They help auditors identify high-risk areas that need more focused testing.
What types of data are used in an analytical review?
Both financial data (e.g., revenues, expenses) and non-financial data (e.g., number of employees, production volumes) are used to perform analytical reviews.
What tools and techniques are commonly used for analytical reviews?
Common tools include financial analysis software, statistical analysis tools, and automated audit software that applies techniques like ratio analysis and regression analysis.
How can auditors ensure the reliability of the data used in an analytical review?
It’s essential to use verified and accurate data sources, validate data against multiple benchmarks, and understand the context of the data sources.
Are there standards that guide the use of analytical review in audits?
Yes, auditing standards such as the International Standards on Auditing (ISA) provide guidance for the use of analytical procedures in audits.
What are the potential limitations of an analytical review?
The main limitations include the dependency on the quality of available data and the potential difficulty in identifying subtle anomalies through high-level analysis.
How does analytical review enhance the audit process?
It provides a cost-effective way to test large volumes of data, helps identify unusual transactions or trends quickly, and directs auditors’ attention to areas that need detailed verification.
Related Terms
- Substantive Test: Procedures designed to detect material misstatements in the financial statements.
- Financial Statements: Records that provide an overview of a business’s financial condition, including the balance sheet, income statement, and cash flow statement.
- Audit Software: Programs used by auditors to aid in the analysis and review of financial data.
- Regression Analysis: A statistical technique used to identify and quantify relationships between variables.
- Ratio Analysis: The process of calculating and interpreting financial ratios to assess a company’s performance.
Online References
- AICPA - Analytical Procedures
- IFAC - International Standards on Auditing
- ACAUS - Tools for Audit Analytics
- COSO - Guidance on Conducting Analytical Reviews
Suggested Books for Further Studies
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“Auditing and Assurance Services” by Alvin A. Arens, Randal J. Elder, et al.
- A comprehensive guide to the audit process, including analytical reviews.
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“Principles of Auditing & Other Assurance Services” by Ray Whittington, Kurt Pany
- Covers the principles and practices of auditing with insights into analytical procedures.
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“Audit and Assurance Essentials” by Romila Batra
- Provides a foundational understanding of various audit techniques, including analytical reviews.
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“Forensic Accounting and Fraud Examination” by William S. Hopwood, Jay J. Leiner, and George R. Young
- Discusses the use of analytical procedures in the detection of fraud.
Accounting Basics: “Analytical Review” Fundamentals Quiz
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