What Are Analytical Review Procedures?
Analytical review is a procedure employed by auditors to evaluate financial account balances, wherein comparisons are made between changes in account balances and related accounts over a period of time. This review is often used to assess the accuracy of account balances and to identify errors and discrepancies.
The CPA conducting the review will assess the changes in account balances between two or more given periods of time and compare them to related accounts, such as sales and expenses. This helps to ensure that the accounts are in balance and that there are no errors or discrepancies.
Below are the product specs, pros, and cons of an analytical review procedure:
Product Specs:
- Compares changes in account balances over time and related accounts
- Assesses the accuracy of account balances and identifies errors and discrepancies
Pros:
- Can detect errors and discrepancies in financial account balances
- Helps to ensure that the accounts are in balance
- Provides a comprehensive overview of financial account balances
Cons:
- Time-consuming process
- Can be costly due to the need to hire CPAs
- Can be difficult to interpret complex financial data
Example
Comparing actual results to expected results provides insight into the efficacy of business processes. Analytical reviews are used to assess the accuracy of financial information and the efficacy of internal control processes.
An analytical review involves the comparison of current financial data to similar data from previous periods, industry standards, or budgeted amounts. For example, if a company reports a sales increase, the accounts receivable should increase in a similar proportion. If the increase in receivables is greater than the increase in sales, it could indicate possible issues such as reduced collections effort or extending credit to lower-quality customers.
If 10% of inventory is declared obsolete, then the obsolescence charge for the current year should be around 10%. If the actual obsolescence charge is lower than 10%, it could indicate that unidentified obsolete inventory may still be in stock.
Additionally, if there is a change in an expense account of more than 25% from the same account for the previous year with a variance of more than $5,000, then it is necessary to investigate the reason for the change.
Analytical reviews provide the necessary insights to identify any discrepancies and ensure the accuracy of financial information.
Uses Of Analytical Reviews
Comparing various data points can help to identify discrepancies, assess the accuracy of financial information, and evaluate the efficacy of internal control processes. Analytical review procedures provide an effective way to identify and address any errors or inconsistencies in financial statements. Through analytical review, auditors can gain an understanding of the underlying operations, identify any areas of risk, and make sure that all processes are functioning as intended.
Analytical review procedures involve analyzing and comparing data points from various sources. This could include reviewing the company’s financial statements to find any unusual patterns or inconsistencies. It could also involve using analytical procedures to review the accuracy of the data, such as calculating ratios or analyzing trends. By comparing the data points, auditors can identify any significant differences or outliers that could indicate a potential risk.
Analytical reviews can also be used to evaluate the effectiveness of internal control processes. For example, auditors can review the company’s segregation of duties, access controls, and security policies to ensure that all processes are being implemented correctly. Additionally, they can review the accuracy of the financial statements to ensure that all transactions are recorded properly. By using analytical reviews, auditors can gain an understanding of potential risks and take the necessary steps to mitigate them.
Types Of Analytical Reviews
Analyzing financial data through various techniques can provide insight into the operations of any given entity, allowing for the identification of potential risks and the implementation of necessary controls. Analytical review procedures involve the use of ratios, trend analysis, diagnostic approach, casual approach, and reasonable tests. These techniques can help in the comparison of financial statement data, such as comparing the current year’s ratios to the prior year, budget, or industry average.
| Technique | Purpose | Examples |
|---|---|---|
| Ratios | Comparing financial statement data | Comparing current year’s ratios to prior year, budget, or industry average |
| Trend Analysis | Comparing current balance to previous year’s balance | Comparing balance sheets for the current year and the prior year |
| Diagnostic Approach | Evaluating if current account balance deviates from previous year’s trend | Comparing sales revenue for the current year to the prior year |
| Casual Approach | Calculating expected balance for the account | Calculating expected inventory levels based on historical data |
| Reasonable Tests | Using nonfinancial data to calculate expected amount | Calculating expected wages based on the number of hours worked |
Analytical review procedures are necessary to ensure the accuracy of financial statements and to verify the accuracy of existing controls. Different procedures can be used depending on the situation, and each can provide valuable insight into the financial condition of a business.
Benefits Of Analytical Reviews
Analyzing financial data through various techniques can provide numerous benefits to businesses, such as identifying potential risks and implementing necessary controls.
Analytical reviews are a great tool in helping businesses identify incorrect financial statements and mis-classified transactions, which can be further investigated to determine the source of the problem.
The reviews can also be used to identify areas of high performance and weaknesses in financial processes that may need improvement.
The use of analytical reviews can help businesses assess their financial performance and create more accurate financial projections. This can be used to create a plan of action to improve the financial health and efficiency of the business.
In addition, the information gathered from the reviews can be used to provide a better understanding of the company’s financial position and help inform future decisions.
Analytical reviews are an important tool for businesses to ensure accuracy and consistency in financial reporting. Regular reviews can help to identify discrepancies and errors, helping businesses to provide accurate data and make more informed financial decisions.
Additionally, the reviews can also help businesses identify areas of improvement and potential savings.
Conclusion
Analytical review procedures are a valuable tool for businesses to assess the accuracy and integrity of financial information. They assist in identifying potential misstatements in financial data and help in assessing the effectiveness of internal controls.
They can also be used to evaluate the overall reliability of financial statements and to assess whether the financial statements are prepared in accordance with applicable standards. Analytical reviews provide stakeholders with a deeper level of assurance when making decisions related to the financial stability of a company.
Furthermore, they provide a means to detect potential fraud and identify the root causes of any discrepancies. In conclusion, analytical reviews are an important tool for improving the accuracy and integrity of financial data and providing stakeholders with a greater level of assurance.