Explore the purpose, types, and examples of Analytical Review in financial auditing. Understand how auditors use analytical procedures to ensure accuracy in financial statements, including ratio analysis, trend analysis, and real-world examples. Stay informed on the vital role analytical review plays in risk assessment and substantive audit procedures.
What is an Analytical Review?
Analytical Review is a review of an entity’s financial statements to ensure that they are accurate. It is one of the techniques used by auditors for verifying the accuracy of financial statements.
According to SA 330 – Auditor’s response to assessed risks (Standards on Auditing) in order to verify the accuracy of financial statements, an auditor is supposed to use substantive audit procedures. Substantive audit procedures are divided into two types – Analytical Procedures and Test of Controls.
Analytical Review is provided under SA 520 – Analytical Procedures. Accordingly, analytical procedures means evaluations of financial information through analysis of plausible relationships between financial and non-financial data. Analytical procedures also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.
Purpose of Analytical Review
Analytical review is a necessary procedure due to the following reasons,
(a) Risk Assessment – Auditor finds certain areas where he would have to concentrate more or check in detail.
(b) Substantive Analytical Procedure – This is to ensure that the financial statements are accurate.
(c) Final Analytical Review – Here, auditor finds out any deviations, if existing and decides whether any further investigations are necessary.
Types of Analytical Review
Some of the types of analytical review are as below,
(a) Ratio Analysis – This includes comparing certain common business ratios such as turnover ratio, debt equity ratio, gross profit ratio, consumption ratio, etc.
(b) Trend Analysis – This includes comparison of results of two or more similar periods and the projections of such period.
Example of Analytical Review
(a) Making a quarter on quarter comparison of profit and loss, analysing each ‘Financial Statement Area’ through variance analysis is an analytical review.
(b) Investigation of outcome of trade receivables confirmations is also an analytical review.
(c) When there is an increase in sales, verifying if there is any corresponding increase in production cost, manufacturing cost, selling expenses is also an analytical review.
(d) Suppose an entity has a windmill. In Quarter 2, due to the wind benefit, the entity incurred less power cost. However, in Quarter 3, during monsoon, wind benefits were minimal, hence the power cost increased. Such analysis is also an analytical review.
Analytical review provides a brief analysis on variance in an entity’s business operations. The reasons for the differences can be identified and if necessary, additional verification procedures can be conducted by the auditor.
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