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Analytical review

Analytical procedures or analytical review? Analytical review is one of the strongest and most important techniques available to auditors to support or refute their opinion on the truth and fairness of the figures or the overall composition of the financial statement in question.

The definition in the ISA (International Standard on Auditing) 520 -Analytical procedures makes the important point that analysis is not simply comparison between two figures but also pondering the relationships between financial and non-financial data and unexpected values.

For the purposes of the ISAs, the term 'analytical procedures' means evaluations of financial information through analysis of plausible relationships among both 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.

The application notes of ISA 520 give rather obvious examples of typical analytical procedures, but they do cover the range of analytical and interpretive methods.

A1. Analytical procedures include the consideration of comparisons of the entity's financial information with, for example:

Comparable information for prior periods.

Anticipated results of the entity, such as budgets or forecasts, or expectations of the auditor, such as an estimation of depreciation.

Similar industry information, such as a comparison of the entity's ratio of sales to accounts receivable with industry averages or with other entities of comparable size in the same industry.

A2. Analytical procedures also include consideration of relationships, for example:

Between financial information and relevant non-financial information, such as payroll costs to number of employees.

Among elements of financial information that would be expected to conform to a predictable pattern based on the entity's experience, such as gross margin percentages.

A3. Various methods may be used to perform analytical procedures. These methods range from performing simple comparisons to performing complex analyses using advanced statistical techniques. Analytical procedures may be applied to consolidated financial statements, components and individual elements of information.

Uses of analytical reviews

- To properly understand your business model and strategies.

- As a due diligence exercise which would inevitably include a detailed analytical review for past years', current and projected figures.

 
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