5.7 Analytical review

Analytical review is a crucial component of the audit process that involves evaluating financial information by analyzing relationships between different sets of data. It is a systematic and logical examination of financial statements, ratios, trends, and other relevant data to identify unusual fluctuations, inconsistencies, or potential risks. The objective of analytical review is to obtain a better understanding of the entity’s financial performance, identify areas of potential misstatement, and assess the reasonableness of financial information.

Here are the key steps involved in conducting an analytical review during an audit:

1. Establish Expectations: The auditor starts by establishing expectations of financial data based on their understanding of the entity’s industry, business operations, and historical performance. Expectations can be determined through various methods such as trend analysis, industry benchmarks, budgeted or forecasted figures, or statistical modeling.
2. Identify Significant Variances: The auditor compares the actual financial data with the established expectations and identifies significant variances that deviate from the expected results. These variances may be positive or negative and may indicate potential risks, errors, or irregularities that require further investigation.
3. Investigate Variances: The auditor conducts detailed inquiries and analytical procedures to understand the reasons behind the identified variances. This may involve discussions with management, obtaining additional documentation or explanations, and performing additional audit procedures to gather sufficient evidence.
4. Assess Materiality: The auditor evaluates the materiality of the identified variances in relation to the financial statements as a whole. Materiality is a concept used to determine the significance of an item or event in the context of its impact on financial statement users’ decisions. Material variances may require adjustments to the financial statements or additional disclosures.
5. Evaluate Reasonableness: The auditor assesses the reasonableness of the financial information by considering the nature, magnitude, and direction of the variances, as well as the entity’s specific circumstances. This involves considering the entity’s internal controls, business operations, economic conditions, industry trends, and other relevant factors.
6. Document Findings: The auditor documents the findings of the analytical review process, including significant variances, explanations obtained, and conclusions reached. This documentation serves as audit evidence and supports the auditor’s opinion on the financial statements.