What is the analytical review?
This procedure is not used to confirm the correctness as well as the accuracy of the amount or balance of the account, but it is used to assess whether the reporting balance or amount is reasonable based on the knowledge that audit have or based on the related data or information that auditor obtained.
For example, the auditor might review the cost of goods sold that records in the income statement against the line of revenues.
The auditor might use this procedure to assess whether the certain kind of income, expenses, and account balance that records in the financial statements are reasonably correct to the nature of the client’s business or not.
This procedure uses to detect the manipulation that intended by management on the financial statements.
For example, some kind of expenses like commission expenses that records in the income statement might be questionable if; base on the auditor understand, client nature of business should not have such kind of expenses.
Analytical review is the technique that uses by the auditor and sometimes also used by the accountant to assess the reasonableness of items that records in the financial statements, the disclosure as well as the critical points that might lead to misstatement.
The common procedure and criteria that normally use are as follow:
- Assess the reasonableness of balance or transactions base on common understanding of the business environment of the client.
- The plausible relationship between one account with others like revenues and cost of goods sold
- The seasonal review between revenues and expenses
- Depreciation with the rate of each class of assets
- Salaries expense with headcount
- Trend analysis