An analytical review is used by auditors to assess the reasonableness of account balances. A CPA does this by comparing changes in account balances over time, as well as by comparing related accounts. Here are several examples of analytical reviews:
- If sales increase by 20% during the review period, then accounts receivable should increase by a similar amount. If the proportional change in receivables is greater than the increase in sales, this could be caused by several issues, such as a reduced collections effort or extending credit to lower-quality customers. In both cases, a larger reserve for bad debts is indicated.
- If 10% of the inventory has been declared obsolete in the past three years, then the obsolescence charge for the current year should be about the same. If the actual amount of this charge is lower than 10%, one might suspect that there is unidentified obsolete inventory still in stock.
- If there has been a change in an expense account of greater than 25% and more than $5,000 in the past year, investigate the reason for the change.
Analytical reviews can be quite useful for spotlighting general areas in which financial statements are incorrect or where transactions have been mis-classified. Once the analysis identifies areas of concern, the auditor must conduct a further investigation in order to pinpoint the source of the underlying problem.