What is a Reasonableness Test?

A reasonableness test is an analytical auditing procedure used to determine whether accounting information appears logical and consistent with expected results. The auditor compares reported amounts, ratios, trends, or relationships with budgets, prior periods, industry data, or independently developed expectations. Significant differences may indicate errors, omissions, unusual transactions, or potential misstatements. Because the procedure provides only a broad indication of possible problems, the auditor must perform additional testing and investigate supporting details to identify the cause of any unexpected variance.

Examples of Reasonableness Tests

Here are several examples of how reasonableness tests are used:

Physical fit test. An auditor could compare a reported ending inventory balance to the amount of storage space in a company's warehouse, to see if the reported amount of inventory could fit in there.
Trend line comparison. A reported receivable balance is compared to the trend line of receivables for the past few years to see if the balance is reasonable.
Ratio analysis. Key financial ratios (e.g., gross margin, current ratio, or return on assets) are calculated and compared to industry norms or prior periods. Unusual changes in ratios can signal problems such as misstatements or operational inefficiencies.
Cross-account analysis. This test evaluates consistency between accounts that should align, such as payroll expense and employee headcount. Inconsistencies may reveal misstatements or operational changes not reflected in the financials.
Revenue comparison. Compare the sales reported by a number of retail outlets to see if any of them are reporting unusually high or low sales in comparison to the average value per square foot.
Seasonal fluctuation testing. Data is analyzed for typical seasonal patterns (e.g., higher retail sales in December). Deviations from normal seasonality can indicate timing issues or unrecorded transactions.
Budget-to-actual comparison. Actual financial results are compared to budgeted figures to detect unexpected variances. Large differences may require further investigation to determine if they result from changes in assumptions or accounting errors.
Industry comparison. Compare a company's gross margin percentage to the same percentage for other companies in the same industry, to see if it is about the same.