Analytical procedures are a part of the financial audit process. Auditors use these procedures to test the financial information prepared by the client. During the testing phase, auditors rework the information to ensure it is accurate and follows national accounting standards. Some commonly used types of analytical procedures include: comparing current information against previous accounting periods, calculating financial ratios and requesting information from outside sources to compare against the company’s internal records. Auditors may use one or all of these procedures for testing a client’s financial information.
Historical reviews of accounting paperwork allow auditors to create a standard level of expectation for a client. Auditors who conduct several repeated audits will typically have a clearer picture of what the client’s information should look like. When using analytical procedures to compare information like sales, noncollectable accounts, miscellaneous expenses or other items, auditors can determine if improprieties exist in the financial information. Auditors typically use these procedures when reviewing specific accounts or other selected parts of the client’s accounting paperwork or information.
Financial ratios help auditors work through a review of information by testing information straight from the client’s financial statements. Analytical procedures using financial ratios allow auditors to quickly determine if the company has current financial information that is significantly different than previous periods. Another way auditors use financial ratios is to compare the company’s information to outside sources. This use of analytical procedures ensures the company is not significantly different from others within the same industry. Major differences in a company’s financial ratios can indicate improper accounting procedures being applied to financial information.
Another use of analytical procedures is to request information from a client’s customers to compare against the company’s internal records. This part of the process often focuses on accounts receivable, accounts payable or banking information. Auditors send out an official letter requesting the client disclose balances relating to these accounts, and then the auditors compare that information to the same month in the client’s accounting ledger. If differences exist between the two figures, auditors will need to dig deeper into the ledger and discover the reason for the differences.
Other types of analytical procedures exist for auditors to use with their client’s paperwork. Auditors will use whatever procedures they deem necessary when conducting an audit. The design and plan for these procedures usually comes from the audit plan. This plan dictates the sample size needed to test information and the procedures that best identify problems in the financial paperwork.