Financial Analysis Terminology

By Alex Vuchnich, CPA, CFE - During a recent presentation I was giving on financial analysis one of the audience members inquired about the difference between analytical review and analytical procedures. I had used the terms throughout the presentation and she was confused regarding what the difference was and what if any standards applied. In particular was a question concerning the nature of substantive analytical procedures and the need to develop expectations when applying these procedures.

To begin with, the broadest definition we can look at is for analytical procedures in general. Analytical procedures entail tests performed using various analytical techniques such as ratio analysis, variance analysis, trend analysis, scanning and mechanical calculations such as extensions of inventory balances, depreciation expense projections and loan amortizations. When we want to rely on an analytical procedure as part of our audit evidence for supporting a financial statement assertion we then need to take the procedure one step further by developing an expectation about the assertion or account balance which can be compared against the results of the procedure. This is what is entailed in a substantive analytical procedure. This also holds true for analytical procedures performed as part of the risk assessment process. Within SAS 109 analytical procedures are included as procedures that should be applied by the auditor in planning an audit to identify unusual or unexpected relationships in the financial statements that could be indicators of risk of misstatement. The standards indicate that these should be performed as substantive analytical procedures since they will be part of the audit evidence and therefore expectations about the account balances should be developed.

When we look at analytical review we commonly think of the preliminary analytical review performed as part of the audit planning process. I have always viewed analytical review of composing of both management inquiry and analytical procedures. Here I am thinking of procedures such as scanning the trial balance and inquiring regarding variances. In some cases the analytical procedures performed will and should be substantive analytical procedures. The preliminary analytical review is part of the risk assessment process and therefore should include procedures designed to identify unusual or unexpected relationships in the financial statements. I would also draw an allusion to the similarity between the procedures that are performed in a review engagement to that of an analytical review performed as part of the audit. Ideally the types of procedures performed in both would be very similar with the exception that in the audit the auditor would follow up the analytical review during fieldwork by performing corroborating substantive procedures such as vouching, inspections and observations.

This blog

by Alex Vuchnich, CPA, CFE - Alex Vuchnich is the developer of Controlzkit an internal controls anaylsis tool and shares his perspective on how audit and accounting theory, technology and professional ethics interrelate to create forward thinking profitable firms.

More from this blog

Bloggers crew

Steve Knowles has spent 25 years in business and practice in the UK, but he also worked in the states and the years haven't dulled his way of seeing an alternative view to everyone else, and every day is a new adventure.

44869

Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies.

77500

Allan Boress, CPA, with over 25 years as a practitioner and consultant to the accounting profession. Mr. Boress is the author of 12 published books in 6 different languages, including a best-seller, The "I-Hate-Selling" Book.

49859

Larry Perry, CPA, CPA Firm Support Services, LLC, is the author of accounting and auditing manuals, author and presenter of live staff training seminars, and author of webcast and self-study CPE programs. He blogs about small audits, reviews, and compilations.

91109
Sandra Wiley, COO and Shareholder, is ranked by Accounting Today as one of the 100 Most Influential People in Accounting as a result of her prominent role as an industry expert on HR and training as well as influence as a management and planning consultant. She is also a founding member of The CPA Consultant's Alliance. Sandra is a certified Kolbe™ trainer who advises firms on building balanced teams, managing employee conflict and hiring staff.
21735

Maria Calabrese, CIR, Human Resources manager for Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC in Cranford, New Jersey, Maria's topics revolve around the world of: Mentoring, Performance management, and The "Y Generation," a.k.a. "The whY generation".

57126

William Brighenti is a CPA, Certified QuickBooks ProAdvisor, and Certified [Business] Valuation Analyst, operating an accounting, tax, and QuickBooks consulting firm in Hartford, Connecticut, Accountants CPA Hartford.

82328

Ken Garen, CPA, is the co-founder and President of Universal Business Computing Company (www.ubcc.com), a software development firm of high-volume, high-productivity accounting and payroll technology.

25918

Eva Rosenberg, MBA, EA, is the publisher of TaxMama.com, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.

65687

Amy Vetter, CPA, CITP is the CPA Programs Leader for Intacct Corporation responsible for leading the CPA/BPO Partners nationally.

35412
Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
104559
Scott H. Cytron, ABC, is president of Cytron and Company, known for helping companies and organizations improve their bottom line through a hybrid of strategic public relations, communications, marketing programs and top-notch client service. An accredited consultant, Scott works with companies, organizations and individuals in professional services (accounting, finance, medical, legal, engineering), high-tech and B2B/B2C product/service sales.
27087

Rita Keller is a nationally known CPA firm management consultant, speaker, author, mentor and blogger. She has over 30 years hands-on experience in CPA firm management, marketing, technology and administrative operations.

54050
Stacy Kildal is the mom of two fantastic kids, an Advanced Certified QuickBooks ProAdvisor, Certified Enterprise Solutions ProAdvisor, Sleeter Group Certified Consultant, a nationally recognized member of the Intuit Trainer and Writer Network, and co-host of RadioFree QuickBooks.
29005
Michael Alter's blog specializes in providing practical advice to those who seek greater profitability and practice management tactics that enhance deeper client relationships.
33372

Sally Glick, CMO, Principal, Marketer of the Year in 2003 and AAM Hall of Famer in 2007, leads a lively discussion of the constantly expanding roles of marketing and the professional marketers that drive this initiative in accounting firms of all sizes.

102533

The IMA Young Professionals Blog features the insights of IMA’s Young Professionals Committee. Committee members share advice and experiences on careers, continuing education, work/life balance, and other issues affecting young accounting and finance professionals.

34685

FEI Financial Reporting Blog provides highlights from SEC, PCAOB, FASB, IASB, and other regulatory news, including reporting under Sarbanes-Oxley Sect 404. It is written by Edith Orenstein, Director of Technical Policy Analysis at FEI.

113617

Sue Anderson has 30 years of experience in continuing education for accountants. Currently she is the program director for online CPE provider CPE Link.

62629

Jim Fahey is COO of Apple Growth Partners, a regional CPA firm in Ohio. His focus is on the effective and efficient use of technology within the firm by all team members.

40720
Caleb Newquist is the Editor-in-Chief of Sift Media US, overseeing content for both AccountingWEB and Going Concern.
67773

Leita Hart-Fanta, CPA, CGFM, and CGAP is the author of "The Yellow Book Interpreted" and owner of Yellowbook-CPE.com a website devoted to training for governmental auditors.

93901

AccountingWEB is more than just a U.S. team of journalists and financial and technology experts - we have an international side, too! Members of our British team who publish AccountingWEB.co.uk share their ideas, insights, and perspectives from across the pond.

54970