Preliminary Analytical REVIEW
Preliminary analytical review has been defined as both analytical procedures and management inquiry procedures applied during the planning stage of the audit. Within the risk assessment standards auditors are required to perform risk assessment procedures that include analytical procedures and management inquiries. Risk assessment procedures also include performing inspection and observation procedures generally focused on obtaining an understanding of the entities internal controls along with an understanding of significant contracts or agreements that are in place. Preliminary analytical review therefore entails a significant component of the risk assessment process. Now let's compare this to a review engagement. Within a review engagement audit evidence consists solely of analytical procedures and management inquiry procedures. There is a common denominator between review engagement procedures and preliminary analytical review procedures. If we are looking for a road map for how to best develop a consistent and efficient framework for preliminary analytical review activities in an audit engagement I would direct you to look at the processes and procedures you already have in place for your review engagements.
This type of framework would imply that significantly more time up front should be spent performing analytical review than what I have observed in practice across many firms. The reality is that most firms are actually spending the time and effort on the analytical review procedures that this framework would imply and in many cases more so, but it is happening inconsistently throughout and across engagements. The result is that the overall approach is inefficient and prone to errors in judgment. For instance a variance detected in accounts receivable turnover that may have been an indicator of improper revenue recognition may be undetected because the variance was only analyzed in the context of the allowance for doubtful accounts once the auditor was already out in the field. By juggling the time budget to shift more time towards the front-end of the engagement using a 'review approach' for risk assessment a firm can potentially realize additional efficiencies and improve the overall effectiveness of the analytical and inquiry procedures they perform.