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.