Explaining the role of Analytical Review Procedures in the audit of financial statements - Essay Example

These include the use of analytical review procedures. In this paper, we will specifically focus on analytical review procedures; define what they are, examine their role in the process of financial audit, highlight examples and lastly give their merits and demerits. Analytical review procedures or techniques can be generally be defined as the most important and valuable tools of trade an auditor possesses. Specifically, they can be defined as vital processes auditors use to give a precise evaluation of financial data presented to them by a business client.

They are used to offer a comprehensive review of business financial information. This is through the analysis of relationships that exist between the business’s financial and nonfinancial data (Rodgers, 2012:45). The primary role of analytical review procedures is to act as an early warning to the business under audit review. This means the primary role of these procedures is to identify risks, which are inherent and specific to the business. These risks are identified throughout the audit process, but mostly in the first stage of an audit process, referred to as the risk assessment procedure (Rodgers, 2012:56).

The audit process normally has three stages. The other two stages involved are the substantive analytical procedures stage and the final analytical procedures stage (Johnstone, 2013:30). In all the three audit stages, analytical review procedures are used. In order for analytical review procedures to be effective in any audit process, they need to follow certain guidelines and best practices. These include being able to give a determination of the trends that are useful to the business and developing sensible relationships derived from historical operations of the business that will serve as guidelines in identifying future changes.

Examples of these analytical procedures include the comparison of business revenue for a period of ten years and the