Business Definition for: analytical test
analytical test
procedure evaluating data relationships to derive substantive audit evidence. It identifies areas requiring additional audit attention. For example, auditors would compare actual financial statement figures against their professional expectations and the firm's experience. Discrepancies are noted and investigated. A comparison may also be made between figures of competing firms and industry norms. Further, financial information can be compared to nonfinancial information, where appropriate. An example is the relationship between sales and number of employees. Analytical tests can be conducted in measures other than dollars, if desired, such as in physical quantities and ratio percentages. If the tests uncover illogical relationships, the CPA will perform more detailed audit testing.
See also
substantive test
Related Terms:
test of account balances to verify the correctness of the amounts. The three forms of substantive tests are: (1) tests of transactions (which are often conducted concurrently with compliance test); (2) tests of balances; and (3) analytical review procedures. Tests of transactions and balances gather evidence of the validity of the accounting treatment of transactions and balances. They are designed to identify errors and irregularities. Statistical sampling may be used in determining the accuracy of financial statement numbers. Tests of transactions may be conducted continually throughout the audit year or at or close to the balance sheet date. When the CPA traces a sales invoice from the journal to the ledger for correctness, it is called a transaction test. When the CPA compares the book balance of cash to the book balance, it is a test of balances. This test is done near or at the year-end reporting date. Another substantive test is calculating interest expense on corporate debt and verifying the amount in the financial records. analytical review procedures involve examining the reasonableness of relationships in financial statement items and uncovering variations from trends. The procedures may be applied to overall financial information, financial data of segments, and individual elements. If relationships appear reasonable, evidence corroborating the account balance exists.
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