Analytical procedures are used by external auditors to get an overall assessment of financial information provided by the company that's being audited. That assessment is used to determine how to proceed with the financial audit. Managers can also use analytical procedures to have a better understanding of their financial statements and to be better prepared to answer questions from external auditors.
Using budgeted revenue amounts and comparing those to actual amounts allows auditors and managers to see which revenue accounts varied from predicted numbers. Significant dollar amount or percentage differences should be investigated to determine the cause. Materiality determines if the differences are significant. An external auditor often does a calculation based on financial statement information and company risk assessments to determine what would be considered "material." Management may use predetermined numbers to determine what is significant. For example, management may decide all differences greater than $1,000 or 20 percent in individual accounts will be investigated.
Comparing current year financial statements to prior year financial statements is another way to review revenue accounts. Start by determining which areas had significant differences compared to the previous year. Then it may be necessary to review other financial and nonfinancial data to determine what may have caused the significant changes. External auditors often interview those with direct control over the affected accounts to get an idea of caused material increases or decreases in those areas.
Reviewing the gross margin of various competitors is another way to analyze a company's performance. Gross margin is the percentage of revenue the company retains after subtracting its cost of goods sold. For example, another retailer may have a significantly higher gross margin on plant sales than the company being audited. Further review may indicate the other retailer has a lower-cost supplier -- and therefore lower cost of goods sold -- or perhaps the other retailer prices its plants higher while maintaining sales volume.
Perhaps a hardware store notices a significant reduction in lawn and garden sales in January of this year compared to January of last year. A review of the weather history may indicate that a huge snowfall last January resulted in record sales of snow blowers, shovels and salt. Nonfinancial information, such as weather history, can be helpful for industries whose demand fluctuates relative to the weather.