Final answer:
Analytical review is the term used when auditors apply ratio analysis to identify potential issues in a company's financial statements. This involves comparing figures to various benchmarks to spota ny discrepancies.
Step-by-step explanation:
When auditors use ratio analysis to identify areas of interest, it is called analytical review. This involves comparing current year figures with prior years, industry norms, or other benchmarks to spot variances that may indicate potential issues or areas that deserve a closer look.
Through ratio analysis, auditors can assess various aspects of a company's performance and financial health, such as liquidity, profitability, and solvency. By analyzing trends over time, they can identify any significant changes which may warrant additional investigation. For instance, a sudden drop in the liquidity ratio might suggest problems in cash flow, or an unusually high turnover rate could indicate inefficient use of assets.
These analyses are essential components of the audit process, as they help auditors focus their efforts on areas with heightened risk of misstatement due to error or fraud.