Financial analysis involves interpreting financial statements and reports using ratios and calculations to identify areas of strength and weakness. There are four types of analysis: internal, fraud investigation, external audit review, and formal. Financial analysis is critical for identifying patterns, opportunities, weaknesses, and strengths in business operations. Accounting professionals complete intermediate and advanced analysis courses, statistics, data management, and computer systems to understand and interpret analysis results.
Financial analysis is the investigation and interpretation of financial statements and related financial reports. Trained and certified accountants generally complete this type of analysis. The role of a financial analyst is to use computer software, standard ratios, and other proven calculations to analyze account activity and identify areas of strength and weakness.
There are four types of analysis: internal, fraud investigation, external audit review, and formal. The ratios and tools used vary according to the purpose of the analysis and the intended audience. The general role of financial analysis is to identify patterns, opportunities, weaknesses, and strength in business operations.
Internal analysis is also called management analysis. This role is responsible for running and reviewing monthly and annual financial activity reports. They investigate details in a specific area of the company and prepare summary reports for senior management.
Financial reports are critical for identifying how money and resources are being spent, for tracking sources of internal revenue, and for comparing actual results against budgets and forecasts. Weak internal financial analysis can lead the company to overspend or fail to capture key market share due to lack of cash flow and poor planning.
Fraud investigation techniques rely on analysis to identify departments with weak internal controls or business procedures. Transactions in these areas can be reviewed in detail using financial analysis or auditing software tools. All financial transactions have an impact on the reported account value. Comprehensive analysis often uncovers fraudulent activity, due to its impact on financial statements.
Financial analysis is also completed by external agencies, ranging from potential investors to financial institutions. These parties typically use financial statements as a source of information. The field of financial analysis is quite mature, with a wide range of calculations used to investigate the transactions in a company’s financial reports. They can also highlight areas that are inconsistent and uncover accounting errors.
In a formal audit of the financial statements, auditors complete an analysis exercise to validate the information in the financial statements. In addition to an actual audit of the transactions, an analysis allows the company to provide an opinion on the financial stability and longevity of the company. Both functions add value to the audit report.
All accounting professionals must complete intermediate and advanced analysis courses. In addition, they also complete courses in statistics, data management, and computer systems. The combination of these skills enables them to quickly and accurately understand and interpret analysis results.
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