Definition
Horizontal analysis, also called trend analysis, measures the change in each line item between periods in dollars and as a percentage of the earlier period. Vertical analysis, or common-size analysis, restates each line as a percentage of a base: revenue for the income statement and total assets for the balance sheet. Together they show what moved and what share of the whole it represents.
Why it matters in an audit or review
Both methods are low-cost analytical procedures that point the team to accounts needing more work. Horizontal analysis flags unusual swings, and vertical analysis flags a changing cost structure even when dollars look stable. AU-C 520 describes analytical procedures as evaluations of plausible relationships, and it has the auditor decide in advance how large a difference can be accepted without further investigation.
Example
Illustrative: revenue rises from $4,000,000 to $4,400,000, up 10.0%. Selling and administrative cost rises from $600,000 to $704,000, up 17.3%. As a share of revenue it moves from 15.0% to 16.0%, so costs grew faster than sales and the increase needs an explanation.
Common mistakes
- Reading percentage changes on small bases without checking dollar amounts.
- Comparing periods after a reclassification without restating the prior year.
Sources
- AICPA, AU-C Section 520, Analytical Procedures
- AICPA, AU-C Section 315, Understanding the Entity and Its Environment (analytical procedures as risk assessment procedures)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error