Numbers in a case are never neutral. Someone prepared them, for a reason, with a degree of skill and perhaps with something to gain. Good financial data analysis starts with accurate arithmetic and then asks whether the inputs deserve trust. This topic covers accurate calculation, how to evaluate assumptions and the seven questions of professional scepticism.
In 30 seconds
Start every calculation from the information given, work in consistent units, label every figure and sense-check the result. Treat assumptions as starting points, not facts: identify them, question them and justify any change. Professional scepticism means asking who prepared the information, why, how precise it is, what it predicts, what problems it raises, how urgent they are and whose view it reflects.
The aim is not to reject the numbers but to decide how far to rely on them.
Accurate calculations
Accurate calculation is the starting point of financial data analysis, and it is rewarded in the assessment box for the relevant appendix. Remember three habits.
- Start with the information provided. You may flex the numbers later, but begin from the given position.
- Use consistent units. Do not begin in thousands of naira with decimals and slip into single naira, or the reverse.
- Label every figure. What seems obvious to you may not be obvious to the reader, and an unlabelled figure in a report is a serious omission.
Then step back and perform a sense-check, or logic check, on your calculations. A quick overview can catch a basic error before you build a report on it.
Evaluating assumptions
When the analysis rests on assumptions from the client or a third party, there is always an implication, and sometimes a clear requirement, that you evaluate them. First identify them. They may be listed, or they may be woven into the information about the issue.
Assumptions are often given as a starting point, but they are not set in stone and can and must be questioned. Skilful questioning of the information provided is part of professional scepticism. If you have to make additional assumptions, or you query the given ones and adjust the numbers, you are applying judgement. Identify each question clearly and justify your position in the report.
Professional scepticism: seven questions
Financial diagnosis must take account of the context, the nature of the information and its source. The questioning that does this is professional scepticism: the professional intelligence, awareness and initiative you bring to the information.
| Question | What to look for |
|---|---|
| 1. Who prepared it? | An insider with a stake, or an outsider? What skill and knowledge did the author have? |
| 2. Why was it prepared? | Standard statements, or something made for a purpose such as a bank loan, a bonus or an insurance claim? Is bias likely? |
| 3. How precise is it? | Audited past data, draft or management accounts, a projection, an extrapolation or a new source? |
| 4. What does it predict? | Are the time frames and activity levels realistic? Are the issues linked to the present or to new speculation? |
| 5. What problems are involved? | Are the big issues obvious or must you find them? Are they financial only? Short-term incidents or long-term issues? |
| 6. How urgent is each issue? | High priority with immediate impact, or low priority with a slow effect over the next two periods? |
| 7. Whose perspective applies? | The preparer, yours or the client’s? Is the client clear on your role as an objective adviser? Who is your audience? |
The answers give the provenance and quality of the information. This does not mean you reject the numbers. It means you judge their quality and suitability, and how much confidence to place in each. That assessment is itself a demonstration of judgement.
Worked example
Scenario (fictitious). A sales forecast shows revenue growing 30% a year for three years. The sales director prepared it, and her bonus depends on sales. The company will give it to a bank to support a loan request. Past growth has been 8% a year. Apply the seven questions.
- Who and why. An interested insider prepared it, to persuade a lender. Bias is likely.
- Precision. It is a projection, not audited, with no supporting orders or market data in the case.
- Predictions. Thirty percent growth is almost four times the past rate, so the time frame is not realistic without evidence.
- Priority and perspective. The loan decision is urgent, and the bank, not the director, bears the risk.
- Conclusion. Do not reject the forecast, but state that it is unreliable as presented. Recalculate on a growth rate close to history, such as 8%, show the effect on the loan’s repayment capacity and recommend that the bank asks for evidence such as signed contracts.
Common mistakes
- Mixing units, such as thousands and single naira, or leaving figures unlabelled.
- Skipping the sense-check, so a basic error runs through the report.
- Treating client assumptions as facts.
- Rejecting the numbers outright instead of rating their reliability.
- Questioning an assumption without justifying the change.
Quick revision
- Calculate from the given data, in consistent units, with labels, then sense-check.
- Identify assumptions, question them and justify any change.
- Seven questions: who, why, precision, predictions, problems, priority, perspective.
- Judge quality and provenance, and state your confidence.
Practice questions
These are original questions in the style of the Institute of Chartered Accountants of Nigeria exam. Try each one before you open the answer.
Question 1. Professional scepticism means:
- Rejecting all information provided
- Questioning information and judging its quality and reliability
- Accepting information from senior people
- Avoiding conclusions
Show the answer
B. You assess the quality of the numbers and your confidence in them.
Question 2. The first step in a calculation is to:
- Change the assumptions
- Start from the information provided
- Round all figures
- Write the conclusion
Show the answer
B. You may flex the numbers afterwards.
Question 3. A forecast was prepared by a manager whose bonus depends on it. Which question is most relevant?
- Who prepared it and why?
- What font was used?
- How long is it?
- When was it printed?
Show the answer
A. Authorship and purpose reveal possible bias.
Question 4 (6 marks). Explain four of the questions you should ask about information in a case, with an example of each.
Model answer
Show the model answer to Question 4
Any four, one and a half marks each. Who prepared it? An insider with a stake, such as a director on a sales bonus, may be biased. Why was it prepared? A document written to win a loan may be optimistic. How precise is it? Audited figures are more reliable than drafts or projections. What does it predict? Growth far above the historical rate needs evidence.
How urgent is it? An imminent loan decision gives the issue priority. Whose perspective? The bank’s risk differs from the preparer’s view.
The next topic covers plausibility, interpretation and using financial data analysis in the exam.
Pathfinder on Accuracy, assumptions and professional scepticism in financial data analysis
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
The key rewards spotting that unaudited statements are less reliable and that an unresolved dispute with the auditors raises integrity concerns. Apply the seven questions to each exhibit.
Revise first: Professional scepticism: seven questions
The key rewards doubting the accuracy of the figures and the over-ambitious targets. Test each target against the evidence.
Revise first: Evaluating assumptions
Source: ICAN Pathfinder, Case Study. Diets covered: May 2015 and May 2016.
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