What is a Reasonableness Test?

A reasonableness test is an auditing procedure that examines the validity of accounting information. It is useful at a high level for spotting inconsistencies in data, though you will need to drill down further to identify specific issues.

Examples of Reasonableness Tests

Here are several examples of how reasonableness tests are used:

Physical fit test. An auditor could compare a reported ending inventory balance to the amount of storage space in a company's warehouse, to see if the reported amount of inventory could fit in there.
Trend line comparison. A reported receivable balance is compared to the trend line of receivables for the past few years to see if the balance is reasonable.
Revenue comparison. Compare the sales reported by a number of retail outlets to see if any of them are reporting unusually high or low sales in comparison to the average value per square foot.
Industry comparison. Compare a company's gross margin percentage to the same percentage for other companies in the same industry, to see if it is about the same.