Preliminary Analytical Review is used during the planning phase to help auditors gain an understanding of the client’s financial situation. It involves analyzing financial ratios and trends, such as gross profit percentages or liquidity ratios, to identify potential risk areas. For example, a decrease in gross profit percentage may indicate the company is heading towards losses, while an increase in debt collection periods may suggest uncollectible receivables. This helps auditors decide the nature, timing, and extent of audit procedures needed to address the identified risks.