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Ratio Analysis Plays a key Roll to determine the business circumstance, here are few Ratios are given below.
In the examination, you will be asked to calculate and interpret the ratios used in analytical procedures at the audit planning stage and when collecting audit evidence. Ratios and comparisons can be used to identify where the accounts might be wrong or right, and where additional auditing effort should be the need to spent.
In audit Analytical Procedures that seek to provide evidence as to the completeness, accuracy, and validity of the information contained in the accounting records or in the financial statements.
Analytical Procedures consists of the systematic study and comparison of relationships among elements of financial information and the investigation of significant fluctuations and variances from the expected relationship
When performing an analytical procedure, the auditor compares numbers, ratios or even non-financial information in order to identify unexpected trends or unexpected relationships, which may indicate the existence of errors.
There are many different analytical procedures including the comparisons listed below
| Analytical Procedures at the Planning stage | To assist the auditor in the planning stage the nature, timing, and extent of other audit procedures. Use at this stage should add to the firm’s understanding of the business and identify the risky areas in which audit resources should be targeted. |
| Analytical Procedures at substantive testing stage | at the detailed testing stage – in most instances analytical procedures should be used in conjunction with tests of detail to achieve a particular audit the objective in relation to specific financial statement assertions.. |
| Analytical Procedures at the Review stage | At the final review stage the the auditor must design and perform analytical procedures that assist him when forming an overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of the entity and that all of the audit objectives with regard to the financial statements have been met. |
Using Ratios
In the Paper Audit and Assurance exam, you may be asked to compute and interpret the key ratios used in analytical procedures at both the audit planning stage and when collecting audit evidence. Ratios and comparisons can be used to identify where the accounts can be wrong, and where additional auditing effort needs to be spent.
Ratio Analysis Plays a key Roll to determine the business circumstance, here are a few Ratios are given below.
In the examination, you will be asked to calculate and interpret the ratios used in analytical procedures at the audit planning stage and when collecting audit evidence. Ratios and comparisons can be used to identify where the accounts might be wrong or right, and where additional auditing effort should be a need to spend.
Calculating a ratio is an easy step, divide a number by another number, the calculations are so basic that they can be calculated using a spreadsheet.
The real skill is the interpretation of results and using that information to conduct out a better audit. Saying that a ratio has increased because the top line in the calculation has increased or the bottom line decreased is rather had no point, this is simply translating the calculation into words. the interpretation is another thing.
Gross Profit Margin: Gross profit/Sales Revenue x 100
Operating profit margin =Operating profit/Sales Revenue x 100
Return on capital employed (ROI) = Operating profit/ Capital employed x 100
Current Ratio= Current Assets/Current Liabilities
Quick ( or asset test) ratios =Current assets minus inventory/ current liabilities
Inventory holding period or Inventory days =Inventory/Cost of sales x 365
Receivable days/ Receivables collection period =Trade receivables/Sales x 365
Trade payable Days/Payables payment period =Trade payables/Cost of sales x 365
Interest cover = profit before interest/ interest
| Gearing = Long-term loan finance/ equity finance x 100 The gearing ratio can also be defined in other words, particularly by comparing long-term loan finance to total finance. As the gearing ratio increases so risk that the interest can’t be paid. But it is difficult to define a ‘safe’ level of gearing. an example is , a property company with properties leased to tenants will have a fairly rental income for one year. Such a company can probably safely sustain substantial borrowings (though it could be in trouble if interest rates increased significantly). A company with volatile streams of income would have to keep its gearing lower as it must ensure that they have the ability to pay interest during the lean times. |
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1. Assessing engagement risks at the planning stage, will ensure that attention is focused early on the areas most likely to cause material misstatements.
2. It will help the auditor to fully understand the entity, which is vital for an effective audit.
3. Any unusual transactions or balances would also be identified early so that these could be addressed in a timely manner.
4. Assessing risks early is an efficient practice by auditors. The auditors will only focus their time and effort on key areas as opposed to transactions or balances that might be immaterial or unlikely to contain errors.
5. As well as assessing risk early should ensure that the most appropriate or most experienced team is selected and staff allocated to higher risk audits and high-risk balances.
6. A thorough risk summary should sequentially reduce the risk of an inappropriate audit opinion being presented.
Audit planning ( Audit Strategy and Audit Plan)
Audit Strategy: Associate in Nursing audit strategy sets the scope, timing, and direction of the audit and guides the development of a more detailed audit plan.
Audit plan: Once the overall strategy has been planned, detailed consideration can be given to each individual audit objective and how it can be best met.
KNOWLEDGE OF THE BUSINESS / UNDERSTANDING OF THE CLIENT
The auditor obtains an Associate in the Nursing understanding of the entity, its control environment, and its detailed internal controls:
Understanding to be gained about– Industry, regulatory, and other external factors
( for example financial reporting framework, laws and regulations, stakeholders, economic conditions like the volatility of exchange rates, competition, level of technology.
type of entity and accounting policies ( legal structure, ownership, and governance, main sources of finance).
Objectives…strategies…related business risks!– Measurement and review of Financial performance ( measures important to the client, KPIs, budgets, targets).
Internal control (gain an understanding of the design and implementation of internal controls)
other issues that arose in the prior year’s audit and how these were resolved.
Also whether any points brought forward were noted for consideration for this year’s audit.
Internal control deficiencies noted in the prior year;
if these have not been rectified by management then they could arise in the current year audit as well as significant changes in the entity as compared to prior years. Is the company using e-commerce?
Read More: AUDIT RISK and Auditor Response
Preconditions for an audit
ISA 210 Agreeing with the Terms of Audit Engagements provides steerage to auditors on the steps they must absorb acceptive a brand new audit or continued on AN existing audit engagement. It sets out a variety of processes that the auditor ought to perform together with agreeing on whether or not the preconditions square measure gift, agreement of audit terms in AN engagement letter, continual audits, and changes in engagement terms.
ACCA Testing Some topics frequently in past exams
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