Analytical Procedures Flashcards
At what stages of the audit should analytical procedures be used?
Risk assessment
Planning analytics - identify risk areas needing more work
Final analytics
What are some limitations of analytical procedures?
Substantial knowledge of the business is required for results to be meaningful
The relevant informaiton needed may not be avaliable
They can be performed mechanically & routinely without proper consideration
Consistency of results may conceal an error
How do you calculate the return on capital employed?
What does this show?
Profit before interest and tax
/ ( Equity + Net Debt )
Shows whether a company is using resoirces effectivley
How do you calculate the return on shareholders’ funds?
What does this show?
Net profit fot the period
/ ( Share capital + reserves )
Shows whether a company is using resources effectively
How do you calculate the gross profit percentage?
What does this show?
( Gross profit * 100 )
/ Revenue
Assesses profitability before taking overheads into account
How do you calculate the cost of sales percentage?
What does this show?
( Cost of sales * 100 )
/ Revenue
Assesses the relationship of costs to revenue
How do you calculate the operating costs percentage?
What does this show?
( Admin Expenses * 100 )
/ Revenue
Assesses the relationship of costs to revenue
How do you calculate the net margin / operating margin?
What does this show?
(Profit before interest and tax * 100)
/ Revenue)
Assesses profitability before taking overheads into account
If you wanted to use analytical procedures to assess performance of an entity, which formulas would you apply?
- Return on capital employed
- Return on shareholders funds
- Gross profit percentage
- COS percentage
- Operating costs percentage
- Net margin / operating margin
If you wanted to use analytical procedures to assess short-term liquidity of an entity, which formulas would you apply?
- Current ratio
- Quick ratio
If you wanted to use analytical procedures to assess long-term solvency of an entity, which formulas would you apply?
- Gearing ratio
- Interest cover
If you wanted to use analytical procedures to assess efficiency of an entity, which formulas would you apply?
- Net asset turnover
- Inventory turnover
- Inventory days
- Trade recievables collection period
- Trade payables payment period
How do you caclulate the current ratio of an entity?
What does this show
Current asses : Current liabilities
Assesses an entity’s ability to pay its current laibilities from its current assets
How do you calculate an entity’s quick ratio?
What does this show?
(Recievables + Current investments + Cash) : Liabilities
Assesses an entity’s ability to pay current liabilities from reasonably liquid assets
How do you calculate an entity’s gearing ratio?
What does this show?
Net debt
/ Equity
Assesses the entity’s reliance on external finance
