Analytical Procedures Flashcards
When are Analytical Procedures Required?
In the Planning stage and Review stage
Recommended as a SUB Test
5 Basic Analytical Procedures
CRAFT
Client vs Industry Related Accounts Actual vs Budget Financial vs Non-Financial This Year vs Prior
Working Capital Ratio
Current Assets - Current Liabilities
Measures Company’s Solvency
Current Ratio
Current Assets/Current Liabilities
Measures ST debt paying Ability
Quick or Acid Test Ratio
Cash, Marketable Securities, Net Receivables/Current Liabilities
Measures Immediate ST Liquidity
Current Cash Debt Coverage Ratio
net Cash Provided by Operating Activities/Average Current Liabilities
Measures company’s ability to pay off its current liabilities in a given year from operations
Receivables Turnover
Net Credit Sales/Average Trade Receivable
measures Liquidity of Receivables
Inventory Turnover
COGS/Average Inventory
Measures liquidity of Inventory
Asset Turnover
net Sales/Average Total Assets
Measures how efficiently assets are used to generate sales
Number of days’ supply in average inventory
=360/ Inventory Turnover
OR
=Average (ending) inventory/Average daily COGS
Measures # of days required to sell inventory
Number of Days’ sales in Average Receivables
=360/Receivables Turnover
Measures # of days required to collect receivables
Profit Margin on Sales (Gross Profit)
Net Income/Net Sales
Measures NI generated by each dollar of sale
Rate of Return on Assets
Net Income/ Average Total Assets
Measures overall profitability of Assets
Rate of Return on Common Stock Equity (Return on Equity)
Net Income - Preferred Dividends/ Average Common Stockholders’ Equity
Measures Profitability of Owners’ Investment
Earnings per Share
Net Income - Preferred Dividends/ Weighted shares of outstanding
Measures NI earned on each share of common stock
Price Earnings Ratio
Market Price of Stock/Earnings per share
measures ratio of market price per share to earnings per share
Debt to Equity
Total Debt/Stockholders’ Equity
Shows creditors the corporation’s ability to sustain losses
Payout Ratio
Cash Dividends/Net Income
Measures % of earnings distributed in form of cash dividends
Debt to Total Assets
Total Debt/Total Assets
Measures % of total assets provided by creditors
Times Interest Earned
Income before Interest Expense and Taxes/Interest Expense
Measures ability to meet interest payments as they come due
Cash Debt Coverage
Net Cash Provided by Operating Activities/Average Total Liabilities
Measures a company’s ability to repay its total liabilities in a given year from its operations
Book Value per Share
Common Stockholders’ Equity/Outstanding Shares
Measures amount each share would receive if the company were liquidated at the amounts reported on B/S
Two Different Audit Approaches
Test of Balances
Test of Transactions
Test of Balances
Audit Ending Balance
Many transactions, small dollar amounts
Cash, AR, Inventory, AP
Test of Transactions
Few Transactions, Large Dollar Amounts
Investments, PP&E, Bonds, N/P, Stockholders Equity
