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
