Accounting and Finance Foundations

Unit 13

Accounting and Finance Foundations Unit 13: Auditing 999

Auditing

Chapter 30

When evaluating any account:

n    Fluctuation analysis

n    Compares prior year account balances to current year account balances and/or with the

company’s budgeted amount

n    Is used to look for unusual or unexpected balance increases and decreases

When evaluating assets:

n    Liquidity activity ratios

n    Accounts Receivable Turnover = Net Sales / Average Gross Receivables

n    Days to Collect Receivables = 365 Days / Accounts Receivable Turnover

n    Inventory Turnover = Cost of Goods Sold / Average Inventory

n    Comparison of prior and current years’ sales returns and allowances as a percentage of gross sales

n    Comparison of prior and current years’ bad debt expense as a percentage of gross sales

n    Comparison of the gross profit percentage by product line with previous years or by month

n    Is used to find unrecorded or understated revenue

n    Auditing of receivables for completeness

n    Involves performing “cut-off” tests that compare shipping documents and related sales

invoices and then performing analytical procedures with sales and cost of goods sold

When evaluating liabilities:

n    Ability to pay short-term debt

n    Cash Ratio = (Cash + Securities) / Current Liabilities

n    Current Ratio = Current Assets / Current Liabilities

n    Accounts-payable turnover ratio

n    Ability to meet long-term debt obligation

n    Debt to Equity = Total Liabilities / Total Equity

When evaluating equity:

n    Profitability ratios

n    Gross Profit Percent = (Net Sales – Cost of Goods Sold) / Net Sales

n    Profit Margin = Operating Income / Net Sales

Auditors use analytical procedures throughout their audits to identify possible misstatements (errors), to

reduce the need for detailed testing of data, and to assess going-concern issues, which involve determin-

ing whether a firm is likely to continue business operations in the future.

Lesson 30.4 The Audit Process—

Conducting Analytical Procedures (cont’d)

Student Guide