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26 Cards in this Set

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  • Back

what are analytical procedures useful for?

for identifying POTENTIAL errors and fraud that may require subsequent engagement procedures

what do analytical procedurres involve ?

comparing information with expectations

What may analytical procedures provide with regard to completeness assertion?

the best available information for the completeness assertion

what do analytical procedures include?

"1) comparing current period information with prior periods, budgets or forecasts 2) relationships between financial and nonfinancial information 3) comparing information with expectations based on similar information for other organizational units and industry"

What should an IA do when he identifies unexpected results during an analytical audit procedure?
obtain more detailed information about the unexpected results before inquiring client's management

what are the ratios measuring liquidity?

"1) current ratio 2) accounts receivable turnover ratio 3) inventory turnover ratio"

how is the current ratio calculated?

current assets / current liabilities

When does the current ratio indicate a high liquidity?

when current assets exceed the current liabilities

What may an abnormally high current ratio indicate?

idle or underutilized resources in the company

how is the accounts receivable turnover ratio calculated?
net credit sales / average balance in receivables
what does the accounts receivable turnover ratio express?

number of times the average balance in receivables is converted to cash

how is the inventory turnover ratio calculated?

cost of goods sold / average balance in inventory

what does the inventory turnover ratio measure?

number of times the average inventory balance is converted to cash

What are the ratios measuring profitability?

1) gross profit rate

2) operating profit rate

3) net profit rate

how is the gross profit rate calculated?

(revenue - COGS) / revenue


gross margin / revenue

what does the gross profit margin measure?

the percentage that is remained from each dollar of revenue as profit

how is the operating profit rate calculated?

(revenue - COGS - operating costs) / revenue


(gross margin - operating costs) / revenue

how is the net profit rate calculated?

net profit / net sales


net profit = revenue - sales returns - COGS - operating expenses - income tax

net sales = revenue - sales returns

what are the three methods of ratio comparison?

"1. trend analysis 2. period-to period analysis 3. industry analysis

what does the trend analysis do?
tracks the changes in a ratio over time
what does period-to-period analysis do?

compares performance for similar time perios e.g. 3.Q 2014 vs. 3. Q. 2013

what does industry analysis do?
compares the organization's ratios with those of competitors or the entire industry
what are other analytical procedures?
- regression analysis
- variance analysis
what does regression analysis do?

determines the degree of relationship between to variables (e.g. sales and cost of goods sold)

what does variance analysis do?

studies the difference between actual and budgeted amount

What is inventory turnover analysis useful for?

- Identifying potential problems in purchasing activities

- Identifying products for which management has not been attuned to changes in market demand

- Identifying obsolete inventory.