Analytical Procedures

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The objective of analytical procedures used in the overall review stage of the audit is to assist the auditor in assessing the conclusions reached and in the evaluation of the overall financial statement presentation. A wide variety of analytical procedures may be useful for this purpose. The overall review would generally include reading the financial statements and notes and considering (a) the adequacy of evidence gathered in response to unusual or unexpected balances identified in planning the audit or in the course of the audit and (b) unusual or unexpected balances or relationships that were not previously identified. Results of an overall review may indicate that additional evidence may be needed. [Paragraph renumbered by the issuance of Statement on Auditing Standards No. 96, January 2002.] (AU Section 329 Analytical Procedures, 2002) The debt to equity ratio is computed by dividing total liabilities by total stockholder’s equity. The ratio measures how the company is leveraging its debt against the capital employed by its owners. If l liabilities exceed the net worth then in that case the creditors have more stake than the shareholders. The gross margin on net sales is computed by dividing gross profit by net sales. The gross profit margin is a measure of the gross profit earned on sales. The gross profit margin considers the firms cost of goods sold, but does not include other costs. By analyzing changes in this figure, you can identify whether it is necessary to examine company policies relating to credit extension, markups (or markdowns, purchasing, or general merchandising (where applicable). This percentage rate can and will vary greatly from business to business, even those within the same industry. Sales, location, size of operations, and intensity of competition are all factors that can affect the gross profit rate. The current ratio is computed by dividing current assets by current liabilities. The ratio is regarded as a test of liquidity for a...
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