The auditor typically compares the client’s balances and ratios with expected balances and ratios using one or more of the following types of analytical procedures: a. Compare client and industry data
b. Compare client data with similar prior-period data
c. Compare client data with client-determined expected results d. Compare client data with auditor-determined expected results e. Compare client data with expected results, using non-financial data There are a wide variety of analytical procedures in which client data are compared with similar data from one or more periods. The following are common examples: a. Compare the current year’s balance with that for the preceding year b. Compare the detail of a total balance with similar detail for the preceding year c. Compare ratios and percentage relationships for comparison with previous years Most companies prepare budgets for various aspects of their operations and financial results. When client data are compared with budgets, there are two special concerns. First, the auditor must evaluate whether the budgets were realistic plans. The second concern is the possibility hat current financial information was changed by client personnel to conform to the budget. A second common type of comparison of client data with expected results occurs when the auditor calculates the expected balance for comparison with the actual balance. COMMON FINANCIAL RATIOS
Auditor’s analytical procedures often include the use of general financial ratios during planning and final review of the audited financial statements. These are useful for understanding recent events and the financial status of the business and for viewing the statements from the perspective of a user. Ratios and other analytical procedures are normally calculated using spreadsheets and other types of audit software. Companies need a reasonable level of liquidity to pay their debts as they come due.