Leslie Fay Case
Auditing 1 Financial ratios
The use of financial ratios assists the auditor in analyzing any unusual deviations from the expected results, (Gupta, 2004). The financial ratios are then compared with the entity 's ratios for prior periods as well as with ratios for other businesses in the same industry. A comparison with the industry ratios would have warned BDO of some irregularities in Leslie Fay 's financial statements. BDO Seidman should have been interested some important ratios that would help in determining the accuracy of the financial statements that had been prepared by Polishan and his staff. The important ratios include the liquidity ratios, the profitability ratios and the operating ratios, the leveraging ratios and the solvency ratios. Of higher importance should have been the profitability apart from the gross profitability ratio.
An example would be the assets turnover ratio which provides information on the efficiency on how the assets that have been purchased are being utilized. The liquidity ratios would have assisted in knowing if and how the entity was going to repay its liabilities especially in the short term. An important ratio to investors and one that BDO Seidman should have considered is the price/cash flow ratio. This indicates the relationship between the stock price and the operating cash flow. This is considered as the best way to determine the entity 's profits. The capital turnover ratio is an important ratio to compare the sales and the capital employed. A change in the capital turnover ratio would mean a manipulation of sales or one or more of the elements that make part of the capital employed, that is, fixed assets, cash, debtors or inventory. The use of ratios by the auditors is an important but it requires skills and experience in order to get the correct analytical results.
Other financial information required during the audit
The auditors should have done more testing in the controls of the
The use of financial ratios assists the auditor in analyzing any unusual deviations from the expected results, (Gupta, 2004). The financial ratios are then compared with the entity 's ratios for prior periods as well as with ratios for other businesses in the same industry. A comparison with the industry ratios would have warned BDO of some irregularities in Leslie Fay 's financial statements. BDO Seidman should have been interested some important ratios that would help in determining the accuracy of the financial statements that had been prepared by Polishan and his staff. The important ratios include the liquidity ratios, the profitability ratios and the operating ratios, the leveraging ratios and the solvency ratios. Of higher importance should have been the profitability apart from the gross profitability ratio.
An example would be the assets turnover ratio which provides information on the efficiency on how the assets that have been purchased are being utilized. The liquidity ratios would have assisted in knowing if and how the entity was going to repay its liabilities especially in the short term. An important ratio to investors and one that BDO Seidman should have considered is the price/cash flow ratio. This indicates the relationship between the stock price and the operating cash flow. This is considered as the best way to determine the entity 's profits. The capital turnover ratio is an important ratio to compare the sales and the capital employed. A change in the capital turnover ratio would mean a manipulation of sales or one or more of the elements that make part of the capital employed, that is, fixed assets, cash, debtors or inventory. The use of ratios by the auditors is an important but it requires skills and experience in order to get the correct analytical results.
Other financial information required during the audit
The auditors should have done more testing in the controls of the