Audit Planning andAudit Planning andAnalytical ProceduresAnalytical Procedures

Chapter 8Chapter 8

First Standard of Fieldwork (GAAS)First Standard of Fieldwork (GAAS)

The work is to be adequately The work is to be adequately plannedplanned

and assistants, if any, are to be and assistants, if any, are to be

properly supervised.properly supervised.

Three Main Reasons for PlanningThree Main Reasons for Planning

To obtain sufficient competent evidenceTo obtain sufficient competent evidencefor the circumstancesfor the circumstances

To obtain sufficient competent evidenceTo obtain sufficient competent evidencefor the circumstancesfor the circumstances

To help keep audit costs reasonableTo help keep audit costs reasonableTo help keep audit costs reasonableTo help keep audit costs reasonable

To avoid misunderstanding with the clientTo avoid misunderstanding with the clientTo avoid misunderstanding with the clientTo avoid misunderstanding with the client

Managing Risk is an Important Aspect of Managing Risk is an Important Aspect of AuditingAuditing

Acceptable audit risk – level of risk the auditorAcceptable audit risk – level of risk the auditorwill accept, that an unqualified opinion is will accept, that an unqualified opinion is mistakenly issued.mistakenly issued.

Acceptable audit risk – level of risk the auditorAcceptable audit risk – level of risk the auditorwill accept, that an unqualified opinion is will accept, that an unqualified opinion is mistakenly issued.mistakenly issued.

Inherent risk – likelihood of material misstatementsInherent risk – likelihood of material misstatementsIn accounts before I/C effectiveness is considered.In accounts before I/C effectiveness is considered.

Inherent risk – likelihood of material misstatementsInherent risk – likelihood of material misstatementsIn accounts before I/C effectiveness is considered.In accounts before I/C effectiveness is considered.

Planning an Audit and Designing an Audit Planning an Audit and Designing an Audit ApproachApproach

Accept client andAccept client andperform initialperform initialaudit planning.audit planning.

Accept client andAccept client andperform initialperform initialaudit planning.audit planning.

Understand the client’sUnderstand the client’sbusiness and industry.business and industry.

Understand the client’sUnderstand the client’sbusiness and industry.business and industry.

Assess client businessAssess client businessrisk.risk.

Assess client businessAssess client businessrisk.risk.

Perform preliminaryPerform preliminaryanalytical procedures.analytical procedures.

Perform preliminaryPerform preliminaryanalytical procedures.analytical procedures.

Planning an Audit and Designing an Audit Planning an Audit and Designing an Audit ApproachApproach

Set materiality andSet materiality andassess acceptable auditassess acceptable auditrisk and inherent risk.risk and inherent risk.

Set materiality andSet materiality andassess acceptable auditassess acceptable auditrisk and inherent risk.risk and inherent risk.

Understand internalUnderstand internalcontrol and assesscontrol and assesscontrol risk.control risk.

Understand internalUnderstand internalcontrol and assesscontrol and assesscontrol risk.control risk.

Gather information toGather information toassess fraud risks.assess fraud risks.

Gather information toGather information toassess fraud risks.assess fraud risks.

Develop overall auditDevelop overall auditplan and audit program.plan and audit program.

Develop overall auditDevelop overall auditplan and audit program.plan and audit program.

The Engagement LetterThe Engagement Letter

Not required by GAAS, but is very useful.Not required by GAAS, but is very useful. GAAS does require a clear understanding of GAAS does require a clear understanding of

the terms of the engagement between auditor the terms of the engagement between auditor and client.and client.

Understanding of the Client’s Business Understanding of the Client’s Business and Industryand Industry

Industry and external environmentIndustry and external environment Industry and external environmentIndustry and external environment

Business operations and processesBusiness operations and processesBusiness operations and processesBusiness operations and processes

Management and governanceManagement and governanceManagement and governanceManagement and governance

Objectives and strategiesObjectives and strategiesObjectives and strategiesObjectives and strategies

Measurement and performanceMeasurement and performanceMeasurement and performanceMeasurement and performance

Understand client’s business and industry.Understand client’s business and industry.Understand client’s business and industry.Understand client’s business and industry.

Industry and External EnvironmentIndustry and External Environment

What are some reasons for obtaining anWhat are some reasons for obtaining an understanding of the client’s industry understanding of the client’s industry and external environment?and external environment?

What are some reasons for obtaining anWhat are some reasons for obtaining an understanding of the client’s industry understanding of the client’s industry and external environment?and external environment?

1.1. Risks associated with specific industriesRisks associated with specific industries2.2. Inherent risks common to all clients inInherent risks common to all clients in certain industriescertain industries3.3. Unique accounting requirementsUnique accounting requirements

1.1. Risks associated with specific industriesRisks associated with specific industries2.2. Inherent risks common to all clients inInherent risks common to all clients in certain industriescertain industries3.3. Unique accounting requirementsUnique accounting requirements

Business OperationsBusiness Operationsand Processesand Processes

Factors the auditor should understand:Factors the auditor should understand:Factors the auditor should understand:Factors the auditor should understand:

– – Major sources of revenueMajor sources of revenue– – Key customers and suppliersKey customers and suppliers– – Sources of financingSources of financing– – Information about related partiesInformation about related parties– – Ability to obtain financingAbility to obtain financing

– – Major sources of revenueMajor sources of revenue– – Key customers and suppliersKey customers and suppliers– – Sources of financingSources of financing– – Information about related partiesInformation about related parties– – Ability to obtain financingAbility to obtain financing

Management and GovernanceManagement and Governance

Management establishes the strategies andManagement establishes the strategies andprocesses followed by the client’s business.processes followed by the client’s business.

Management establishes the strategies andManagement establishes the strategies andprocesses followed by the client’s business.processes followed by the client’s business.

Governance includes the client’s organizationalGovernance includes the client’s organizationalstructure, as well as the activities of the boardstructure, as well as the activities of the boardof directors and the audit committee.of directors and the audit committee.

Governance includes the client’s organizationalGovernance includes the client’s organizationalstructure, as well as the activities of the boardstructure, as well as the activities of the boardof directors and the audit committee.of directors and the audit committee.

Corporate charter and bylawsCorporate charter and bylawsCorporate charter and bylawsCorporate charter and bylaws

Meeting minutesMeeting minutesMeeting minutesMeeting minutesCode of ethicsCode of ethicsCode of ethicsCode of ethics

Related Party TransactionsRelated Party Transactions

It is important to identify related parties to the It is important to identify related parties to the client.client. GAAP requires disclosure of material related party GAAP requires disclosure of material related party

transactionstransactions SOX prohibits loans to any director or executive SOX prohibits loans to any director or executive

officer of the company.officer of the company. Financial institution exceptionsFinancial institution exceptions

Code of EthicsCode of Ethics

In response to the Sarbanes-Oxley Act, the SECIn response to the Sarbanes-Oxley Act, the SECnow requires each public company to now requires each public company to disclosedisclosewhether is has adopted a code of ethics thatwhether is has adopted a code of ethics thatapplies to senior management.applies to senior management.

In response to the Sarbanes-Oxley Act, the SECIn response to the Sarbanes-Oxley Act, the SECnow requires each public company to now requires each public company to disclosedisclosewhether is has adopted a code of ethics thatwhether is has adopted a code of ethics thatapplies to senior management.applies to senior management.

The SEC also requires companies to discloseThe SEC also requires companies to discloseamendments and waivers to the code of ethics.amendments and waivers to the code of ethics.

The SEC also requires companies to discloseThe SEC also requires companies to discloseamendments and waivers to the code of ethics.amendments and waivers to the code of ethics.

Client Objectives and StrategiesClient Objectives and Strategies

Strategies are approaches followed by theStrategies are approaches followed by theentity to achieve organizational objectives.entity to achieve organizational objectives.

Strategies are approaches followed by theStrategies are approaches followed by theentity to achieve organizational objectives.entity to achieve organizational objectives.

Auditors should understand client objectives.Auditors should understand client objectives.Auditors should understand client objectives.Auditors should understand client objectives.

Effectiveness and efficiency of operationsEffectiveness and efficiency of operations Effectiveness and efficiency of operationsEffectiveness and efficiency of operations

Financial reporting reliabilityFinancial reporting reliability Financial reporting reliabilityFinancial reporting reliability

Compliance with laws and regulationsCompliance with laws and regulations Compliance with laws and regulationsCompliance with laws and regulations

Measurement and PerformanceMeasurement and Performance

The client’s performance measurement systemThe client’s performance measurement systemincludes key performance indicators. Examples:includes key performance indicators. Examples:

The client’s performance measurement systemThe client’s performance measurement systemincludes key performance indicators. Examples:includes key performance indicators. Examples:

– – market sharemarket share– – sales per employeesales per employee– – unit sales growthunit sales growth

– – market sharemarket share– – sales per employeesales per employee– – unit sales growthunit sales growth

– – Web site visitorsWeb site visitors– – same-store salessame-store sales– – sales/square footsales/square foot

– – Web site visitorsWeb site visitors– – same-store salessame-store sales– – sales/square footsales/square foot

Performance measurement includes ratio analysisPerformance measurement includes ratio analysisand benchmarking against key competitors.and benchmarking against key competitors.

Performance measurement includes ratio analysisPerformance measurement includes ratio analysisand benchmarking against key competitors.and benchmarking against key competitors.

Assess Client Business RiskAssess Client Business Risk

Client business riskClient business risk is the risk that the is the risk that theclient will fail to achieve its objectives.client will fail to achieve its objectives.

Client business riskClient business risk is the risk that the is the risk that theclient will fail to achieve its objectives.client will fail to achieve its objectives.

What is the auditor’s primary concern?What is the auditor’s primary concern?What is the auditor’s primary concern?What is the auditor’s primary concern?

– – material misstatements in the financialmaterial misstatements in the financialstatements due to client business riskstatements due to client business risk

– – material misstatements in the financialmaterial misstatements in the financialstatements due to client business riskstatements due to client business risk

Assess Client Business RiskAssess Client Business Risk

The Sarbanes-Oxley Act requires thatThe Sarbanes-Oxley Act requires that management certify it has designedmanagement certify it has designeddisclosure controls and procedures todisclosure controls and procedures toensure that material information aboutensure that material information aboutbusiness risks is made known to them.business risks is made known to them.

The Sarbanes-Oxley Act requires thatThe Sarbanes-Oxley Act requires that management certify it has designedmanagement certify it has designeddisclosure controls and procedures todisclosure controls and procedures toensure that material information aboutensure that material information aboutbusiness risks is made known to them.business risks is made known to them.

It also requires that management certifyIt also requires that management certifyit has informed the auditor and auditit has informed the auditor and auditcommittee of any significant deficienciescommittee of any significant deficienciesin internal control.in internal control.

It also requires that management certifyIt also requires that management certifyit has informed the auditor and auditit has informed the auditor and auditcommittee of any significant deficienciescommittee of any significant deficienciesin internal control.in internal control.

The Client’s Business, Risk, andThe Client’s Business, Risk, andAuditor’s Risk AssessmentAuditor’s Risk Assessment

Understand client’sUnderstand client’sbusiness and industry.business and industry.

Understand client’sUnderstand client’sbusiness and industry.business and industry.

Industry and external environmentIndustry and external environmentIndustry and external environmentIndustry and external environment

Business operations and processesBusiness operations and processesBusiness operations and processesBusiness operations and processes

Management and governanceManagement and governanceManagement and governanceManagement and governance

Objectives and strategiesObjectives and strategiesObjectives and strategiesObjectives and strategies

Measurement and performanceMeasurement and performanceMeasurement and performanceMeasurement and performance

Assess client businessAssess client businessrisk.risk.

Assess client businessAssess client businessrisk.risk.

Assess risk of materialAssess risk of materialmisstatements.misstatements.

Assess risk of materialAssess risk of materialmisstatements.misstatements.

Enterprise Risk ManagementEnterprise Risk Management

Enterprise risk management (ERM) hasEnterprise risk management (ERM) hasemerged as a new paradigm for managing risk.emerged as a new paradigm for managing risk.

Enterprise risk management (ERM) hasEnterprise risk management (ERM) hasemerged as a new paradigm for managing risk.emerged as a new paradigm for managing risk.

ERM integrates and coordinates riskERM integrates and coordinates riskmanagement across the entire enterprise.management across the entire enterprise.

ERM integrates and coordinates riskERM integrates and coordinates riskmanagement across the entire enterprise.management across the entire enterprise.

Preliminary Analytical ProceduresPreliminary Analytical Procedures

Comparison of client ratios to industryComparison of client ratios to industryor competitor benchmarks provides anor competitor benchmarks provides anindication of the company’s performance.indication of the company’s performance.

Comparison of client ratios to industryComparison of client ratios to industryor competitor benchmarks provides anor competitor benchmarks provides anindication of the company’s performance.indication of the company’s performance.

Analytical procedures are also an importantAnalytical procedures are also an importantpart of testing throughout the audit.part of testing throughout the audit.

Analytical procedures are also an importantAnalytical procedures are also an importantpart of testing throughout the audit.part of testing throughout the audit.

Examples of Planning Analytical Examples of Planning Analytical ProceduresProcedures

Liquidity activity ratio:Liquidity activity ratio:Inventory turnoverInventory turnover 3.363.36 5.205.20

Liquidity activity ratio:Liquidity activity ratio:Inventory turnoverInventory turnover 3.363.36 5.205.20

Ability to meet long-term obligations:Ability to meet long-term obligations:Debt to equityDebt to equity 1.731.73 2.512.51

Ability to meet long-term obligations:Ability to meet long-term obligations:Debt to equityDebt to equity 1.731.73 2.512.51

Profitability ratio:Profitability ratio:Profit marginProfit margin 0.050.05 0.070.07

Profitability ratio:Profitability ratio:Profit marginProfit margin 0.050.05 0.070.07

Short-term debt-paying ability:Short-term debt-paying ability:Current ratioCurrent ratio 3.863.86 5.205.20

Short-term debt-paying ability:Short-term debt-paying ability:Current ratioCurrent ratio 3.863.86 5.205.20

ClientClient IndustryIndustrySelected RatiosSelected Ratios

Key Parts of PlanningKey Parts of Planning

Accept client and performAccept client and performinitial planninginitial planning

Accept client and performAccept client and performinitial planninginitial planning

New clientNew clientacceptance andacceptance andcontinuancecontinuance

New clientNew clientacceptance andacceptance andcontinuancecontinuance

Identify client’sIdentify client’sreasons for auditreasons for audit

Identify client’sIdentify client’sreasons for auditreasons for audit

Obtain anObtain anunderstandingunderstandingwith clientwith client

Obtain anObtain anunderstandingunderstandingwith clientwith client

Staff theStaff theengagementengagement

Staff theStaff theengagementengagement

Key Parts of PlanningKey Parts of Planning

Understand the client’sUnderstand the client’sbusiness and industrybusiness and industry

Understand the client’sUnderstand the client’sbusiness and industrybusiness and industry

Understand client’sUnderstand client’sindustry and externalindustry and externalenvironmentenvironment

Understand client’sUnderstand client’sindustry and externalindustry and externalenvironmentenvironment

Understand client’sUnderstand client’soperations, strategies,operations, strategies,and performanceand performancesystemsystem

Understand client’sUnderstand client’soperations, strategies,operations, strategies,and performanceand performancesystemsystem

Key Parts of PlanningKey Parts of Planning

Assess client business riskAssess client business riskAssess client business riskAssess client business risk

Assess clientAssess clientbusiness riskbusiness risk

Assess clientAssess clientbusiness riskbusiness risk

Evaluate management controlsEvaluate management controlsaffecting business riskaffecting business risk

Evaluate management controlsEvaluate management controlsaffecting business riskaffecting business risk

Assess riskAssess riskof materialof materialmisstatementsmisstatements

Assess riskAssess riskof materialof materialmisstatementsmisstatements

Key Parts of PlanningKey Parts of Planning

Perform preliminary analytical proceduresPerform preliminary analytical proceduresPerform preliminary analytical proceduresPerform preliminary analytical procedures

Analytical ProceduresAnalytical Procedures

Analytical procedures use comparisons andAnalytical procedures use comparisons andrelationships to assess whether accountrelationships to assess whether accountbalances or other data appear reasonable.balances or other data appear reasonable.

Analytical procedures use comparisons andAnalytical procedures use comparisons andrelationships to assess whether accountrelationships to assess whether accountbalances or other data appear reasonable.balances or other data appear reasonable.

SAS 56 emphasizes the expectationsSAS 56 emphasizes the expectationsdeveloped by the auditor.developed by the auditor.

SAS 56 emphasizes the expectationsSAS 56 emphasizes the expectationsdeveloped by the auditor.developed by the auditor.

Timing and Purposes of Analytical Timing and Purposes of Analytical Procedures Procedures (p. 208)(p. 208)

Five Types of Analytical ProceduresFive Types of Analytical Procedures

1.1. Compare client and industry data.Compare client and industry data.2.2. Compare client data with similarCompare client data with similar prior period data.prior period data.3.3. Compare client data withCompare client data with client-determined expected results.client-determined expected results.4.4. Compare client data withCompare client data with auditor-determined expected results.auditor-determined expected results.5.5. Compare client data with expectedCompare client data with expected results, using nonfinancial data.results, using nonfinancial data.

1.1. Compare client and industry data.Compare client and industry data.2.2. Compare client data with similarCompare client data with similar prior period data.prior period data.3.3. Compare client data withCompare client data with client-determined expected results.client-determined expected results.4.4. Compare client data withCompare client data with auditor-determined expected results.auditor-determined expected results.5.5. Compare client data with expectedCompare client data with expected results, using nonfinancial data.results, using nonfinancial data.

Compare Client and Industry DataCompare Client and Industry Data

Inventory turnoverInventory turnover 3.4 3.4 3.5 3.5 3.9 3.9 3.4 3.4Gross marginGross margin 26.3%26.3% 26.4%26.4% 27.3%27.3% 26.2%26.2%

Inventory turnoverInventory turnover 3.4 3.4 3.5 3.5 3.9 3.9 3.4 3.4Gross marginGross margin 26.3%26.3% 26.4%26.4% 27.3%27.3% 26.2%26.2%

ClientClient IndustryIndustry20052005 20042004 20052005 20042004

Compare Client Data with Similar Prior Compare Client Data with Similar Prior Period DataPeriod Data

Net salesNet sales $143,086$143,086 100100 .0.0 $131,226$131,226 100.0100.0Cost of goods soldCost of goods sold 103,241 103,241 72 72 .1.1 94,876 94,876 72.3 72.3Gross profitGross profit $ 39,845$ 39,845 27.9 27.9 $ 36,350$ 36,350 27.7 27.7Selling expenseSelling expense 14,810 14,810 10 10 .3.3 12,899 12,899 9.8 9.8Administrative expenseAdministrative expense 17,665 17,665 12.4 12.4 16,757 16,757 12.8 12.8OtherOther 1,689 1,689 1 1 .2.2 2,035 2,035 1.6 1.6Earnings before taxesEarnings before taxes $ 5,681$ 5,681 4.0 4.0 $ 4,659$ 4,659 3.5 3.5Income taxesIncome taxes 1,747 1,747 1.2 1.2 1,465 1,465 1.1 1.1Net incomeNet income $ 3,934$ 3,934 2.8 2.8 $ 3,194$ 3,194 2.4 2.4

Net salesNet sales $143,086$143,086 100100 .0.0 $131,226$131,226 100.0100.0Cost of goods soldCost of goods sold 103,241 103,241 72 72 .1.1 94,876 94,876 72.3 72.3Gross profitGross profit $ 39,845$ 39,845 27.9 27.9 $ 36,350$ 36,350 27.7 27.7Selling expenseSelling expense 14,810 14,810 10 10 .3.3 12,899 12,899 9.8 9.8Administrative expenseAdministrative expense 17,665 17,665 12.4 12.4 16,757 16,757 12.8 12.8OtherOther 1,689 1,689 1 1 .2.2 2,035 2,035 1.6 1.6Earnings before taxesEarnings before taxes $ 5,681$ 5,681 4.0 4.0 $ 4,659$ 4,659 3.5 3.5Income taxesIncome taxes 1,747 1,747 1.2 1.2 1,465 1,465 1.1 1.1Net incomeNet income $ 3,934$ 3,934 2.8 2.8 $ 3,194$ 3,194 2.4 2.4

20042004

(000)(000)Prelim.Prelim.

% of% ofNet salesNet sales

20032003

(000)(000)Prelim.Prelim.

% of% ofNet salesNet sales

Common Financial RatiosCommon Financial Ratios

Short-term debt-paying abilityShort-term debt-paying abilityShort-term debt-paying abilityShort-term debt-paying ability

Liquidity activity ratiosLiquidity activity ratiosLiquidity activity ratiosLiquidity activity ratios

Ability to meet long-term debt obligationsAbility to meet long-term debt obligationsAbility to meet long-term debt obligationsAbility to meet long-term debt obligations

Profitability ratiosProfitability ratiosProfitability ratiosProfitability ratios

Short-term Debt-paying AbilityShort-term Debt-paying Ability

Cash ratio:Cash ratio:(Cash + Marketable securities) ÷ Current liabilities(Cash + Marketable securities) ÷ Current liabilities

Cash ratio:Cash ratio:(Cash + Marketable securities) ÷ Current liabilities(Cash + Marketable securities) ÷ Current liabilities

Quick ratio:Quick ratio:(Cash + Marketable securities(Cash + Marketable securities+ Net accounts receivable) ÷ Current liabilities+ Net accounts receivable) ÷ Current liabilities

Quick ratio:Quick ratio:(Cash + Marketable securities(Cash + Marketable securities+ Net accounts receivable) ÷ Current liabilities+ Net accounts receivable) ÷ Current liabilities

Current ratio:Current ratio:Current assets ÷ Current liabilitiesCurrent assets ÷ Current liabilities

Current ratio:Current ratio:Current assets ÷ Current liabilitiesCurrent assets ÷ Current liabilities

Liquidity Activity RatiosLiquidity Activity Ratios

Accounts receivable turnover:Accounts receivable turnover:Net sales ÷ Average gross receivables Net sales ÷ Average gross receivables

Accounts receivable turnover:Accounts receivable turnover:Net sales ÷ Average gross receivables Net sales ÷ Average gross receivables

Days to collect receivables:Days to collect receivables:365 days ÷ Accounts receivable turnover365 days ÷ Accounts receivable turnover

Days to collect receivables:Days to collect receivables:365 days ÷ Accounts receivable turnover365 days ÷ Accounts receivable turnover

Inventory turnover:Inventory turnover:Cost of goods sold ÷ Average inventoryCost of goods sold ÷ Average inventory

Inventory turnover:Inventory turnover:Cost of goods sold ÷ Average inventoryCost of goods sold ÷ Average inventory

Days to sell inventory:Days to sell inventory:365 days ÷ Inventory turnover365 days ÷ Inventory turnover

Days to sell inventory:Days to sell inventory:365 days ÷ Inventory turnover365 days ÷ Inventory turnover

Ability to Meet Long-term Debt ObligationAbility to Meet Long-term Debt Obligation

Debt to equity:Debt to equity:Total liabilities ÷ Total equityTotal liabilities ÷ Total equity

Debt to equity:Debt to equity:Total liabilities ÷ Total equityTotal liabilities ÷ Total equity

Times interest earned:Times interest earned:Operating income ÷ Interest expenseOperating income ÷ Interest expense

Times interest earned:Times interest earned:Operating income ÷ Interest expenseOperating income ÷ Interest expense

Profitability RatiosProfitability Ratios

Earnings per share:Earnings per share:Net income ÷ Average common shares outstandingNet income ÷ Average common shares outstanding

Earnings per share:Earnings per share:Net income ÷ Average common shares outstandingNet income ÷ Average common shares outstanding

Gross profit percent:Gross profit percent:(Net sales – Cost of goods sold) ÷ Net sales(Net sales – Cost of goods sold) ÷ Net sales

Gross profit percent:Gross profit percent:(Net sales – Cost of goods sold) ÷ Net sales(Net sales – Cost of goods sold) ÷ Net sales

Profit margin:Profit margin:Operating income ÷ Net salesOperating income ÷ Net sales

Profit margin:Profit margin:Operating income ÷ Net salesOperating income ÷ Net sales

Profitability RatiosProfitability Ratios

Return on assets:Return on assets: Income before taxes ÷ Average total assetsIncome before taxes ÷ Average total assets

Return on assets:Return on assets: Income before taxes ÷ Average total assetsIncome before taxes ÷ Average total assets

Return on common equity:Return on common equity:(Income before taxes – Preferred dividends)(Income before taxes – Preferred dividends)÷ Average stockholders’ equity÷ Average stockholders’ equity

Return on common equity:Return on common equity:(Income before taxes – Preferred dividends)(Income before taxes – Preferred dividends)÷ Average stockholders’ equity÷ Average stockholders’ equity

Summary of Analytical ProceduresSummary of Analytical Procedures

They involve the computation of ratiosThey involve the computation of ratiosand other comparisons of recordedand other comparisons of recordedamounts to auditor expectations.amounts to auditor expectations.

They involve the computation of ratiosThey involve the computation of ratiosand other comparisons of recordedand other comparisons of recordedamounts to auditor expectations.amounts to auditor expectations.

They are used in planning to understandThey are used in planning to understandthe client’s business and industry.the client’s business and industry.

They are used in planning to understandThey are used in planning to understandthe client’s business and industry.the client’s business and industry.

They are used throughout the audit to identifyThey are used throughout the audit to identifypossible misstatements, reduce detailed tests,possible misstatements, reduce detailed tests,and to assess going-concern issues.and to assess going-concern issues.

They are used throughout the audit to identifyThey are used throughout the audit to identifypossible misstatements, reduce detailed tests,possible misstatements, reduce detailed tests,and to assess going-concern issues.and to assess going-concern issues.