University:
California State University, Northridge
Course:
ACCT 460 | Auditing Principles and Analytics
Academic year:

2013
Views:

33

Pages:

9
Author:

animiramt0o

Audit Planning and Analytical Procedures Chapter 8 Learning Objective 8 Compute common financial ratios. Common Financial Ratios  Short-term debt-paying ability  Liquidity activity ratios  Ability to meet long-term debt obligations  Profitability ratios Short-term Debt-paying Ability Cash ratio (Cash + Marketable securities) = Current liabilities Quick ratio (Cash + Marketable securities + Net accounts receivable) = Current liabilities Current assets Current ratio = Current liabilities Liquidity Activity Ratios Accounts receivable Net sales = turnover Average gross receivables Days to collect receivable 365 days = Accounts receivable turnover Inventory turnover Cost of goods sold = Average inventory Days to sell inventory 365 days = Inventory turnover Ability to Meet Long-term Debt Obligation Debt to equity = Total liabilities Total equity Times interest = earned Operating income Interest expense Profitability Ratios Earnings per share Gross profit percent = Net income Average common shares outstanding = (Net sales – Cost of goods sold) Net sales Profit margin = Operating income Net sales Profitability Ratios Return on = assets Income before taxes Average total assets Return on = common equity (Income before taxes – Preferred dividends) Average stockholders’ equity Summary of Analytical Procedures They involve the computation of ratios and other comparisons of recorded amounts to auditor expectations. They are used in planning to understand the client’s business and industry. They are used throughout the audit to identify possible misstatements, reduce detailed tests, and to assess going-concern issues.