Analytical Procedures

Question 1

Framework

Answer 1

1. Decide which calculations & ratios
2. Develop an expectation
3. Decide on the acceptable deviation
4. Obtain data
5. Execute the procedure
6. Compare the results with the expectation
7. Investigate significant differences
8. Determine effect on audit planning

Question 2

Ratios

Answer 2

1. Liquidity ratio
   - Current ratio
   - Quick ratio
2. Asset management ratio
   - Debtors collection period
   - Inventory turnover
   - Creditors payment period
   - Fixed asset turnover
   - Total asset turnover
3. Debt management ratio
   - Debt ratio
   - Interest cover
   - Debt equity ratio
4. Profitability ratio
   - Growth %
   - Gross profit margin
   - Operating profit margin
   - Net profit margin
   - Return on total assets
   - Return on equity
5. Solvency
   - Solvency ratio
6. Market Value ratio
   - Dividend yield
   - Earnings yield
   - Price earnings ratio
   - Dividend cover
7. Cash flow ratio
   - Cash flow to total debt

Question 3

Liquidity ratio

Answer 3

Current ratio
= Current assets/ Current liabilities

Quick ratio
= Current assets- Inv/ Current liabilities

Question 4

Asset management Ratios

Answer 4

• Debtors collection period
  = Trade Debtors/ Credit sales x 365
• Inventory turnover
  = COS/ avg inventory
• Creditors payment period
  = Creditors/ credit purchases x 365
• Fixed asset turnover
  = Sales/ Fixed Assets
• Total asset turnover
  = Sales/ Assets

Question 5

Debt management ratio

Answer 5

• Debt ratio
  = Debt/ Total assets
• Interest cover
  = EBIT/ Interest
• Debt equity ratio
  = Debt/ Equity

Question 6

Profitability ratio

Answer 6

• Growth %
  = (CY- PY)/ PY x 100
• Gross profit margin
  = Gross profit/ Sales x 100
• Operating profit margin
  = EBIT/ Sales x 100
• Net profit margin
  = Net profit/ Sales x 100
• Return on total assets
  EBAIT/ Total assets x 100
• Return on equity
  = Net profit/ Total equity x 100

Question 7

Solvency

Answer 7

Total assets/ Total liabilities

Question 8

Market Value ratio

Answer 8

• Dividend yield
  = Dividend per share/ price per share
• Earnings yield
  = Earnings per share/ Price per share
• Price earnings ratio
  = Price per share/ Earnings per share
• Dividend cover
  = Price per share/ Dividend per share

Question 9

Cash flow ratio

Answer 9

Cash flow from activities/ Total debt