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Question 1:
Analytical Procedures are an important part of the whole audit process which is conducted by an
auditor before actually beginning his audit processes.
Analytical Procedure requires an auditor to analyze the relationship between financial and non-
financial data of a firm. Such data is obtained by calculating various ratios between the financials
of the entity. Comparative analysis between such data is also a part of the analytical procedures.
1. Cu
ent Ratio:
2013 2014 2015
Cu
ent Assets 5385938 7509150 9600929
Cu
ent Liabilities 3780000 5120250 6397500
Cu
ent Ratio 1.42 1.47 1.50
The cu
ent ratio of the company has shown a systematic growth in the last three years. The
cu
ent ratio determines the liquidity ratio of the company. The company has promised a
minimum cu
ent ratio of 1.5 which has to be maintained by it in the future in regard to the
loan taken from BDO Finance Ltd. Although the ratio has now come to the desired level, but
it will always be a matter of concern because if even slight downfall in this ratio occurs it
will impact the loan bo
owing.
Although the company’s cu
ent assets have increased, similar increase has also been showed
y the cu
ent liabilities as well. The auditor has to check the possibilities where the liquidity
of the company may be affected due to decrease in cu
ent assets in future.
2. Debt Equity Ratio
2013 2014 2015
Debt
3780000 5120250 13897500
Equity
9150000 10783650 12250491
Debt Equity Ratio 0.41 0.47 1.13
Debt Equity Ratio is a solvency measure which determines how solvent an entity is. The lower
atio is always a god sign since it shows that the company does not heavily rely on bo
owings to
finance its assets.
From 0.41 in 2013 this ratio increased to 0.47 in 2014. But in 2015 it showed a huge increase
when it became more than double of the existing. The company has promised to keep this ratio
elow 1 to BDO Finance Ltd and this remains a matter of huge concern which has to be checked
and treated by the auditor. The auditor may suggest the company to pay off its long term
liabilities, if not the company may decide to get the additional capital infused by the owners of
the company so as to maintain the Debt Equity ratio of the company within the limits. The
auditor may also analyze where the bo
owed funds of the company have been invested.
3. Gross Profit Ratio
2013 2014 2015
Gross Profit
6004500 6079500 6604500
Net Sales
34212000 37699500 43459500
Gross Profit Ratio 17.55 16.13 15.20
Gross Profit is the profit earned by the company from its core business activities. It does not
consider the other indirect expenses and indirect incomes which have been incu
ed and earned
y the company. The Gross Profit ratio of this...