While auditing a client, the analytical procedures are performed by the auditor at all stages of the audit. In planning stage, the analytical procedures are performed to gain a better understanding of the entity and identify and assess any risks that contradict the auditor’s basic understanding of the entity. At performance stage, the analytical procedures are performed as substantive procedures. The use of substantive analytical procedures during the audit increases the efficiency of the audit. The auditor shall also perform analytical procedures near the audit end. Those procedures will help the auditor to form an overall conclusion to evaluate whether the Financial Statements of the entity are consistent with the understanding of the auditor about the entity. During the audit, the analytical procedures may be applied by the auditor on the assertions of Completeness, Existence, Classification and Accuracy. Analytical procedures may be performed through various methods. These methods include simple comparisons and also complex mathematical and statistical analyses using advanced statistical formulae. The following mathematical and statistical tools are mostly used as analytical procedures: Financial ratio analysis Trend analysis Regression analysis Indicators analysis RATIO ANALYSIS: It is the most commonly used technique of financial analysis. The technique uses the study of relationships among several elements of the financial information. Various ratios may be found by using the formulae on the financial information of the company. The comparison may also be made by calculating ratios for the prior periods or the ratios for the competitor company. JD Sports Fashion PLC is a company engaged in selling and distribution sports goods and apparel. The company is the prospective audit client. Sports Direct International PLC is also engaged in the retailing and wholesale distribution of sports clothing, footwear and apparel. Thus, it stands as a strong competitor of JD Sports Fashion PLC. Financial Ratio Formulae JD Sports Fashion PLC Sports Direct International PLC 2008 2009 2010 2011 2011 Current Ratio Current Assets/ Current Liabilities 0.95 1.14 1.29 1.45 1.29 Acid Test Ratio Quick Assets/ Current Liabilities 0.30 0.50 0.73 0.87 0.53 Debt Ratio Total Liabilities/ Total Assets 0.57 0.53 0.54 0.50 0.64 Debt Coverage Ratio (Net Profit + Non-cash expense)/ Total debt 0.35 0.44 0.42 0.45 0.21 Return on Assets (Net Income/ Total Assets) x 100% 12.34% 11.11% 13.96% 15.19% 9.08% Return on Total Equity (Net Income/ Total Equity) x 100% 28.48% 23.62% 30.71% 30.35% 25.13% Net Profit Margin (Net Income/ Net Sales) x 100% 3.98% 3.65% 5.55% 6.32% 5.20% Cash Flow from Operations to Net Income Cash Flow from Operations/ Net Income 2.39 2.21 1.77 1.35 2.21 Cash flow Liquidity Ratio (Cash + Marketable Securities)/ Current Liabilities 0.13 0.28 0.49 0.62 0.21 The Ratio analysis, a tool of analytical procedures, may be used while making a decision about the financial performance of the entity. This will also assist the auditor to focus on any unusual deviations from expected amounts and thus, to evaluate whether these may cause a significant risk. The above table shows the financial ratios of JD Sports Fash
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REPORT: ANALYICAL PROCEDURES ANALYTICAL PROCEDURES: The assessment of financial information made through analyzing plausible relationships among the financial and non-financial information and data is called Analytical Procedures. These procedures include the comparison of the financial data of the company with financial information of prior periods, the expected results of the entity such as mentioned in forecasts, the auditor’s expectation or the financial information of other companies in the same industry in which the company operates…
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