Analytical Procedures

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GOOD MORNING/AFTERNOON
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AUDITOR OBJECTIVE WITH BUSINESS ANALYSIS

• Understand Business and Assess Business Risk
• Assess Risk of Material Misstatement
• Determine Nature, Timing, and Extent of Audit
  Procedures
• Identify Material Misstatements Contained in the
  Financial Statements
• Determine if Financial Statements Communicate
  Significant Business Risks
• Provide Constructive Consultation

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RELATIONSHIP OF ECONOMIC, ENVIRONMENTAL, AND
STRATEGIC ISSUES TO FINANCIAL STATEMENTS
Business Environment
Business Strategy
Business Activities
Accounting Strategy
Accounting Environment
Accounting System
Financial Statements
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BUSINESS ENVIRONMENT

• Labor Market
• Supplier Market
• Capital Market
• Product Market
• Business Regulations

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ACCOUNTING ENVIRONMENT

• Capital Market Structure
• Contracting and Governance of Organization
• Accounting Conventions and Regulations
• Tax and Accounting Linkages
• Auditing
• Legal System for Accounting Disputes

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BUSINESS STRATEGY

• Scope of Business
• Competitive Positioning

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ACCOUNTING STRATEGY

• Choice of Accounting Policies
• Choice of Accounting Estimates
• Choice of Reporting Format
• Choice of Supplementary Disclosures

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ANALYSIS APPROACH

• Business Analysis
• Understand Entitys Business Environment and
  Strategy and Assess Business Risk
• Accounting Analysis
• Determine if Entitys Accounting Captures
  Economic Reality (Accounting Quality)
• Financial Analysis
• Determine If Business Strategy Is Successful and
  Assess Risk of Material Misstatement
• Prospective Analysis
• Forecast Future Results and Provide Constructive
  Consultation

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BUSINESS ANALYSIS

• Competition
• Employees
• Suppliers
• Customers
• Regulators
• Business Strategy
• Key Success Factors and Risks

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ACCOUNTING ANALYSIS

• Key Accounting Policies
• Accounting Flexibility
• Accounting Strategy
• Quality of Disclosure

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FINANCIAL ANALYSIS

• Ratio Analysis
• Cash Flow Analysis
• Risk of Material Misstatement

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FINANCIAL ANALYSIS

• Overall Performance
• Net Profit Margin Ratio
• Return On Assets Ratio
• Asset Turnover Ratio
• Financial Leverage Ratio
• Return on Stockholders Equity Ratio
• Cash Flow Analysis

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FINANCIAL ANALYSIS (Continued)

• Operating Management Performance
• Accounts Receivable Turnover Ratio
• Inventory Turnover Ratio
• Payables Turnover Ratio
• Common-size Income Statement Ratio
• Cash Flow Analysis
• Investment Management Performance
• Return on Assets Ratio
• Asset Turnover Ratio
• Common-size Balance Sheet
• Cash Flow Analysis

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FINANCIAL ANALYSIS (Continued)

• Financial Management Performance
• Current Ratio
• Quick Ratio
• Operating Cash Flow Ratio
• Accounts Receivable Turnover Ratio
• Inventory Turnover Ratio
• Payables Turnover Ratio
• Times Interest Earned Ratio
• Cash Flow Interest Coverage Ratio
• Debt Ratio
• Debt To Equity Ratio
• Financial Leverage Ratio
• Cash Flow Analysis

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LIMITATIONS OF FINANCIAL ANALYSIS

• Accounting Principles
• Historical Cost
• Geographic Locations
• Production Technologies
• Capacity Utilization
• Financial Leverage
• Non-standardization of Ratio Formulas

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PROSPECTIVE ANALYSIS

• Sustainability of Strategy
• Changes in Industry
• Adaptability/Flexibility of Entity