The audit significance of the financial ratio, return on common equity is: A) this financial ratio provides a reasonableness test of the entity's proportion of equity that may be compared with prior years' experience or industry data. B) an unexpected increase or decrease in the depreciation expense as a percent of depreciable assets may indicate an error in calculating depreciation. C) an unexpected increase in this financial ratio may indicate the failure to record or capitalize depreciable assets. D) this financial ratio provides a test of the entity's ability to generate earnings to cover the cost of service debt. E) this financial ratio provides a reasonableness test of shareholders' equity given the company's earnings and financing structure.

Question

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Return on common equity measures how effectively a company is using its equity to generate profits, providing insights into the reasonableness of shareholders' equity in relation to earnings and financing.

The Audit Significance of the Financial Ratio, return on Common