Which of the following is a correct statement regarding analytical procedures?
A) A major strength in using industry ratios for auditing is the difference between the nature of the client's financial information and that of the firms making up the industry totals.
B) Common-size financial statements display all items as a percentage change from a base year.
C) In identifying areas of specific risk, the auditor is likely to focus on the liquidity activity ratios.
D) In order to look for a misstatement in the allowance for bad debts, the auditor should divide gross sales by sales returns and allowances.

Question

Quizplus · Accepted Answer

Analytical procedures involve comparing financial information with expectations developed from the auditor's understanding of the client and its environment. In identifying areas of specific risk, auditors focus on ratios that can indicate potential problems, such as liquidity ratios (e.g., current ratio, quick ratio) which assess the company's ability to meet its short-term obligations. This focus helps auditors to identify areas where the financial statements may be at risk of material misstatement.

Which of the Following Is a Correct Statement Regarding Analytical