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Flashcards in Planning Deck (13)
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AP Gross profit margin

Gross profit / Revenue


AP Inventory days

Inventory / CoS x 365


AP Trade receivables days

TR / Revenue x 365


Trade payables days

TP / purchases x 365


Questions for management:

Reasons for:
- % increase in revenue
- increase in gross profit margin
- increase in receivables days
- increase in payables days
- decrease in PPE
- decrease in cash


Increase in Revenue

- increased volume / new product
- Inflation / pricing policy
- New customers and contract terms
- Any change in income recognition policy


Increase in gross Profit Margin

- whether cut-off has been properly applied
- changes in selling price / suppliers price
- Inflated sales / unrecorded purchases
- increase in sales of higher margin items
- overstatement of closing inventory


Increase in receivables days

- Changes in trading / credit terms
- Unrecoverable debts
- large credit sale just before year end - further analysis required


Increase in payables days

- New suppliers' credit terms
- Whether all liabilities are included / appropriate cut-off (decrease)
- Whether all suppliers are demanding early payment (decrease)


Decrease in cash and cash equivalents

- Working capital forecasts - possible over trading


Increase in PPE

- what assets have been purchased


Benefits of analytical procedures

Planning stage:
- Assist in understanding if the business
- Identify areas of potential risk
- Plan nature, timing and extent of other audit procedures.

Audit testing:
- Can be more effective and efficient
- Provide corroborative evidence

Completion stage:
- Identify unexpected variances


Limitations of analytical procedures

- Auditor needs a good understanding if the business to interpret results.
- Consistency of results may conceal a material error which may not be identified.
- Need to be carried out by experienced members of staff.
- Rely on good quality and reliable information being available from the client.