Auditors should conduct a detailed review of the figures disclosed in the financial statements in order to determine whether:
Individual amounts are compatible with each other and with comparative figures
Amounts appearing in the financial statements compare with internal data such as management accounts, budget statements and forecasts.
With regard to the first point, the auditor will, for example, check the relationship of cost of sales to sales revenue, to ensure that the figures are reasonable, by calculating the gross profit percentage and comparing it:
with that of previous years
with those of other companies or businesses in the same field of operations.
Likewise, auditors will compare the figure for trade receivables with sales revenue, expressing accounts receivable in terms of the number of day’s sales outstanding, to ensure that it appears reasonable in the light of previous results and their knowledge of the industry in which their client operates. （Local government authorities, for example, are notorious for the long credit periods they negotiate with their contractors. If the client carries out a large percentage of local government work, the number of days sales outstanding may be a lot more than the normal ideal of 30.）
When it comes to comparing amounts appearing in the financial statements with internal data, auditors should obtain the relevant documents, insofar as they are prepared by the management, so that they can compare actual performance with expected performance. The inspection and comparison of monthly levels may highlight areas beyond the management’s control – e.g. a particularly cool summer will depress ice – cream sales or an internal dispute with employees will affect production.
Individual amounts are compatible with each other and with comparative figures
Amounts appearing in the financial statements compare with internal data such as management accounts, budget statements and forecasts.
With regard to the first point, the auditor will, for example, check the relationship of cost of sales to sales revenue, to ensure that the figures are reasonable, by calculating the gross profit percentage and comparing it:
with that of previous years
with those of other companies or businesses in the same field of operations.
Likewise, auditors will compare the figure for trade receivables with sales revenue, expressing accounts receivable in terms of the number of day’s sales outstanding, to ensure that it appears reasonable in the light of previous results and their knowledge of the industry in which their client operates. （Local government authorities, for example, are notorious for the long credit periods they negotiate with their contractors. If the client carries out a large percentage of local government work, the number of days sales outstanding may be a lot more than the normal ideal of 30.）
When it comes to comparing amounts appearing in the financial statements with internal data, auditors should obtain the relevant documents, insofar as they are prepared by the management, so that they can compare actual performance with expected performance. The inspection and comparison of monthly levels may highlight areas beyond the management’s control – e.g. a particularly cool summer will depress ice – cream sales or an internal dispute with employees will affect production.
