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Which balance sheet ratios are usually considered during auditing?

Answers

a) Fixed assets (FA):
The utilization of FA’s is usually worked out. This is: Turnover÷FA(NBV)
To determine how much sales are generated for every shilling invested in FA’s. It is normally
called the FA turnover ratio.
Global depreciation ratio is worked out which involves taking the NBV of the FA’s divided by the
depreciation charge in the profit and loss account. The resultant figure gives a rough estimate of
the average remaining useful life if the assets. Too big a figure indicating that maybe the rates of
depreciation used are too low.

b) Stocks:
The percentage increase is calculated and is compared with the corresponding percentage increases in purchases. If the two increases do not correspond, it may indicate that the provision for obsolescence is inadequate.
The stock turnover ratio is also worked out. To ensure that we’re comparing like with like, the cost
of sales figure is used and not the sales figure. A slowing down turnover ratio may also indicate
that the provision for obsolescence is also inadequate therefore it would appear that the demand
for the products of the organization may be diminishing.

c) Debtors:
The percentage increase in debtors is worked out and this is compared with the percentage increase in turnover. It is usually being expected that an increase in turnover ordinarily should have a corresponding increase in debtors. Debtors to sales ratio is also worked out to determine the number of day’s sales are debtors. This number of days is compared with the normal allowed credit period. It measures the effectiveness of credit control and consequently the adequacy provision for bad and doubtful debts.

d) Liquidity ratios are then worked out
The most common of which are:
i. The current ratio
ii. The acid test ratio

e) For cash at bank an additional measure is consideration of the overdraft limit for the trade creditors.
The percentage increase is worked out and compared with the increase in the cost of sales.
Also the number of day’s purchases in creditors worked out of measure the difference between credit taken and credit allowed by supplies

f) The gearing ratio
This is worked out of measure the company’s exposure or the cost of external capital to the organization.

Wilfykil answered the question on April 12, 2019 at 05:44

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Which balance sheet ratios are usually considered during auditing?

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