Common ratios to look at:
Profitability
Gross profit margin, net profit margin
Liquidity
Current ratio, quick ratio
Efficiency
Inventory turnover, receivable collection period
Auditor will:
1. Calculate the ratios.
2. Compare with:
- Last year
- Budget
- Industry average
3. Ask: “Is this change reasonable?”
- If reasonable → OK.
- If not reasonable → red flag, need further audit work.
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