2)

Ratios Used in APs

1) Liquidity ratios
Current ratio = Current assets + Current liabilities
Quick or acid test ratio = Quick or liquid assets + Current liabilities

Quick or liquid assets are cash & cash equivalents, current investments in
marketable securities, & net accounts receivable
3) Activity ratios

Accounts receivable turnover = Net credit sales + Average net accounts receivable
Inventory turnover = Cost of goods sold + Average inventory
Asset turnover = Net sales + Average total assets
3) Profitability ratios
Gross margin percentage = Gross margin + Sales
Net operating margin percentage = Operating income Sales
4) Coverage ratios
Times interest earned = Income before interest & taxes Interest expense
Debt to equity percentage = Total debt + Total equity
4)

Focus on
Evidence - Module 3 98

Auditing Specific Accounts

Using Management Assertions to Develop Audit Programs

For each management assertion, the auditor selects auditing procedures from a variety of pro-
cedures available
Procedures include
Inquiry
Confirmation
Comparison
Observation
Recalculation
Examination
Analytical procedures
Not all procedures will apply to each assertion

Focus on
Evidence - Module 3 99