remember this on the journey ahead.: Analytical Procedures? Why Common-Size Financial Statement?

Analytical procedures are an important part of the audit process and it’s consist of evaluations of financial information made by auditor and a study of plausible relationships among both financial and nonfinancial data. Analytical procedures range from simple comparisons to the use of complex models involving many relationships and elements of data. For auditor when planning and evaluating the analytical procedure, they should understand financial relationships through the company’s client and generally requires knowledge of the client and the industry/industries in which the client operates.

Analytical procedures purposes, there are:

· Comparable of financial information within the prior periods to know whether it’s improved or not.

· Anticipated results like for example, budgets, or forecasts including extrapolations from interim or annual data

· Relationships among elements of financial information within the period

· Information regarding the industry in which the client operates, like or example, gross margin information

· Relationships of financial information with relevant nonfinancial information

In order to meet the purpose of analytical procedures, it’s necessary for the auditor to make calculations and identify comparison of the financial information within the client’s company that being audited. And the comparison itself can be made by these five ways:

• Absolute Data Comparisons

• Common-size Financial Statements

• Ratio Analysis

• Trend Analysis

• Compare Financial Information with Nonfinancial Information

Now, I’m going to just focus on the 2^nd point whicih is the common-size financial statements.

Common-size financial statement is a financial statement which is displayed the all items as a form of percentages or a common base figure. This financial statement allows the auditor to make a comparable between companies or between time periods of a company. The values on the common size statement are expressed as percentages of a statement component, such as revenue.

This is the example of Common-size Financial Statement