Gale Gordon, CPA, has found ratio and trend analysis relatively useless as a too
ID: 2489768 • Letter: G
Question
Gale Gordon, CPA, has found ratio and trend analysis relatively useless as a tool in conducting audits. For several engagements, he computed the industry ratios included in publications by Standard and Poor’s and compared them with industry standards. For most engagements, the client’s business was significantly different from the industry data in the publication and the client automatically explained away any discrepancies by attributing them to the unique nature of its operations. In cases in which the client had more than one branch in different industries, Gordon found the ratio analysis no help at all. How can Gordon improve the quality of his analytical procedures?
Explanation / Answer
He can improve by following below procedures:
1))If they have more than one branch in different industries then dont compare overall. Compare each business division with corresponding industry standard
2)He can make internal comparisons by calculating ratios of previous years to present year
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