Fraud investigators use several tools in order to discover and examine accounting anomalies that may lead to discovering fraud at companies. However, many professionals have debated on whether using financial ratio analysis is actually useful to auditors and other fraud investigators. In my opinion, I believe that the use of financial ratio analysis does provide a benefit to auditors in several ways. Also, auditors and fraud investigators should continue to use financial ratio analysis on their audit engagements. Financial statement analysis has several uses throughout the audit engagement.
The first way that financial ratio analysis is helpful during the beginning stages of the audit engagement. Financial ratio analysis is useful at the beginning of the audit engagement because it helps them to discover and examine unusual relationships demonstrated by the stated financial information (Investigation Techniques for Fraudulent Financial Statement Allegations). The unusual relationships are a starting point for auditors or fraud investigators in order to effectively conduct further investigation, which increases efficiency and leave more time in the audit plan to perform audit test (The Use of Analytical Procedures in Auditing, 2014). The next way that financial analysis improves efficiency is that it helps auditors identify specific audit risks more effectively in order to further investigate certain based on the unexpected relationships (The Use of Analytical Procedures in Auditing, 2014). Financial ratio analysis also helps auditors determine the investigation threshold for the audit plan (The Use of Analytical Procedures in Auditing, 2014). Another benefit of using financial ratio analysis is that it helps auditors determine the nature, timing, and extent of their procedures in addition to increasing the auditor’s understanding the client’s business and general operations (The Use of Analytical Procedures in Auditing, 2014).
The second major helpful use of financial ratio analysis is during the final steps in an audit engagement. Financial ration analysis is extremely helpful in developing the final assessment of the audit in order to reach an appropriate conclusion with certain accounts and evaluating the general financial statement presentation (The Use of Analytical Procedures in Auditing, 2014). By using financial ratio analysis as one of the last steps in an audit, auditors better acquit to determine the company’s ability to continue business and the prediction of the company’s possibility of going into bankruptcy (The Use of Analytical Procedures in Auditing, 2014).
Besides the uses of financial ratio analysis being beneficial to auditors, there has been several studies done in order to test the accuracy and usefulness of financial ratio analysis during fraud investigation. Based off Guan, Kaminski, and Wetzel research determining if Ratio Analysis is a predictor of fraud, they concluded that there is a “widely held contention that financial ratio analysis can be a useful tool for identifying irregularities and/or fraud” (Gaun, Kaminski, & Wetzel, n.d.) According to Cynthia Harrington’s research, financial ratios analysis can help “carry out the SAS 99 requirement to perform audits to be reasonably assured that financial statements are free from material misstatement” in addition to helping “flag problems areas for auditors and CFEs” (Harrington, March/April 2005).
References
Gaun, L., Kaminski, K. A., & Wetzel, T. (n.d.). Ratio Analysis – Predictor of Fraud? Retrieved from American Accounting Association: https://aaahq.org/audit/midyear/01midyear/papers/kaminski.pdf
Harrington, C. (March/April 2005, April). Analysis ratios for detecting finacial statement fraud. Fraud Magazine. Retrieved from Association of Certified Fraud Examiners: file:///C:/Users/Ashley/Downloads/ACFE%20Article%20Formulas%20for%20detection%20Analysis%20(2).pdf
Investigation Techniques for Fraudulent Financial Statement Allegations. (n.d.). In Finanical Statement Fraud.
The Use of Analytical Procedures in Auditing. (2014). Retrieved from N R Doshi & Partners: http://www.nrdoshi.ae/index.php/publications/articles/the-use-of-analytical-procedures-in-auditing
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