Ratio analysis is a term often used to refer to the analysis of the ratio of:

(1) An account balance to another account balance. For example, when examining debtors the auditor may analyse the ratio of credit sales to average net receivables; for stock the ratio of cost of goods sold to average inventory may be reviewed; and for revenue and expense accounts the auditor may analyse the ratios of investment income to investments, depreciation expense to gross assets subject to depreciation, and the repairs and maintenance expense to related property, plant and equipment.

(2) A class of transactions to an account balance. Examples would include analysis of the ratio of sales returns and sales discounts to total sales, and the ratio of cost of goods sold to total sales, by individual product line.

(3) Financial data to operating data. Analysis could be undertaken of the ratio of total sales to selling space in a retail company, of the ratio of payroll expense to average employee numbers and of the changes in ratios within the entity over time or the ratios of different entities or different segments within the entity. For example, the ratio of revenue to number of units sold as a series could be analysed: over time for an individual product range, over different sales centres for an individual product range and over different products for an individual sales centre. Such procedures may be a valuable source of audit evidence as, when auditing completeness of transactions, the cost of examining all items, especially routine transactions, is generally uneconomical.