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The external audit team assigned to audit Gonzalez Company is comprised of Nathan, Kate and Breanna. They are having a meeting to discuss its plan
The external audit team assigned to audit Gonzalez Company is comprised of Nathan, Kate and Breanna. They are having a meeting to discuss its plan for the audit engagement. During its brainstorming session, the team has come up with various types of analytical procedures to be performed. Tyler, one of their junior auditors, was having difficulty understanding commonsize analysis. Which of the following explanations by the audit manager is correct?
A Commonsize analysis takes into account the trend of account balances over time. It allows auditors to assess the movement of accounts over time and match with the auditor's understanding.
B Commonsize analysis involves comparing account balances to a specific line item. An example is determining the proportion of all line items in the balance sheet relative to the amount of total assets.
C Commonsize analysis involves calculating different ratios such as profitability, liquidity, and solvency. These will then be compared to the auditor's expectation based on an understanding of the client.
D Commonsize analysis involves the comparison of specific line items in the financial statements with another entity of the same size and industry. Any variation might indicate risks of misstatement in the company being audited.
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