You are an audit senior of Aidit & Co and are in the process of preparing the audit programs for the final audit of CariClean Ltd. for the year ending 31 December 2019. The company develops and manufactures specialist cleaning products and has been a client of your firm for several years. The audit manager has attended a planning meeting with the finance director and has provided you with the following notes of the meeting: 

Aidit & Co calculates a large number of ratios and trends for comparison with industry averages and prior year calculations. For most engagements, the client’s business was significantly different from the industry data and the client would automatically explain away any discrepancies by attributing them to the unique nature of its operations. Aidit is concerned about the usefulness of ratio and trend analysis. However, the analysis is done at the completion of every audit and Aidit believes the calculations provide him with an overview of the client’s operations. 

CariClean Ltd has a contractual commitment as a part of a bond indenture to maintain a current ratio of 2.0; if the ratio falls below that level on the balance sheet date, the entire bond becomes payable immediately. In the current year, the client’s financial statements show that the ratio has dropped from 2.6 to 2.05 over the past year. 

Required: 

1) You have been asked by the audit manager to undertake preliminary analytical procedures. 

a) Identify the most important reasons for performing analytical procedures. 

b) Describe the broad purposes of analytical procedures. 

c) Identify the sources of information from which an auditor develops expectations. 

d) Describe the factors that influence an auditor’s consideration of the reliability of data for purposes of achieving audit objectives. 

2) Discuss the major strengths and shortcomings in Aidit’s use of ratio and trend analysis. 

3) How should the bond situation affect your audit plan?