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Hello Kim, hope you are well
I’m really confused about the use of analytical procedure in assessing the business risk and ROMM in the questions.
For the business risk, in the paper 2018 December Q1, the answer calculated the change of revenue and profit before tax and concluded there is overtrading, and calculated the change in number of sport and leisure centers/ number of members/ number of ‘pay as you go’ entry tickets sold to conclude that the center maybe crowded.
For the ROMM, in the paper 2018 December Q2 and 2018 September Q1, the answer calculated some ratios to find audit risks.
I really have no ideas about how should I know what exactly the ratio should I use to reflect the whatever the business risk and ROMM. I ‘m really confused. Hope you could help me out. Thank you
Sincere
I am on vacation this week so it’s difficult to reply in detail. The ratios that can be calculated will be limited by the available information. Change in revenue tells you whether business is expanding, contracting or static. GP% tells you if cost base is increasing or revenue reducing e.g. increasing discounts to increase volume. You then look at the efficency “days” ratios to see where are the risks in working capital management e.g. business risk is too much money tied up in inventory but audit risk is overstatement if insufficient allowance for slow moving items, etc.
Changes in ratios that are contrary to expectation (based on management’s narrative of what has happened during the year) should suggest a risk of misstatement.
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