Question

Analytical procedures have always been a key element of the audit process as the auditors assess key ratio trends as well as the relationship between various accounts on the financial statements. However, in recent years, many experts have identified specific ratios which tend to point towards an entity’s “quality of earnings.” Class, do a bit of research and see if you can find some of those ratios that indicate earnings quality and/or earnings manipulation. Can you describe two that you feel would be especially helpful?

Answer 1

the following procedures that you feel would be especially helpfull

analytical procedures which consists of significant ratios and trends and investigating unusual fluctuations and items during the course of audit analytical reviews are substantive aduit procedures

when the company manipulates earning per share and price to earning per share P/E = MPSP/EPS by buying back the securities from the market which reduces the number of equity share which has to be leading to increase in the earning per share in the same way the price to earnings per share will show a reducing trend which force the investors to invest in the companies by which have a low pay back period

the earning quality will show the income statement whether the income statement has been prepared without mistake the same can be calculated by cash from operation/net income * 100 the ratio is near to 100 then the company have high quality earniing ratio if the same is far away from 100 then it have low quality earning ratio and the ABC ltd have cash from operation to net income around 90% the company have received have received 90% earning without any risk the same company