MODERN AUDITING 7th Edition by William C. Boynton, Raymond N. Johnson, Walter G.

Kell


Audit
Ratio Formula Significance

Inventory Average inventory payable Prior experience in inventory turn
turn days cost of goods sold x 365 days combined with knowledge of
cost of sales can be useful in
estimating current inventory
levels. A lengthening of the period
may indicate existence problems,
or lower of cost or market
problems.

Inventory growth ((Inventory
n
inventory
n-1
)-1) Ratios larger than 1.0 indicate
to cost of sales ((cost of sales
n
cost of that inventories are growing
growth sales
n-1
)-1) faster than sales. Large ratios
may indicate possible inventory
obsolescence problems.


Audit
Ratio Formula Significance

Finished goods Finished goods quantities Useful in estimating the efficiency
produced to raw raw material quantities of the manufacturing process.
material used May be helpful in evaluating the
reasonableness of production
costs.

Finished goods Finished goods quantities Useful in estimating the efficiency
produced to direct labor hours of the manufacturing process.
direct labor May be helpful in evaluating the
reasonableness of production
costs.

Product defects Number of product defects as Useful in estimating the efficiency
per million a percentage of each million of the manufacturing process.
produced May be helpful in evaluating the
reasonableness of production
costs and warranty expenses.