ACCA Audit and Assurance (F8) Practice Exam

Which of the following additional ratios is important in analytical procedures?

1. Cost of sales / Revenue

2. Gross profit margin / Net assets

3. Inventory turnover / Fixed asset ratio

4. Liabilities / Shareholder equity

The correct answer is: Cost of sales / Revenue

The ratio of cost of sales to revenue is particularly important in analytical procedures because it provides insights into a company's profitability and operational efficiency. This ratio reveals the proportion of revenue that is consumed by the costs of producing goods or services. A higher ratio may indicate that the company is facing increased production costs or reduced sales prices, which could raise concerns about its profitability. In the context of analytical procedures during an audit, this ratio can highlight trends over time and compare the business against industry standards or competitors. Auditors utilize such ratios to identify unusual fluctuations or inconsistencies that may warrant further investigation. By examining the relationship between cost of sales and revenue, auditors gain essential insights into financial performance, which assists them in making informed assertions regarding the integrity of the financial statements. Other ratios, while useful in assessing different aspects of a company's financial health, might not directly indicate the operational efficiency and cost structure in the same immediate manner as the cost of sales to revenue ratio. Thus, this ratio stands out for its relevance in the context of analytical procedures.