Published Paper Details:

An auditor can use ratio analysis to identify anything abnormal or anything which deviates from the expected and the known. The rationale underlying the use of ratio analysis is that while absolute quantities can be manipulated easily, it may be quite difficult to manipulate all the figures which are interrelated. Such manipulation normally causes widespread repercussions and can be detected more easily. Example: Sales figure can be easily manipulated through forged invoices but it is difficult to get manipulated GP, NP and Direct Expenses ratios. This is because it may not be possible for the management to manipulate all the interrelated figures, i.e. cash, debtors, purchases, stocks, production, etc. The ratio of cost of material consumed to inventory i.e. inventory turnover or quantitative ratio of inputs to outputs would indicate that something abnormal has happened. Even if all these are adjusted fall in the ratios of expenses to sales would put the auditor to enquiry.