Financial Data
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Financial Ratio Analysis Guide for European Auditors — free PDF
ISA 520 & ISA 570 practical workbook: all formulas with visual explanations, industry benchmark reference tables from BACH for 15 industries, ratio interpretation guide, and template narrative paragraphs for audit working papers.
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ISA 520.5 — Design and perform analytical procedures near the end of the audit that assist in forming an overall conclusion.
ISA 520.A1 — Analytical procedures may include ratios such as gross margin percentages and ratio of sales to accounts receivable.
ISA 570.A3 — Negative working capital, adverse key financial ratios, operating losses, and other indicators may cast doubt on going concern.
Financial Ratio Analysis in Canada — CAS 520 / CAS 570
Financial ratio analysis for Canadian audits is governed by Canadian Auditing Standards (CAS) 520 and CAS 570, issued by the Auditing and Assurance Standards Board (AASB) under the auspices of CPA Canada. CAS are based on ISA with Canadian amendments and additional guidance paragraphs that address the specific requirements of the Canadian regulatory and legal environment. The Canadian Public Accountability Board (CPAB) conducts annual inspections of firms auditing Canadian reporting issuers and has identified analytical procedures as an area of persistent focus. Canada's dual financial reporting framework, where publicly accountable enterprises apply IFRS and private enterprises may elect ASPE (Accounting Standards for Private Enterprises), means that auditors must understand how framework differences affect ratio computation and interpretation. The bilingual nature of Canadian professional standards, published in both English and French, reflects the country's linguistic duality.
Regulatory Context — CPAB / CPA Canada
CPAB's annual public inspection reports have consistently highlighted analytical procedures as an area requiring improvement among Canadian audit firms. Specific findings include insufficient rigour in the development of expectations for substantive analytical procedures, over-reliance on prior-year comparisons without incorporating industry or macroeconomic data, investigation thresholds not appropriately calibrated to materiality, and inadequate documentation of the auditor's independent assessment. CPA Canada has responded with publications and webinars addressing best practices in analytical procedures, including the use of financial ratio analysis. The Canadian Securities Administrators (CSA) have also focused on going concern reporting quality, including cases where financial ratio deterioration was not adequately reflected in the auditor's assessment. The Office of the Superintendent of Financial Institutions (OSFI) provides additional oversight for auditors of federally regulated financial institutions, with specific expectations for ratio-based analysis of capital adequacy, liquidity, and leverage.
Practical Guidance for Canada
Canadian auditors can access benchmark data from Statistics Canada, which publishes quarterly financial statistics for enterprises by industry (CANSIM tables). Industry Canada's financial performance data provides sectoral benchmarks including profitability, liquidity, and leverage ratios. Dun & Bradstreet Canada offers company-level financial data. For publicly listed entities, SEDAR+ filings provide comparative data for peer analysis. The Bank of Canada publishes financial system reviews and business outlook surveys that provide macroeconomic context for ratio trends. When performing ratio analysis, Canadian auditors should consider factors specific to the Canadian economy, including the impact of natural resource cycles on profitability ratios for mining and energy entities, the effect of the Canadian dollar exchange rate on exporters' margins, seasonal patterns in agriculture and tourism, and the influence of interprovincial trade on working capital cycles.
Audit Expectations
CPAB expects Canadian auditors to demonstrate a disciplined approach to ratio analysis as an analytical procedure. This includes forming an expectation that is independent of the recorded amount, using data that is sufficiently reliable for the purpose, establishing a threshold that would identify differences requiring investigation at the relevant materiality level, performing sufficient investigation of variances to obtain the required level of assurance, and documenting all steps including the final conclusion. For going concern assessments under CAS 570, CPAB has noted deficiencies where auditors failed to evaluate financial ratio trends, relied on management forecasts without assessing the reasonableness of underlying assumptions, and did not consider the entity's compliance with debt covenant ratios. CPA Canada's practice aids on going concern emphasise the importance of analysing both financial and non-financial indicators, with financial ratios forming the quantitative foundation of the assessment.
Canada-Specific Considerations
Canada's insolvency framework operates under two principal statutes: the Bankruptcy and Insolvency Act (BIA) for less complex proceedings and the Companies' Creditors Arrangement Act (CCAA) for larger restructurings involving debts exceeding five million dollars. The BIA insolvency test considers whether the entity's liabilities exceed the value of its assets or whether it is unable to meet its obligations as they generally become due. These dual tests make both balance sheet ratios (debt-to-equity, net asset position) and liquidity ratios (current ratio, quick ratio, cash flow coverage) directly relevant to going concern assessments. The CCAA provides a restructuring mechanism for larger entities that may support the going concern basis even when financial ratios indicate distress, provided there is a realistic prospect of a viable plan of arrangement. Canadian auditors should also consider the impact of provincial legislation, including provincial securities laws and business corporations acts, on the going concern assessment. The oppression remedy under the Canada Business Corporations Act may create additional considerations where deteriorating ratios affect stakeholder interests.
Common Inspection Findings
Expectations for substantive analytical procedures were not developed independently of the recorded amounts, with auditors appearing to reverse-engineer expectations from actual results.
Industry benchmark data from Statistics Canada or Innovation Canada was not consulted, with ratio analysis relying exclusively on prior-year internal data.
Investigation thresholds for ratio variances were not linked to performance materiality, resulting in inconsistent application across audit engagements.
Going concern ratio analysis did not consider debt covenant compliance, despite the entity having significant borrowing facilities with ratio-based covenants.
For mining and exploration entities, ratio analysis did not adequately adapt to the pre-revenue business model, with standard profitability ratios applied inappropriately.
Documentation of the analytical procedure did not clearly demonstrate the sequence of expectation, comparison, investigation, and conclusion.