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 South Africa — ISA 520 / ISA 570
Financial ratio analysis for South African audits is governed by ISA 520 and ISA 570 as adopted by the Independent Regulatory Board for Auditors (IRBA). South Africa adopted international auditing standards directly, and the IRBA conducts an active inspection programme examining how registered auditors apply these standards. The South African audit environment presents unique characteristics relevant to ratio analysis, including the prevalence of broad-based black economic empowerment (B-BBEE) structures that may affect financial ratios, the impact of exchange rate volatility on the South African rand, and the significance of the mining sector with its distinctive financial characteristics. South African entities apply IFRS as issued by the IASB for listed companies and IFRS for SMEs for qualifying entities, while certain public entities follow Standards of Generally Recognised Accounting Practice (GRAP). Understanding these framework differences is essential for meaningful ratio analysis.
Regulatory Context — IRBA
The IRBA's inspection findings reports have identified analytical procedures as an area where South African audit firms need improvement. Common deficiencies include the use of generic ratio analysis templates without adaptation to the entity's industry and circumstances, insufficient consideration of the macroeconomic environment including inflation, exchange rate movements, and load shedding impacts on financial ratios, inadequate documentation of expectations and investigation thresholds, and failure to adequately investigate significant ratio variances. The IRBA has also focused on going concern assessments, noting that auditors sometimes fail to connect deteriorating financial ratios to the specific going concern indicators outlined in ISA 570. The South African Institute of Chartered Accountants (SAICA) has published guidance on analytical procedures and going concern assessment that supplements the international standards with locally relevant practical guidance.
Practical Guidance for South Africa
South African auditors can access benchmark data from Statistics South Africa (Stats SA), which publishes financial statistics by industry sector. The South African Reserve Bank (SARB) publishes quarterly bulletins with macroeconomic data relevant to contextualising financial ratios. The Bureau for Economic Research (BER) at Stellenbosch University provides business confidence indices and sectoral analysis. For company-level data, the Companies and Intellectual Property Commission (CIPC) maintains the company registry, although the depth of publicly available financial data varies. Johannesburg Stock Exchange (JSE) filings provide peer comparison data for listed entities. When performing ratio analysis in South Africa, auditors should consider the impact of inflation on trend analysis, the effect of rand volatility on entities with foreign-currency-denominated transactions, the impact of Eskom load shedding on operational efficiency ratios, the influence of B-BBEE ownership structures on equity ratios, and the cyclicality of the mining and commodity sectors.
Audit Expectations
The IRBA expects South African auditors to demonstrate professional scepticism in their application of ratio analysis, forming independent expectations based on their understanding of the entity and its environment, and rigorously investigating variances that exceed defined thresholds. For going concern assessments, the IRBA expects auditors to evaluate a range of financial indicators including deteriorating profitability, declining liquidity, increasing leverage, and adverse cash flow trends. The IRBA has noted that auditors should consider the unique South African operating environment, including infrastructure challenges, labour market dynamics, and regulatory changes, when interpreting financial ratios and forming going concern conclusions. The IRBA Practice Note on going concern provides additional guidance on how South African auditors should approach the assessment of financial viability indicators within the local context.
South Africa-Specific Considerations
South Africa's Companies Act 71 of 2008 establishes the solvency and liquidity test in Section 4, which must be satisfied for various corporate actions including distributions. The solvency test requires that assets fairly valued exceed liabilities fairly valued, while the liquidity test requires that the company will be able to pay its debts as they become due in the ordinary course of business for the twelve months following the test. This statutory framework makes both balance sheet ratios and liquidity ratios critical for South African going concern assessments. Business rescue proceedings under Chapter 6 of the Companies Act 71 provide a restructuring mechanism for financially distressed companies that have a reasonable prospect of rescue. Financial distress is defined as the company being reasonably unlikely to be able to pay all of its debts as they become due within the immediately ensuing six months, or being reasonably likely to become insolvent within the immediately ensuing six months. These statutory definitions create specific ratio thresholds that auditors should evaluate, particularly the projected current ratio and debt service coverage over the six-month and twelve-month horizons. The King IV Code on Corporate Governance also requires governing bodies to consider the going concern status as part of their integrated reporting responsibilities.
Common Inspection Findings
Ratio analysis templates were applied generically without tailoring to the entity's industry, operating environment, or the specific impact of South African macroeconomic conditions.
The impact of rand volatility on financial ratios for entities with significant foreign currency exposures was not considered in the analytical procedures.
Going concern ratio analysis did not reference the specific solvency and liquidity tests under Section 4 of the Companies Act 71 of 2008.
Investigation of ratio variances did not consider the operational impact of load shedding on cost ratios and profitability metrics.
External benchmark data from Stats SA or the SARB was not used to inform ratio expectations, with analysis limited to prior-year comparisons.
The financial distress indicators under Chapter 6 business rescue provisions were not systematically evaluated using ratio analysis.