Analytical review can be an extremely powerful tool in identifying potential problem areas in an audit. Analytical review can consist of trend and ratio analysis and can be performed by comparisons within the same company or comparisons across industry. The following information shows the past two periods of results for a company and a comparison with industry data for the same period.

Required
a What are the advantages and limitations of comparing company data with industry data during the planning portion of an audit?
b. From the preceding data, identify potential risk areas and explain why they represent potential risk. Briefly indicate how the risk analysis should affect the planning of the auditengagement.

ANALYTICAL DATA FOR JONES MANUFACTURING Industry Average Prior Period (000 Current Period (000 as a Percent Percent Percent Perce omitted) of Sales omitted) of Sales Change of Sales Sales Inventory Cost of goods sold Accounts payable Sales commissions Inventory turnover Average number of $10,000 $2,000 $6,000 $1,200 $500 100 20 60 12 $11,000 $3,250 $6,050 $1,980 $550 100 29.5 55 18 5 10 57.5 0.83 65 100 22.5 59.5 14.5 10 Not available (33) 5.85 39 days to collect Employee turnover Return on investment Debt/Equity 36 4 13.8 30 48 23 5% 14% 35% 60 14.3% 71