According to the textbook, ratio analysis is a tool that is used to evaluate relationships among different financial statement items to help understand a companys financial statements and the overall performance for the company (Richardson, V 2023). One example of why audit firms perform analytical procedures to identify risk is to assess the financial stability and the ability of a company to continue as a going concern. By analyzing various financial ratios, auditors can gain insights into the company's liquidity, solvency, activity, and profitability, which are indicators of the companys financial health.

To evaluate the company's ability to continue as a going concern, the liquidity rations, solvency ratios, activity ratios, and profitability ratios can be used.

Examples of the liquidity ratios are the current ratio, and quick ratio. The current ratio measures the company's ability to meet short-term obligations. A higher current ratio indicates better liquidity and a lower risk of financial distress. The quick ratio, also known as the acid-test ratio, assesses the company's ability to cover immediate liabilities using its most liquid assets. A higher quick ratio indicates a stronger ability to meet short-term obligations (Richardson, V 2023).

Examples of solvency ratios are the debt-to-equity ratio, and the interest coverage ratio. The debt-to-equity Ratio compares the company's total debt to its shareholders' equity. A lower ratio suggests a lower risk of insolvency and indicates a more conservative capital structure. The interest coverage ratio evaluates the company's ability to meet interest payments on its debt. A higher interest coverage ratio signifies a better ability to cover interest expenses (Richardson, V 2023).

Examples of activity ratios are the inventory turnover ratio, and accounts receivable turnover ratio. The inventory turnover ratio measures the efficiency of inventory management. A higher ratio indicates effective inventory control and faster sales, which is favorable for a going concern. The accounts receivable turnover ratio assesses how quickly the company collects payments from its customers. A higher ratio suggests efficient credit and collection practices (Richardson, V 2023).

Examples of the profitability ratios are the gross profit margin ratio and the net profit margin ratio. The gross profit margin ratio it indicates the profitability of a company's core operations. A higher gross profit margin implies better financial stability and a higher likelihood of continuing as a going concern. The net profit margin measures the company's overall profitability after considering all expenses. A higher net profit margin signifies better financial performance and the ability to sustain operations (Richardson, V 2023).

These ratios provide valuable insights into a company's financial health and the companys ability to continue operating. By analyzing these ratios, auditors can identify potential risks or areas of concern, allowing them to provide appropriate recommendations and guidance to their clients.