Vertical analysis expresses each financial statement item as a percentage of a base figure (e.g., revenue).
In this case, the internal auditor calculates electricity and depreciation expenses as a percentage of revenue
, which is a clear application of vertical analysis.
* (A) Horizontal analysis:
* Compares financial data across different periods to identify trends and growth.
* The given scenario does not compare financial statements over time, making this incorrect.
* (B) Vertical analysis (Correct Answer):
* Expresses each line item as a percentage of a base figure (e.g., revenue for income statements, total assets for balance sheets).
* In this case, electricity and depreciation expenses are calculated as a percentage of revenue, confirming vertical analysis.
* (C) Ratio analysis:
* Involves calculating financial ratios (e.g., profitability, liquidity, efficiency).
* This scenario does not involve ratios but rather percentage-based comparisons, making it incorrect.
* (D) Trend analysis:
* Identifies patterns over multiple periods (e.g., revenue growth over five years).
* The question does not involve time-based comparisons, so this answer is incorrect.
* IIA Practice Guide: Internal Audit and Financial Reporting - Recommends vertical analysis for financial statement assessment.
* IIA Standard 2320 - Analysis and Evaluation - Requires auditors to apply relevant analytical techniques, including percentage-based evaluations.
* COSO Internal Control Framework - Financial Reporting Component - Supports financial data analysis techniques such as vertical and horizontal analysis.
Analysis of Each Option:IIA References:Conclusion:Since the auditor expressed financial statement items as a percentage of revenue, option (B) is the correct answer.