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Australia

Financial ratio analysis in Australia: ASA 520 / ASA 570

Financial ratio analysis for Australian audits is governed by ASA 520 Analytical Procedures and ASA 570 Going Concern, issued by the Auditing and Assurance Standards Board (AUASB). These standards are based on the equivalent ISAs with Australian-specific paragraphs (marked with 'Aus' prefixes) that address local regulatory and legal requirements. The Australian Securities and Investments Commission (ASIC) conducts an active audit inspection programme that has repeatedly examined the quality of analytical procedures, including financial ratio analysis. ASIC's findings feed into its annual audit inspection report and inform targeted communications to audit firms. Australian auditors operate within a financial reporting framework where listed entities apply Australian equivalents of IFRS (AASB standards), while certain entities may use reduced disclosure requirements or special-purpose frameworks, each affecting the computation and interpretation of financial ratios.

Regulatory context: ASIC / AUASB

ASIC's audit inspection programme has consistently identified analytical procedures as an area requiring improvement. In its published inspection findings, ASIC has noted that auditors frequently fail to develop precise enough expectations when using ratio analysis as a substantive procedure, do not adequately consider the reliability and relevance of underlying data, set investigation thresholds that are too wide to detect material misstatements, and accept management explanations without sufficient corroboration. The AUASB has published guidance on the application of ASA 520, emphasising that substantive analytical procedures must be designed to provide sufficient appropriate audit evidence. ASIC has also focused on going concern assessments under ASA 570, highlighting cases where auditors failed to adequately evaluate financial ratio indicators of going concern risk, particularly for entities in the mining, resources, and technology sectors where pre-revenue or early-stage business models present unique ratio analysis challenges.

Practical guidance for Australia

Australian auditors can access benchmark data from several sources. The Australian Bureau of Statistics publishes business financial statistics including income, expenditure, and balance sheet data by industry division. IBISWorld provides detailed industry reports with financial benchmarks for Australian industries. Dun & Bradstreet Australia offers company-level credit and financial data. For listed companies, ASX announcements and annual reports provide peer comparison data. The Reserve Bank of Australia publishes financial stability reviews and lending condition data relevant to leverage and liquidity assessment. When performing ratio analysis, auditors should consider Australia-specific factors such as the imputation dividend system, the impact of the goods and services tax on working capital ratios, the prevalence of factoring and invoice financing arrangements that affect receivables ratios, and the seasonal patterns in agricultural and tourism-dependent industries.

Audit expectations

ASIC expects Australian auditors to apply a structured approach to ratio analysis that includes forming an independent expectation before examining actual results, defining a quantitative threshold for investigation that is linked to performance materiality, systematically investigating variances that exceed the threshold, and documenting all steps including the conclusion reached. For going concern assessments, ASIC expects auditors to consider a comprehensive set of financial indicators including declining profitability trends, deteriorating liquidity ratios, increasing leverage, declining interest coverage, and adverse cash flow from operations. ASIC has been particularly critical of auditors who perform going concern assessments for entities in financial distress without computing and documenting key financial ratios, instead relying solely on management representations and cash flow forecasts. The AUASB's Aus paragraphs in ASA 570 also require consideration of the directors' declaration regarding solvency under the Corporations Act 2001.

Australia-specific considerations

Australia's insolvency framework under the Corporations Act 2001 establishes the solvency test in Section 95A, which defines insolvency as the inability to pay debts as and when they become due and payable. Directors have a duty under Section 588G to prevent the company from trading while insolvent, with personal liability for debts incurred during insolvent trading. This legal framework makes liquidity ratios, particularly the current ratio and cash flow adequacy ratio, directly relevant to going concern assessments. The safe harbour provisions introduced in 2017 under Section 588GA provide directors with protection from insolvent trading liability if they are developing a course of action reasonably likely to lead to a better outcome for the company, which may include restructuring plans that affect the auditor's assessment of management's response to distressed ratios. The voluntary administration procedure under Part 5.3A of the Corporations Act offers a restructuring mechanism that auditors should consider when evaluating whether the going concern basis remains appropriate for entities with deteriorating financial ratios. Additionally, the PPSA (Personal Property Securities Act 2009) affects the priority of claims in insolvency, which auditors should consider when evaluating the recoverability of assets included in ratio calculations.

Common inspection findings

Substantive analytical procedures lacked sufficiently precise expectations, with auditors computing ratios after the fact rather than setting expectations independently.

External benchmark data from the ABS or IBISWorld was not used to inform ratio expectations, with analysis relying solely on prior-year internal comparisons.

Going concern assessments for entities with declining liquidity ratios did not adequately link the ratio analysis to the Corporations Act Section 95A solvency test.

Investigation of significant ratio variances was limited to inquiry of management without obtaining corroborative documentary evidence.

For mining and resources entities, traditional profitability ratios were applied without adaptation to the pre-revenue business model, failing to identify cash sustainability risks.

The threshold for investigating ratio variances was not documented or was set at a level that would not detect material misstatements at the applicable materiality.