Ratio Analysis
Definition
Calculation of financial ratios across periods or business units to identify statistically unusual deviations that might indicate manipulation: cost ratios, gross margin shifts, or expense-to-revenue anomalies that exceed normal variation.
- Field
- Forensic accounting, CAATs
- Compares
- Financial ratios across periods or business units
- Flags
- Statistically unusual deviations
- Examples
- Cost ratios, gross margin shifts, expense-to-revenue anomalies
Common questions
How does ratio analysis actually flag potential financial statement manipulation?+
An analyst calculates ratios such as gross margin or expense-to-revenue for each period or unit and compares them against the entity's own historical trend or against peers. A ratio that shifts sharply outside the normal range without a clear business explanation becomes a candidate for closer investigation.
Does an unusual ratio prove fraud on its own?+
No. An anomalous ratio only indicates that something changed and warrants explanation; it can just as easily result from a legitimate business event such as a new supplier contract or a one-off write-off, so it is a lead for further testing, not a conclusion.
Related terms
- CAATs
- Computer-Assisted Audit Techniques: software-driven procedures applied to electronic data files that test the full population of transactions rather than a sample, covering...
- Duplicate Detection
- A systematic search for records that share key fields (invoice number, vendor, amount, date) that should be unique, surfacing duplicate payments, double...
- Gap Test
- A test that identifies missing numbers in a document sequence (check numbers, invoice series, purchase orders) where continuity is expected; gaps often...
- Join-and-Match
- A cross-table technique that links two or more data files on a common key, such as matching vendor bank account numbers against...
- Sequence Analysis
- Verification that a numbered series progresses in expected order without skips, reversals, or unexpected repetitions. It is the positive counterpart to gap...
- Stratification
- The grouping of numeric values into defined ranges (strata) to reveal the distribution of a dataset. In fraud detection, large concentrations of...