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.
