Thesis: Trend Analysis

Sample Thesis Paper

Trend Analysis is a form of comparative analysis which is not restricted to analysis of balance sheet and income statement of two years but it uses multiple year data and projects it into the future. It is normally regarded as a  long term technique, where 5, 10 or more years’ data is selected and it is analyzed to see if the trend is upwards, downwards or constant (Fogiel 2000). The long term trend analysis therefore ‘show bright spots in the business and can help with asset allocation’ (Blocker 2007, p. 45).Trend analysis is carried out either using a diagnostic approach or cash approach. Under the earlier approach the auditor evaluates the trend of current balance in line with previous balances. While under the later approach the auditor estimates an expected balance for the account using the factors of change as the basis for evaluation (Colbert et al. 1996).

The base year values of financial statement elements are assigned as 100% and consecutive years’ figures are analyzed by determining the percentage increase over 100%. This type analysis provides company a different view of the trends in the financial figures. Suppose a company makes sales for a period of three years as year 1 US£ 500, year 2 US£ 600 and year 3 US£ 650 then the trend analysis will provide results as year 1 100% year 2 120% and year 3 130%. However, this type of analysis has its limitation and requires further investigation to determine the cause of the trend in different elements. The audit of financial statements cannot rely simply on analytical test such as trend analysis and therefore needs to perform substantive tests. Also the development of expectations is implicit and the presumption is that the current year’s figure should be compared to last years’ figures that may not be entirely useful (Mentz 1996).

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