This ratio is an indicator of what is available, after deducting costs of sales, to defray general and selling expenses, research and development costs. The auditor is responsible for testing the propriety of a company's financial statements. You might think that only checking the arithmetic is involved. This could be the case if financial statements were simply the sum of their parts. But that's not true.
Financial statements are a combination of facts, judgments and estimates.
In testing their validity, an auditor uses audit procedures developed by the accounting profession to identify improperly prepared statements. Before the audit begins, the independent certified public accountant develops a working knowledge of the company's industry. Before forming an opinion, the auditor considers the company's internal control structure. This structure is divided into the control environment, accounting system and control procedures. It must be considered in terms of its relationship to significant errors or omissions in financial statements.