Introduction
SA 520 – Analytical Procedures requires the auditor to evaluate financial information by analyzing reasonable and logical relationships among financial and non-financial data. These procedures help the auditor identify unusual fluctuations, trends, or inconsistencies that may indicate a material misstatement in the financial statements.
Objectives of the Auditor
Under SA 520, the auditor aims to achieve the following objectives:
- First, obtain relevant and reliable audit evidence by applying substantive analytical procedures.
- Second, perform analytical procedures at the final review stage of the audit to determine whether the financial statements are consistent with the auditor’s understanding of the entity.
When the Auditor Applies Analytical Procedures
The auditor applies analytical procedures at different stages of the audit. For example:
- During audit planning, the auditor uses them to understand the entity’s business and identify potential risk areas.
- During substantive testing, the auditor uses them to obtain audit evidence.
- Finally, at the overall review stage, the auditor uses them to assess whether the financial statements appear reasonable.
Therefore, analytical procedures assist the auditor throughout the entire audit process.
Basis of Analytical Procedures
Analytical procedures rely on the expectation that relationships among financial data normally exist and continue over time unless specific conditions change.
For example, the auditor may compare:
- Current year figures with previous year results
- Budgeted figures with actual results
- Industry averages with company performance
- Relationships between financial and non-financial information
When these relationships remain consistent, they provide evidence regarding the completeness, accuracy, and validity of accounting data.
Reliability and Auditor’s Judgment
However, the auditor should not rely solely on analytical procedures. Instead, the auditor evaluates the risk of material misstatement and determines whether the analytical results are sufficiently reliable.
Accordingly, the extent of reliance depends on the auditor’s professional judgment and risk assessment.
Investigation of Unusual Variations
If analytical procedures reveal significant fluctuations, unexpected relationships, or deviations from predicted amounts, the auditor must investigate further.
In such situations, the auditor should:
- Obtain explanations from management
- Perform additional audit procedures when necessary
- Collect appropriate corroborative audit evidence
These steps ensure that the financial statements do not contain material misstatements.
Conclusion
Analytical procedures play an important role in auditing. They help the auditor identify risk areas, obtain audit evidence, and form an overall conclusion regarding the reliability and consistency of financial statements.