ISA 520 - Analytical Procedures

Question 1

ISA 520: Analytical Procedures

Answer 1

Analytical - To Analyse.
> Evaluating the relationship between financial and non-financial data of client.
> For better performance of Audit.
> You can compare Financial Information vs Financial Information, eg. Sales vs Cost of Sales.
> You can also compare Financial Information vs Non-financial Information, eg. Salaries vs No of employees.
> Can also use Ratios.
> Perform Trend Analysis.
All the above will help you check the reasonableness.

Comparison of Data:
> Compare Current Year vs Previous Year,
> Expected Results for:
*Budgets
*Auditors Expectations.
> Industry standards.
*Comparing similar entities,

When comparing Financial Information vs Financial Information, all the information comes from the Financial Statements.
> Net Profit Ratio =
* Sales to Net Profit Ratio.

> Non Financial Information is not reflected on the Financial Statement, however it has a relationship with Financial Information and if we use the relationships correctly, it helps to get reasonable conclusions, eg No. Of employees * Average salary will give us a hint of the Salaries Expense.

Analytical Procedures will give us the direction to get Sufficient and Appropriate Audit Evidence.

Question 2

ISA 520: Objective:

Answer 2

> To obtain relevant and reliable Audit Evidence by Substantive Analytical Procedures.
To perform SAPs at the end of the Audit, to say what you have understood about the client and what you got on the FS are matching.

What is the difference between Analytical Procedures and Substantive Analytical Procedures?
> At Audit Planning Stage, we do Analytical Procedures.
> During the performance of Audit, we do Substantive Analytical Procedures.

Analytical Procedures are performed at 3 stages of the Audit:
Stage1: Audit Planning,
Stage 2: Performing the Audit,
Stage 3: Concluding the Audit.

Analytical Procedures are, - Risk Assessment Procedures at the Audit Planning stage:
>Nature, Timing, and Extent.

> When Performing the Audit, Analytical Procedures are used to Obtain, Sufficient and Appropriate Audit Evidence (SAAE) If on analysis say purchases you find an unreasonable amount, it then implies that you have to do Test of Details or Substantive Tests where you will have to check the purchases transactions thoroughly.

At the conclusion stage, Analytical Procedures are done after performing:
> Inspection
> Inquiry
> External Confirmation.
Eg. Verification of Debtors you decide to compare Debtors figures for say, Year 2021, 2022, and 2023 but then find something not right.
Use :
> Provisions vs Debtors
> Sales vs Debtors.
All things being right, these comparisons or Analytical Procedures figures should match.
If they don’t match, then you must investigate and possibly give an opinion.

Question 3

ISA 520: Procedure for performing- Substantive Audit Procedures:

Answer 3

We have talked about When and What Analytical Procedures are performed.

Now we need to talk about How Analytical Procedures are performed.
> The How part is done in 4 Stages.

Stage 1:
> Suitability of SAP.
> For given Assertion.

Stage 2:
> Reliability of Data

Stage 3:
> Expectation on Recorded data,
> Evaluation of expected data.

Stage 4:
> Difference between recorded and expected values.
> If the figures do match you can rely on the data and not do Substantive Analytical Procedures.

What is the Auditor supposed to do if expected and Actuals are not Matching?

Expected vs Actuals:
*Investigate the matter.
> Extending N, T, and E ( Additional Audit Procedures)
> Inquiry with management.
* Management responded.
- Do Additional Audit Procedures.
* Management Not responded.
- Do other Audit Procedures.
- If they do not match, give an opinion.

Objective:
> To perform SAP at end of Audit.
> Inconsistency between the Evidence from other Procedures and AP, means that you will have to perform additional Audit Procedures before concluding.

Question 4

ISA 520 - Methods or Techniques of AP

Answer 4

1. Trends, from year to year.
2. Ratios, relationships in the form of ratios eg Sales to Net Profit Ratio.
3. Reasonable check, where by merely checking one can tell that 10% of $100 is $10 but in the Ledger there is $6.
4. Statistical tools.

Question 5

ISA 520: Analytical Procedures- Not suitable for every entity.

Answer 5

Eg.
> A Non-profit Organization.
> Government entities.
For example it is very difficult to match Income vs Expenditure.