SA 520 Analytical Procedures: The Complete Guide

Analytical procedures (SA 520) are used to evaluate the financial information by analyzing the plausible relationships between financial as well as non-financial data. Auditors refer to SA 520 in order to investigate the identified fluctuations or relationships that do not match with the other relevant information, or which differ from the expected values with a significant amount.

There is a particular order in which Analytical Procedures are conducted. This order can be explained by the following steps:

• Step 1 – Studying suitable plausible (probable) interrelationship in financial and non-financial data
• Step 2 – Collecting reliable data
• Step 3 – May or may not performing calculations, computing ratios percentage etc.
• Step 4 – Then comparing them with relevant data or expected values and investigating unusual differences

Example
Analytical methods can be carried out in a variety of ways. These exercises cover everything from making straightforward comparisons to carrying out intricate analyses using cutting-edge statistical methods. Analytical prcocedure may be applied to consolidated financial statements, components and certain informational components.

Consequently, we can state that analytical methods may be separated into these type as comparision of client and industry data, comparision of client data with similar period data, comparision of client data with client-determined expected results, comparision of client data with auditor-determined expected results and comparison of client data with expected results, using non-financial data.

Purposes of Analytically applied Procedure
Analysis processes compare and relate data to see whether account balances or other data appear logical. The auditor’s goals are to:

• To acquire pertinent and trustworthy audit evidence, when employing a substantive analytical technique.
• To plan and carry out analytical procedures that aid the auditor in determining whether the financial statements are accurate and consistent with their understanding of the entity near the end of the audit.

Timing of Analytical Procedure

• At Planning Stage: At planning stage, the auditor obtains unsderstanding about the client business and identifies the risk of material
• While performing the audit: At this stage, the auditor applies substantive analytical procedure
• Near the end of audit: The auditor performs analytical procedures when forming an overall conclusion to ascertain whether financial statements are consistent with the understanding of audit.

Substantive Analytical Procedures
The auditor’s  substantive procedure at the asseration level may be tests of  details, substattive analytical procedure or a combination of both. The auditor could inquire of management regarding the availability and reliability of information needed to apply substantive analytical procedures, and the results of any such analytical procedure by the entity.

Factors to be considered for substantive audit procedures:

• Availabilty of Data
• Disaggreagation
• Account type
• Source
• Predictability
• Nature of Asseration
• Inherent Risk or “What can go Wrong”

Different forms of analytical procedures

• Data comparison with previous year
  • Trend Analysis : This trend use to  compare of current data with prior period balance or with trend in two or more prior period balance.Auditor check whether  current balance of an account moves in the line with trend established with previous balance for that account or based on an understanding of factors that may cause the account to change.
• Ratio comparison with other firms, Like Inter Firm Analysis
  • Ratio Analysis : Ratio analysis used to compares line item of assets and liability accounts as well as revenue and expenses. (Eg. Debtor balance related to sales.)
• Correlation, Regression to construct equation and the use it to predict current year
  • Structural modeling : A modeling tool constructs a statistical model from financial and/or non-financial data of prior accounting periods to predict current account balances (Eg. Linear regression) 
• Comparison with expected Data, Like Predictive Analysis
  • Reasonableness Tests: Unlike trend analysis, this analytical procedure does not Count on event of prior periods, but upon non-financial data for the periods, but upon non-financial data for the audit period under consideration.

(Eg, occupancy rate to estimate rental income or interest rates to estimate interest income or expense)

Factors Affecting Reliability of Data/Extent of Reliance on analytical procedures
SA 520 on ‘Analytical procedures’ concludes that the honesty of data is judged on the basis of its origin and nature. Also, it depends on the situation under which it is obtained. Accordingly, the following are relevant criteria when determining whether the data is reliable for purpose of designing substantive analytical procedure:

• Origin of information
• Comparabilty
• Nature and relevance
• Control

Conclusion
The conclusions drawn from the results of analytical procedures are intended to validate  conclusions formed during the audit of individual components or elements of the financial statements. This assists the auditor to draw reasonable conclusions in order to make opinions

The outcomes of such analysis techniques might reveal a major misstatement risk that wasn’t previously understood.

At MAS, we assist our clients in dealing with internal audits; government audits of various corporate matters (company incorporation), statutory audits, ROC compliance, and company winding-up) in India by providing them adequate support and guidance from our end. If you have any questions or wish to know more about SA 520 Analytical Procedures, kindly contact us.