Analytical Procedures
Analytical Procedures
PLANNING
PERFORMANCE
CONCLUDING
ISA 520 Analytical Procedures
PLANNING
REVENUE 50 100
RECEIVABLE 80 40
RISK:
RECEIVABLE MAY BE OVERSTATED
BAD DEBT EXPENSE MAY HAVE NOT
BEEN RECORDED
ISA 520 Analytical Procedures
CONCLUDING
Analytical Procedures that Assist When Forming an Overall Conclusion
CONCLUDING example
concluding
phase
31 mid of mid of 7 14
Nov
Dec Jan Feb march March
Team F.S
Year End Review Report
Deployed Provided
ISA 520 Analytical Procedures
CONCLUDING
Accounting profit XX
No Deff. tax asset
Taxable profit XX recognized
Provision (X X)
B/S
Accounting profit/(loss) (X X) LIABILITY ASSET
_
Taxable loss (X X) DTL XX DTA
PERFORMANCE
TEST OF DETAILS
SUBSTANTIVE ANALYTICAL
PROCEDURE
ISA 520 Analytical Procedures
PERFORMANCE
SSGC Audit
Revenue XX SAAE
PERFORMANCE
IQSF Audit
Revenue XX SAAE
students = 1000
fees = 5000
revenue = 1000 X 5000
revenue = Rs. 5000000
ISA 520 Analytical Procedures
Source of information
CA OF FA xxx
1
COST X = EXPECTED DEPRECIATION
PERFORMANCE USEFUL LIFE
PERFORMANCE
PERFORMANCE
The need to perform other audit procedures may arise when, for
example, management is unable to provide an explanation, other
explanation, together with the audit evidence obtained relevant to
management’s response, is not considered adequate.
ISA 520 Analytical Procedures Past papers ( Practical Example)
VERIFY
EXISTANCE
COMPLETENESS
FIXED PLANT & MACHINERY
ASSET RIGHTS &
OBLIGATIONS At start of year 100 Rs.
Addition 60 Rs.
VALUATION
Disposal (10) Rs.
At year end 150 Rs.
DEPRECIATION Op. Asset 100 Rs.
(SLM @ 10%) Cl. Asset 150 Rs.
250 Rs.
TEST OF TEST OF SUBSTANTIVE Avg. balance = 250/2 = 125 Rs.
DETAIL CONTROL ANALYTICAL = 125x10% = 12.5
Dep. Exp.
PROCEDURE
WHO? If Dep. Exp. isn’t within threshold
investigate Management
Recalculate • Authorize
• Determine
Depreciation Useful life
ISA 520 Analytical Procedures Past papers ( Practical Example)
AUDIT NBP
31-Dec-2022
Your audit team performed verification of the payroll cost for the
year ended 30 June 2022, by projecting the June 2021 payroll cost in
line with increase in revenue from last year to current year.
Required:
Comment on the suitability of analytical procedure as substantive
procedure performed by your audit team. Also suggest any changes
to be made in the analytical procedure.
ISA 520 Analytical Procedures Past papers ( Practical Example)
ANSWER
Payroll cost:
Completeness and accuracy of the payroll cost can be determined by
performing analytical procedures. However, projecting the payroll
cost of June 2021 on the basis of revenue is not correct, as certain
payroll costs are fixed and do not move in line with the revenue.
Changes to be incorporated in the analytical procedures:
Payroll cost of June 2021 would be projected to the payroll cost of year
ended June 2022 by taking the effect of the following:
The effect of those employees who have joined and left during the year
The effect of increments
The effect of any deductions made in the salary
Discuss any significant differences/inconsistencies with the management
ISA 520 Analytical Procedures Past papers
Answer (b)
When analytical procedures identify significant fluctuations or relationship,
the auditor shall investigate such differences.
(i) Inquiring of management and obtaining appropriate audit evidence
relevant to management responses.
(ii) Performing other audit procedures when:
Management is unable to provide an explanation.
The explanation together with the audit evidence obtained is not
considered adequate.
ISA 520 Analytical Procedures Past papers
Required:
Answer (a)
Examples of analytical procedures:
Comparison of the entity’s financial information with comparable
information for prior periods.
Comparison of the entity’s financial information with anticipated results
of the entity, such as budgets or forecasts, or expectations of the auditor,
such as an estimation of depreciation.
Comparison of the entity’s financial information with similar industry
information, such as a comparison of the entity’s ratio of sales to
accounts receivable with industry averages or with other entities of
comparable size in the same industry.
Consideration of relationships among elements of financial information
that would be expected to conform to a predictable pattern based on
the entity’s experience, such as gross margin percentages.
Consideration of relationships between financial information and
relevant nonfinancial information, such as payroll costs to number of
employees.
ISA 520 Analytical Procedures Past papers
Answer (b)
The following factors are relevant in determining the reliability of
data while designing substantive analytical procedures:
Evaluate the reliability of data and for these auditor needs to consider the
following factors:
Source of information.
Comparability of the information such as industry data and budget.
Nature and relevance of information available.
Controls over preparationof data.
Answer (c)
When analytical procedures identify significant fluctuations or relationship,
the auditor shall investigate such differences.
(i) Inquiring of management and obtaining appropriate audit evidence
relevant to management responses.
(ii) Performing other audit procedures when:
Management is unable to provide an explanation.
The explanation together with the audit evidence obtained is not
considered adequate.
ISA 520 Analytical Procedures Past papers
Answer
Determine the suitability of particular substantive analytical procedures
for given assertions, taking account of the assessed risks of material
misstatement and tests of details, if any, for the assertions; how effective
they will be in detecting particular type of material misstatements.
Evaluate the reliability of the data from which the expectation has been
developed.
Develop an expectation of recorded amounts or ratios and evaluate
whether that expectation is sufficiently precise to identify a misstatement.
Determine what level of difference from expected amounts is acceptable
without further investigation.
To investigate.
ISA 520 Analytical Procedures Past papers Required:
(i) Explain the fluctuations and
Question: (Autumn 2020 Q.2(a), 09 marks) inconsistencies in the given
You are manager responsible for the audit of Pine Limited (PL) for the year ratios.
ended 31 August 2020. PL has large contracts with many government
(ii) State any four key audit
entities. During the year, the government has significantly reduced its
procedures which you would
spending which has also affected its contract volumes with PL.
perform to address each issue
Devaluation of the local currency has also resulted in increased costs of
identified in (i) above.
the materials purchased from overseas suppliers.
During the planning work review, your team has provided you the
following ratios:
2020 2019
Occurrence
Completeness
SALES
Accuracy
ASSERTIONS
Cutoff
Classification
ISA 520 Analytical Procedures Past papers
Occurrence
Completeness
PURCHASE
Accuracy
ASSERTIONS
Cutoff
Classification
ISA 520 Analytical Procedures Past papers
Answer
The increase in the gross profit margin is inconsistent with the increase in
the cost of materials due to devaluation of local currency.
Following steps may be performed:
• Review the explanations obtained by the audit team for the increase in
the gross profit margin even after decrease in government contracts
and increase in import prices.
• Perform early cut-off test for purchases.
• Perform late cut-off testing for sales.
• Select samples from sales register and inspect original GDN to verify the
occurrence of sales.
• Select samples from sales register and inspect original sales invoice to
ensure that sales had been recorded at correct amount.
• Select samples from GRN and trace to purchase register to ensure the
completeness of purchase.
• Select samples from purchase register and inspect original supplier
invoice to ensure that purchase had been recorded at correct amount.
ISA 520 Analytical Procedures Past papers
Existence
ACCOUNTS Completeness
PAYABLE
ASSERTIONS Rights &
Obligation
Valuation
ISA 520 Analytical Procedures Past papers
Answer
The accounts payable to cost of sales ratio has decreased significantly
(28%), despite weakening of the local currency.
Consequently, the following procedures may be performed:
Ensure that foreign trade payables are translated at the closing foreign
currency exchange rates.
Circulate balance confirmation requests to trade creditors with nil or
zero balance.
Compare the current list of trade payables with prior year’s working
papers to identify any omissions.
Perform test of unrecorded liability
ISA 520 Analytical Procedures Past papers
Answer
Trade day receivable has increased significantly (20%), which indicates
that PL is facing problems in collecting trade debts. There is a possibility
that provision for doubtful debt may not be correctly recorded.
Considering this, following procedures may be performed:
Occurrence
Completeness
REVENUE
Accuracy
ASSERTIONS
Cutoff
Classification
ISA 520 Analytical Procedures Past papers
SALES
Assertion
Understand the
impact of significant
accounting policies for sales balance and
compliance with the applicable financial
reporting framework. Consid whether the
Occurrence accounting policies and methods for
revenue recognition are appropriate and
are applied consistently
Select sample
from sales register and
inspect goods
delivery note Procedures
ISA 520 Analytical Procedures Past papers
SALES
Select a sample sales register.
For each selection, perform the
following:
SALES
Cutoff
Select few samples Test whether the date
before and after of of goods
last goods delivery delivery note support
note and check the recognition of the
whether it has been revenue in the
recorded in the correct period or not
correct accounting
period
ISA 520 Analytical Procedures Past papers
Answer
Long-term loan
It seems that DPL has failed to make the quarterly installment of its
long-term loan or has made delayed payment. This may represent
default on part of DPL.
Audit procedures
Inspect the loan agreement to identify loan covenants.
Inspect the correspondence file with banks to identify and breach
in covenant and Bank’s course of action.
Send External confirmation to bank.
If covenant breached it may indicate events or condition that may
cast significant doubt on Company’s ability to continue as a going
concern therefore perform audit procedures on Going Concern
assessement.
ISA 520 Analytical Procedures Past papers
Answer
Trade payables
Creditor days have decreased from 43 days to 34 days. This may
represent that creditor purchases may be understated.
Consequently, the following procedures may be performed:
Audit procedures:
Circulate balance confirmation requests to trade creditors with nil
or zero balance.
Compare the current list of trade payables with prior year’s
working papers to identify any omissions.
Perform test of unrecorded liability.
ISA 520 Analytical Procedures Past papers
Answer
Inventory
The inventory turnover days have increased from 47 to 57 days.
Due to this increase there might be some obsolete inventory
which requires provisioning.
Obtaining an understanding of management process related to
identifying, estimating and recording impairment for inventory to
determine whether it is consistent with the requirement of IAS 02.