0% found this document useful (0 votes)
119 views37 pages

Analytical Procedures

The document discusses ISA 520 and analytical procedures. It covers planning, performance, and concluding analytical procedures. It provides requirements and examples of applying analytical procedures during substantive testing and to form an overall conclusion.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
0% found this document useful (0 votes)
119 views37 pages

Analytical Procedures

The document discusses ISA 520 and analytical procedures. It covers planning, performance, and concluding analytical procedures. It provides requirements and examples of applying analytical procedures during substantive testing and to form an overall conclusion.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 37

ISA 520 Analytical Procedures

PLANNING

PERFORMANCE

CONCLUDING
ISA 520 Analytical Procedures

PLANNING

ISA 315 deals with the use of


analytical procedures to identify
and assess risk procedures

YEAR 20X2 20X1

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

The auditor shall design and perform analytical


procedures near the end of the audit that assist
the auditor when forming an overall conclusion as
to whether the financial statements are consistent
with the auditor’s understanding of the entity.

The results of such analytical procedures


The conclusions drawn from the results of
may identify a previously unrecognized risk
analytical are intended to corroborate
of material misstatement. In such
conclusions formed during the audit of
circumstances, ISA 315 (Revised) requires
individual components or elements of the
the auditor to revise the auditor’s
financial statements. This assists the auditor
assessment of the risks of material
to draw reasonable conclusions on which to
misstatement and modify the further
base the auditor’s opinion.
planned audit procedures accordingly.
ISA 520 Analytical Procedures

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

Previously unidentified Risk identified


ISA 520 Analytical Procedures

PERFORMANCE

To obtain sufficient appropriate audit evidence (SAAE)


while performing analytical procedure

SUBSTANTIVE TEST OF CONTROL


PROCEDURE

TEST OF DETAILS

SUBSTANTIVE ANALYTICAL
PROCEDURE
ISA 520 Analytical Procedures

PERFORMANCE
SSGC Audit

Revenue XX SAAE

Test of detail (TOD) Test of Control (TOC) Substantive Analytical


Inspect sales invoice Inspect sales invoice procedure
(amount) (signature)

opening stock 10 units


Revenue 50 Risk identified
SAAE isn’t purchase 105 units 100% verify
Receivable 40 obtained (15) units
closing stock
sold 100(units)X 10(rate)
revenue
Revenue = 1000
= Rs. Rs. 1000
ISA 520 Analytical Procedures

PERFORMANCE
IQSF Audit

Revenue XX SAAE

Test of detail (TOD) Test of Control (TOC) Substantive Analytical


Inspect Admission Inspect Admission procedure
form (amount) form (signature)

students = 1000
fees = 5000
revenue = 1000 X 5000
revenue = Rs. 5000000
ISA 520 Analytical Procedures

Steps / Requirements for performing substantive


procedures as Analytical Procedures

Determine the suitability of particular substantive analytical


procedures for given assertions, taking account of the assessed risks
1 of material misstatement and tests of details, if any, for the
assertions; how effective they will be in detecting particular type of
material misstatements.

Source of information

Comparability of the information


Evaluate
such as industry data and budget
the reliability of
data and for these
auditor needs to Nature and relevance of information
consider the available
following
factors :
Controls over preparation of data
FIXED ASSET INCLUDE
BALANCE SHEET
LAND & BUILDING

ASSET PLANT & MACHINERY


FURNITURE & FIXTURE

ISA 520 Analytical Procedures FIXED ASSETS xxx


DEPRECIATION & USEFUL
DEP (xxx) LIFE ARE DIFFERENT

CA OF FA xxx
1
COST X = EXPECTED DEPRECIATION
PERFORMANCE USEFUL LIFE

The accuracy with


which the expected
results of substantive
Develop an expectation of recorded analytical procedures
can be predicted
amounts or ratios and evaluate
whether the expectation is sufficiently
precise to identify a misstatement
The degree to which
that, individually or when aggregated
information can be
with other misstatements, may cause disaggregated
the financial statements to be
materially misstated; For these audi-
tor needs to consider the following
factors: The availability of the
information, both
financial and
non-financial
ISA 520 Analytical Procedures

PERFORMANCE

Determine the amount of any difference of recorded


amounts from expected values that is acceptable
without further investigation

The auditor’s determination of the amount of difference from the


expectation that can be accepted without further investigation is
influenced by materiality and the consistency with the desired level
of assurance, taking account of the possibility that a misstatement
individually or when aggregated with other misstatements, may
cause the financial statements to be materially misstated.
ISA 330 requires the auditor to obtain more persuasive audit
evidence the higher the auditor’s assessment of risk. Accordingly,
as the assessed risk increases, the amount of difference considered
acceptable without investigation decreases in order to achieve the
desired level of persuasive evidence.
ISA 520 Analytical Procedures

PERFORMANCE

If analytical procedures performed in accordance with this ISA


identify fluctuations or relationships that are inconsistent with
other relevant information or that differ from expected values by
a significant amount, the auditor shall investigate such differences
by:

(a) Inquiring of management and obtaining appropriate audit


evidence relevant to management’s responses
(b) Performing other audit procedures as necessary in the
circumstances.

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

Employees Previous year (last month)


payroll Expense Payroll Rs.10
(31-Dec-21) =10x12 =Rs.120
ADD:
TEST OF TEST OF SUBSTANTIVE
Additional = 1x9 = Rs.9
DETAIL CONTROL ANALYTICAL
employee
PROCEDURE (01-Apr-22)
verify
LESS:
Employee resign = (1x3) = (Rs.3)
(30-sep-22)
• employees • Authorize
• disposal • segregation of Incentive =120x10%= Rs.12
• incentive duties
• bonus • Payroll slip Bonus(if any) = XX
Rs.138
ISA 520 Analytical Procedures Past papers ( Practical Example)

Question: (Autumn 2022 Q.5, 05 marks)

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

Question: (Autumn 2010 Q.3, 08 marks)


The analytical procedures which are carried out near the end of the
audit usually assist the auditor in forming an overall conclusion on the
financial statements.
Required:
(a) State the objectives which an auditor expects to achieve while
applying analytical procedures at the end of an audit.
(b) Discuss the course of action an auditor should adopt when
results of analytical procedures identify inconsistent relationships
or differ from expected values by significant amounts.
Answer (a)
(i) The auditor should apply analytical procedures at or near the end of
the audit in order to form an overall conclusion as to whether the
financial statements as a whole are consistent with the auditor’s
understanding of the entity.
(ii) The conclusions drawn from the results of analytical are intended to
corroborate conclusions formed during the audit of individual
components or elements of the financial statements. This assists the
auditor to draw reasonable conclusions on which to base the auditor’s
opinion.
ISA 520 Analytical Procedures Past papers

(iii) The results of such analytical procedures may identify a previously


unrecognized risk of material misstatement. In such circumstances,
ISA 315(Revised) requires the auditor to revise the auditor’s assessment
of the risk of material misstatement and modify the further planned
audit procedures accordingly.

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

Question: (Spring 2013 Q.7, 10 marks)


Analytical procedures are an important audit tool for the auditor at the
planning stage as well as at the time of finalization.

Required:

(a) Give four examples of different types of analytical procedures.


(b) State with examples the factors that are relevant in assessing the
reliability of data for the purposes of designing substantive
analytical procedures.
(c) Specify the procedures that an auditor may undertake if analytical
procedures identify inconsistencies with other information.
ISA 520 Analytical Procedures Past papers

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

Question: (Spring 2015 Q.1(e), 04 marks)


Identify the matters that need to be considered by the auditor at the time
of designing and performing substantive analytical procedures.

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

Gross profit margin 32% 28%

Accounts payable to cost of sales ratio 0.20 0.28

Trade days receivable 90 75


ISA 520 Analytical Procedures Past papers

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:

Obtain an understanding of management process to record provision


and ensure that it is consistent with the AFRF i.e. IFRS 09.
Obtain aging of the receivable balances to identify long outstanding
receivable to ensure that adequate provision has been recorded.
Check that whether assumption, estimates and judgement used by the
management are reasonable.
Inspect the subsequent receipt to assess the recoverability of balance.
Question: (Autumn 2021 Q.5, 10 marks) Notes:
You are the audit manager in a firm of chartered accountants. Your audit client (i) During the year, sales price of DPL
Dairy (Private) Limited (DPL) has emailed you its draft financial statements for the products were increased by 20%, to
offset the corresponding increase in
year ended 30 June 2021 along with related notes. The information provided by DPL is cost of production.
summarized below: (ii) On 30 June 2019, DPL had obtained a
Draft statement of financial position as at Draft income statement for the year ended loan of Rs. 20 million, which is payable
in 10 equal quarterly instalments at the
30 June 2021 30 June 2021 end of every quarter. The loan carries
2021 2020 2021 2020 fixed mark-up rate of 9%.
Equity and Liabilities ---- Rs. in 000 ---- ---- Rs. in 000 ---- (iii) Decrease in property, plant and
equipment represents disposals made
Equity and reserves 35,922 26,000 Sales 110,000 73,000
during the year, net of depreciation.
Long - term loan 6,000 12,000 Cost of Sales (83,050) (54,750) (iv) Prepayment represents advance rental
Gross profit
payment of warehouse, obtained for 6
26,950 18,250
Trade and other payables 7,800 6,500 months on 16 June 2021 at a monthly
Admin and marketing exp. (12,100) (10,950) rent of Rs. 250,000.
TOTAL 49,722 44,500
Expenses (675) (1,530)

Assets Net profit before taxation 14,175 5,770

Taxation @ 30% (4,253) (1,731)


PPE 22,630 26,818
Net profit 9,922 4,039
Prepayments 1,500 -
Trade debtors 12,000 8,000
Required:
Inventory 13,000 7,000 Using analytical procedures, identify any four unexplained
fluctuations and inconsistencies in the above situation. State
Cash and bank balances 592 2,682 the key audit procedures which you would perform to
address the issues identified by you.
TOTAL 49,722 44,500
ISA 520 Analytical Procedures Past papers

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:

Inspect sales invoice to


check quantity and rate

Accuracy Inspect goods delivery


note to verify quantity

Agree the rate to approved


price list

Perform recalculation based


on GDN and Approved price list
ISA 520 Analytical Procedures Past papers

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.

Obtain management’s calculation to impairment and check that


whether management assumptions (estimated selling price and
estimated cost) to make sales are reasonable.

Perform subsequent event procedures such as Inspect


subsequent sales register to verify the subsequent sales.

You might also like