## Risk Assessment Procedures: Analytical Procedures (SA 315 / SA 520)

### What Are Analytical Procedures?

Analytical procedures involve evaluating financial information through analysis of plausible relationships among both financial and non-financial data, and investigating identified fluctuations or relationships that are inconsistent with other relevant information.

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### Where Are They Used?

Stage	Standard
Risk Assessment (planning stage)	SA 315
Further Audit Procedures (substantive testing)	SA 520
Near completion (overall review at reporting end)	SA 520

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### Purpose During Risk Assessment (SA 315)

Analytical procedures at this stage:

Can reveal unknown aspects of the entity
Help assess ROMM (Risk of Material Misstatement) for designing further audit procedures
May involve both financial and non-financial data
Can highlight unusual transactions, events, or trends with potential audit implications
Provide a broad indication of potential material misstatements
Combined with other gathered information → help auditor understand and evaluate ROMM

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### How It Works — The Rent Example

> Entity pays rent of ₹50,000 per month.

> Auditor tested supporting documents → all in order.

> Auditor then compared with industry average → industry pays only ₹10,000 p.m.

> Result: Significant unexplained difference → potential ROMM → requires further investigation.

This is a classic analytical procedure: even though documents were clean, the relationship to external data flagged a risk.

Worked example

### Example 1

Revenue vs. Industry Growth: Entity reports 40% revenue growth while the industry grew at 5%. Auditor flags this as an unusual trend → potential overstatement of revenue → ROMM identified at risk assessment stage.

### Example 2

Non-financial correlation: Entity reports 1,000 units produced but headcount in production fell 50% with no change in machinery. Non-financial data (headcount) is inconsistent with financial data (production volume) → possible misstatement in inventory or cost of production.

⚠️ Common exam mistakes

Confusing the purpose of analytical procedures at the risk assessment stage (to identify ROMM areas) with their purpose under SA 520 (to obtain substantive audit evidence) — they are used differently.
Thinking analytical procedures only involve financial data — non-financial data (units produced, number of employees, square footage) are equally valid inputs.
Treating a clean set of supporting documents as sufficient — the rent example shows that document testing alone missed the anomaly; comparison with external benchmarks was essential.

Reference: SA 315 – Risk Assessment Procedures; SA 520 – Analytical Procedures (further audit procedures and overall review) — SA 315 / SA 520

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Risk Assessment Procedures – Analytical Procedures (SA 315 & SA 520)

Worked example

⚠️ Common exam mistakes