## Analytical Procedures – Evaluating Expectations and Investigating Results (SA 520)
### 1. Evaluating Whether the Expectation is Sufficiently Precise
Before relying on an analytical procedure, the auditor must judge whether the expected result is precise enough to detect a material misstatement. Three factors drive this assessment:
| Factor | Explanation |
|---|---|
| Accuracy of predicted result | How reliably can the auditor forecast the figure? (e.g., GP margin is easy to predict; thus SAP on GP is highly precise) |
| Degree of disaggregation | The more granular the data (e.g., product-line vs. total revenue), the more precise the expectation |
| Availability of information | Both financial and non-financial data must be available and reliable |
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### 2. Determining the Acceptable Difference
The acceptable difference is the maximum deviation between the auditor's expectation and the recorded amount that can be accepted without further investigation.
Three factors influence this threshold:
1. Materiality – higher materiality → wider acceptable band
2. Desired level of assurance – higher assurance required → narrower band
3. Assessed Risk of Material Misstatement (ROMM) – higher ROMM → lower acceptable difference (auditor must investigate smaller deviations)
> Key relationship: Assessed ROMM ↑ ⟹ Acceptable Difference ↓
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### 3. Investigating Results of Analytical Procedures
When to investigate: When a difference from expected values is significant (i.e., it identifies a fluctuation or relationship inconsistent with other relevant information).
Steps the auditor shall take:
1. Inquiry of management – obtain explanations and then obtain sufficient audit evidence to corroborate those responses
2. Perform other audit procedures – as necessary to resolve the difference
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### 4. Analytical Procedures at the Overall Conclusion Stage
At the end of the audit, analytical procedures serve two purposes:
- Support the individual conclusions formed during the audit of each element of the financial statements
- Assist the auditor in drawing a reasonable overall conclusion on which the audit opinion is based
> Important side-effect: Results of overall analytical procedures may identify a previously unrecognised risk → auditor must re-assess ROMM under SA 315.