## SA 520 — Purpose and Timing of Analytical Procedures

### Purpose of Analytical Procedures

AP is performed for two primary purposes:

1. Identify unusual transactions, events, ratios, or trends — anything that deviates from expectation.

2. Identify Risks of Material Misstatement (ROMM), especially those arising from fraud.

#### Illustrative Examples of Purpose in Action

Comparing income/expense ratios of current year with prior year to find the cause of variation in profitability.
Performing ratio analysis where an expense/income item has a direct mathematical relationship with profit or sales that can be independently verified.
Checking commission % of sales — if commission is always 5% of sales, a deviation signals either an error or an undisclosed arrangement.

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### Timing of Analytical Procedures

AP is used at three distinct stages of the audit:

#### (A) Planning Phase — SA 315

Purpose: Risk assessment

Assists in understanding the entity's business and its environment.
Helps identify areas of ROMM across the financial statements.
Assists the auditor in determining the Nature, Timing, and Extent (NTE) of other audit procedures.

#### (B) Testing Phase

Purpose: Evidence gathering

AP used as substantive procedures to generate relevant and reliable audit evidence.
Especially effective where a predictable relationship between data exists.

#### (C) Completion Phase

Purpose: Overall conclusion

Used when forming the audit opinion.
Ensures the financial statements are consistent with the auditor's overall understanding of the entity.

Worked example

### Example 1

Planning Phase AP: At the start of the audit, the auditor notices that gross margin has dropped from 35% to 22%. This flags a potential ROMM in cost of goods sold or revenue recognition, prompting the auditor to increase substantive testing in those areas.

### Example 2

Testing Phase AP: The auditor uses interest expense vs. average loan balance × interest rate as a substantive analytical procedure. If the recorded interest expense is within the acceptable threshold of the computed expectation, this provides evidence that interest expense is not materially misstated.

### Example 3

Completion Phase AP: Before signing the audit report, the auditor computes key financial ratios (current ratio, debt-equity, profit margin) and compares them with prior year. An unexpected improvement in the current ratio is investigated and found to be due to legitimate cash inflows from a new term loan — consistent with the auditor's understanding.

⚠️ Common exam mistakes

Mixing up SA 315 (risk assessment / planning AP) with SA 520 (substantive and completion AP) — both SAs use AP but for different purposes.
Believing that AP in the testing phase replaces tests of details entirely — AP and tests of details are complementary; for high-risk assertions they must be combined.
Omitting completion-phase AP — many students focus only on planning and testing phases and forget that SA 520 specifically requires AP near end of audit for overall conclusion.

Reference: SA 520 — Paragraphs 5–6 (Requirements); SA 315 — Risk Assessment — SA 520 — Analytical Procedures (ICAI)

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