## SA 520: When Are Substantive Analytical Procedures Appropriate?

### What Are Substantive Analytical Procedures?

Substantive analytical procedures involve evaluating financial information by studying plausible relationships among financial and non-financial data. Unlike tests of details, they look at patterns and ratios rather than individual transactions.

### Key Condition for Appropriateness: Predictability

Substantive analytical procedures work best when there is a predictable relationship — i.e., a relationship that may reasonably be expected to exist and continue over time.

Examples of predictable relationships:

Sales and Cost of Goods Sold (gross margin should remain relatively stable)
Payroll expense and headcount
Interest expense and average borrowings
Depreciation and gross fixed assets

### Assertion Dependency

The effectiveness of substantive analytical procedures also depends on the assertion being tested:

Assertion	Suitability of Analytical Procedures
Completeness	High — trends reveal missing items
Valuation	High — ratios can flag over/undervaluation
Existence	Moderate
Rights & Obligations	Low — analytical procedures cannot confirm who owns an asset
Cut-off	Low — timing issues not detectable by trends

### Decision Framework

```

Is the relationship predictable? → No → Use tests of details instead

↓ Yes

Which assertion is being tested?

→ Completeness/Valuation → Analytical procedures are effective

→ Rights & Obligations → Analytical procedures are NOT effective

Use inspection of title deeds, contracts, etc.

```

Worked example

### Example 1

Case 1 – Sales vs. Cost of Sales (Appropriate):

CA M plans to use substantive analytical procedures to test the relationship between sales and cost of sales. Since gross margin % is a predictable and relatively stable relationship for most businesses, this is an appropriate use. The auditor can compute the expected gross profit %, compare it with the actual, and investigate significant unexplained variances.

Case 2 – Rights Over Assets (Inappropriate):

CA M also plans to use substantive analytical procedures to test rights over certain assets (the rights and obligations assertion). This is inappropriate. Whether the entity owns an asset cannot be determined by looking at trends or ratios. The auditor would need to inspect title deeds, registration documents, lease agreements, or other legal documents to verify ownership — analytical procedures provide no useful evidence here.

⚠️ Common exam mistakes

Assuming analytical procedures can address all assertions equally — they are weak for 'rights and obligations' and 'cut-off'.
Using analytical procedures on non-predictable or one-time items (e.g., restructuring charges, litigation settlements) where no stable relationship exists.
Treating an unexplained variance as automatically insignificant — any significant unexplained difference requires further investigation or corroboration through tests of details.
Confusing 'analytical procedures as risk assessment' (SA 315) with 'substantive analytical procedures' (SA 520) — the latter must meet a higher evidential standard.

Reference: — SA 520 – Analytical Procedures

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SA 520 – Substantive Analytical Procedures: Appropriateness and Assertion Limitations

Worked example

⚠️ Common exam mistakes