## SA 520 – Auditor's Responsibilities When Performing AP

### Step-by-Step Framework for Substantive AP

When designing and performing AP (alone or combined with tests of details), the auditor must:

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#### Step 1 – Determine Suitability of AP

AP is more suitable for large volumes of predictable transactions
Relies on the assumption that stable relationships among data exist
Suitability depends on auditor's assessment of ROMM
Even an unsophisticated predictive model can be effective if relationships are clear

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#### Step 2 – Evaluate Reliability of Data

Data reliability depends on:

Source: Independent external sources > internal sources
Comparability: Broad industry data may need adjustment to be comparable to a specialised entity
Nature and relevance: Budgets set as expected results vs. aspirational goals have different reliability
Controls over preparation: Controls over accuracy/completeness/validity of information (e.g., budget review controls)

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#### Step 3 – Develop an Expectation

Factors that affect accuracy of the expectation:

Consistency of relationships: Gross profit % is more consistent period-to-period than discretionary expenses (R&D, advertising)
Degree of disaggregation: AP on individual segments > AP on the entity as a whole
Availability of financial and non-financial data: Budgets, forecasts, units produced/sold

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#### Step 4 – Determine Acceptable Difference

The threshold of difference that can be accepted without further investigation
Influenced by materiality
Differences within the acceptable range → no further action needed

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### Investigating Results (Unexpected Differences)

When AP reveal unexpected variances:

1. Inquire of management and obtain appropriate audit evidence relevant to management's response

2. Evaluate management's response in light of auditor's understanding and other audit evidence

3. Perform other AP or tests of details if:

Management cannot provide an explanation, OR
Explanation + related evidence is not considered adequate

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### Auditor's Conclusion

Scenario	Outcome
AP corroborates other evidence	Conclusion in performing AP is strengthened
AP supports consistent overall picture	Helps draw reasonable conclusion on overall FS
AP identifies unexpected relationship	May identify a previously unrecognised ROMM

If a new ROMM is identified → Revise ROMM assessment → Modify Further Audit Procedures (FAP) accordingly

Worked example

### Example 1

Suitability Example: For a retail company with thousands of daily sales transactions, AP on revenue using footfall data (non-financial) and average ticket size is highly suitable. For a one-time fixed asset disposal, AP is not suitable — a test of details is required.

### Example 2

Reliability Example: An auditor compares client budgets against actuals. Investigation reveals that the company's budgets are set as aspirational stretch targets (goals to be achieved), not realistic forecasts. This reduces the reliability of the budget as a benchmark for expected results — the auditor would place less reliance on the AP result.

### Example 3

Acceptable Difference Example: Materiality is set at ₹5 lakh. The auditor expects sales commission of ₹12 lakh (5% of ₹2.4 Cr sales) but the recorded amount is ₹12.8 lakh — a ₹80,000 difference. Since this is below the performance materiality threshold, no further investigation is needed.

### Example 4

New ROMM Identified via AP: The auditor performs a reasonableness test on electricity expense and expects ₹18 lakh based on production units. Actual recorded expense is ₹14 lakh. Management says they switched to a new energy-efficient supplier. The auditor cannot obtain reliable data to corroborate this. This raises a new ROMM — possible understatement of expenses or unrecorded accruals — and the auditor revises their FAP to include testing of accruals.

⚠️ Common exam mistakes

Accepting management's explanation for an unexpected variance without corroborating it with audit evidence
Forgetting that a new ROMM discovered through AP requires revision of the FAP — AP findings don't just get noted and forgotten
Using budgets as a reliable benchmark without first checking whether they were set as realistic expectations or aspirational goals
Not adjusting the acceptable difference threshold for materiality — some students treat any difference as requiring investigation
Skipping the disaggregation principle — applying AP to the entity as a whole when segment-level data is available, which reduces the effectiveness of the AP

Bare-Act text SA 520 – Requirements: Substantive Analytical Procedures · SA 520 – Analytical Procedures (ICAI) · click to expand

When designing and performing analytical procedures, either alone or in combination with tests of details, as substantive procedures in accordance with SA 330, the auditor shall: (a) determine the suitability of particular substantive analytical procedures for given assertions; (b) evaluate the reliability of data; (c) develop an expectation of recorded amounts; (d) determine the amount of any difference of recorded amounts from expected values that is acceptable without investigation.

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Auditor's Responsibilities: Suitability, Reliability, Expectation, Acceptable Difference, Investigation, and Conclusion

Worked example

⚠️ Common exam mistakes