## SA 520 — Analytical Procedures: Meaning, Types, and Timing

### Meaning

Analytical Procedures (AP) involve:

Evaluation of financial information
Through analysis of plausible relationships
Among both financial and non-financial data

AP work because related data items move together predictably — when one changes without the other, it signals a potential misstatement.

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### Types of Analytical Procedures

Type	What is Compared
Client vs. Industry data	Client ratios vs. industry benchmarks
Client vs. Prior period	Current figures vs. same period last year
Client vs. Budget	Actual results vs. management's expected results
Client vs. Auditor expectation	Recorded amount vs. auditor's independently calculated expectation
Financial vs. Non-financial	Financial data vs. operational drivers (e.g., units × price = revenue)

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### Timing of Analytical Procedures — Three Stages

#### Stage 1: Planning Phase

Assists in understanding the client's business
Identifies areas of potential risk (unexpected fluctuations, anomalies)
Informs the Nature, Timing, and Extent (NTE) of further audit procedures
Uses both financial data and non-financial information (e.g., number of employees, square footage of selling space, production volume)

#### Stage 2: Testing Phase (Substantive AP)

Used as a substantive procedure to detect material misstatements
Complement or alternative to Tests of Details (TOD)

#### Stage 3: Completion Phase

Performed near the end of the audit
Assists in forming an overall conclusion on the FS
Ensures the FS are consistent with the auditor's overall understanding of the entity

Worked example

### Example 1

Planning phase: The auditor compares revenue per employee — current year ₹25 lakhs vs. prior year ₹22 lakhs and industry average ₹20 lakhs. The 14% increase is unexpected and prompts the auditor to identify revenue recognition as a higher-risk area requiring more substantive work.

### Example 2

Substantive AP: Expected interest expense = Loan ₹10 crore × 9% rate = ₹90 lakhs. Actual recorded interest = ₹2 lakhs. The ₹88 lakh unexplained difference flags a likely misstatement — the auditor performs detailed testing.

### Example 3

Completion phase: After all substantive testing, the auditor reviews the overall GP ratio — 38% current vs. 36% prior year vs. 35% industry. The slight improvement is consistent with a disclosed price increase. No unexplained anomalies → supports unmodified opinion.

⚠️ Common exam mistakes

Thinking AP are only performed at the planning stage — they are mandatory at planning and completion, and optional (but common) as substantive procedures
Confusing 'auditor-determined expected results' with budget comparison — auditor expectation is independently calculated, not just management's budget
Assuming AP alone can provide sufficient evidence for high-risk or significant risk areas — for significant risks, SAP alone is insufficient

Reference:

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Meaning, Types, and Timing of Analytical Procedures

Worked example

⚠️ Common exam mistakes