## Analytical Procedures (SA 520)

### Definition

Evaluation of financial information through analysis of plausible relationships among both financial and non-financial data.

Includes investigation of identified fluctuations or relationships that are:

Inconsistent with other relevant information, OR
Differ from expected values by a significant amount

> The definition has two parts: (1) computing the relationship/ratio, and (2) investigating when the result is unexpected. Both are required.

### Three Stages of Use

Stage	Purpose
Planning	Understand the entity; identify areas of higher risk to direct audit procedures
As substantive procedures	Reduce detection risk more effectively/efficiently than tests of details for specific assertions
Final review	Overall reasonableness check of the FS before forming the audit opinion

### Factors Affecting Precision of Analytical Procedures

(i.e., how precisely can you predict expected results?)

1. Accuracy with which the expected results of substantive AP can be predicted

2. Disaggregation – the more granular the data, the more precise the expectation (monthly data > annual data; product-level > entity-level)

3. Availability of financial data (budgets, forecasts) and non-financial data (units produced/sold, headcount)

### Factors Affecting Reliability of Data Used in AP

(i.e., can you trust the underlying data?)

1. Source – independent external sources are more reliable than internal data

2. Comparability – broad industry benchmarks may need adjustment for specialized entities

3. Nature and relevance – are budgets set as expected outcomes or aspirational targets?

4. Controls over data preparation – are there controls ensuring completeness, accuracy, and validity of the information?

Worked example

### Example 1

Planning stage AP: An auditor expects revenue to be ≈ ₹50 crore based on prior year (₹45 crore) and industry growth of 10%. Actual reported revenue is ₹30 crore. This ₹20 crore adverse variance (40% below expectation) is a significant fluctuation requiring investigation – possible causes include lost major contracts, early cut-off errors, or fraud.

### Example 2

Substantive AP for payroll: The auditor expects salaries expense = average headcount × average salary × 12 months. Using HR records (non-financial data) and last year's average salary, the auditor calculates expected payroll of ₹3.6 crore. Actual ₹3.62 crore is within acceptable range → less need for detailed testing of individual payroll records.

### Example 3

Disaggregation improving precision: Comparing total annual revenue is less precise than comparing quarter-by-quarter revenue. A seasonal business with ₹80% revenue in Q4 would appear normal in annual AP but Q1–Q3 AP would immediately flag an anomaly if Q4 revenues are shifted.

⚠️ Common exam mistakes

Treating AP as only a planning tool – SA 520 explicitly allows AP as substantive procedures and mandates their use in the final review stage
Ignoring non-financial data (units produced, number of employees) – these are explicitly mentioned as inputs to AP and can powerfully corroborate or contradict financial figures
Stopping after computing the ratio/variance without investigating – the definition of AP requires investigation of significant fluctuations; computing without investigating is incomplete
Confusing precision factors (accuracy, disaggregation, availability) with reliability factors (source, comparability, nature, controls) – precision relates to the expectation you build; reliability relates to the data you use

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

The term 'analytical procedures' means evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. Analytical procedures also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.

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Purpose, Precision Factors, and Reliability of Data Used in Analytical Procedures

Worked example

⚠️ Common exam mistakes