## SA 520 – Timing, Factors & Techniques

### Timing of Analytical Procedures

AP is used across all three stages of an audit:

Stage	Purpose
Planning	Determine the nature, extent, and timing of audit procedures for specific account balances / classes of transactions
Testing (Substantive)	Substantive AP as an alternative or supplement to tests of details
Completion	Overall review — assess whether FS are consistent with auditor's understanding

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### Factors for Substantive Analytical Procedures

Factor	Key Insight
Availability of data	More reliable data → more effective AP
Disaggregation	More disaggregated data → better at detecting misstatements
Account type	P&L (accumulated transactions) is more predictable than B/S (management judgement involved)
Source	Routine/repetitive transactions (sales, purchases) are easier to predict; significant one-time items (R&D, advertising) are not
Predictability	More predictable relationships → AP is more appropriate
Nature of assertion	AP is stronger for completeness/valuation than for rights/obligations
Inherent risk / significant risk	If significant risk is identified, AP alone is NOT sufficient — need test of details too

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### 4 Techniques of Analytical Procedures

#### 1. Trend Analysis

Most commonly used technique
Compares current data with prior period data (one or more years)
Analyses account fluctuations over time
Example: Salary expense increasing steadily then spiking → possible ghost employees

#### 2. Ratio Analysis

Analyses relationships between accounts (single account is hard to predict alone)
Ratios can be compared over time or across entities in same industry
Examples: Trade receivables turnover, Freight expense as % of revenue, Gross Profit ratio

#### 3. Reasonableness Test

Does not rely on prior period events
Uses non-financial data for the current period to predict financial amounts
Examples:
Interest expense vs. interest-bearing obligations
Raw material consumption (₹) vs. production (units)
Wastage % vs. production and raw material consumption
Rental revenue vs. occupancy of premises

#### 4. Structural Modelling

Constructs a statistical model (e.g., linear regression) from historical financial/non-financial data to predict current balances
Most sophisticated technique

Worked example

### Example 1

Trend Analysis Example: Auditor reviews salary expense: FY22 ₹80L, FY23 ₹85L, FY24 ₹90L, FY25 ₹1.2 Cr. The sudden jump in FY25 despite no significant hiring is unusual. Auditor investigates and discovers payments to non-existent employees.

### Example 2

Ratio Analysis Example: The auditor calculates the GP ratio of a manufacturing company: Current year = 18%, Prior year = 32%, Industry average = 30%. The sharp fall triggers investigation. Management explains a ₹50L raw material write-off, but the auditor also discovers unrecorded sales returns inflating COGS.

### Example 3

Reasonableness Test Example: A hotel had 80% occupancy for 300 rooms at ₹5,000/night for 365 days. Expected revenue = 300 × 0.80 × 5,000 × 365 = ₹43.8 Cr. Reported revenue is ₹38 Cr — a ₹5.8 Cr gap that requires explanation.

### Example 4

Significant Risk — AP not sufficient: The auditor identifies side agreements as a revenue recognition fraud risk. An AP comparing sales to cash receipts would not be appropriate to respond to this risk — detailed testing of individual contracts is needed.

⚠️ Common exam mistakes

Using AP alone when a significant risk has been identified — SA 520 requires substantive AP to be supplemented with tests of details in such cases
Applying AP at P&L level only — disaggregated analysis (by segment, product line) is far more effective at detecting misstatements
Confusing Reasonableness Test with Trend Analysis — Reasonableness Test does NOT use prior period data; it uses non-financial data of the current period
Treating B/S accounts as equally predictable as P&L accounts — B/S involves more management judgement and estimation, making AP less reliable for those accounts
Forgetting that AP is MORE effective for completeness/valuation assertions than for rights/obligations

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

Analytical procedures performed as substantive procedures (substantive analytical procedures), and analytical procedures that assist the auditor in forming an overall conclusion as to whether the financial statements are consistent with the auditor's understanding of the entity.

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Timing, Factors for Substantive AP, and Techniques

Worked example

⚠️ Common exam mistakes