ISA 520 – Objective
The objectives of the auditor are:
- To obtain relevant and reliable audit evidence when using substantive analytical procedures; and
- To design and perform analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion as to whether the financial statements (Balance Sheet, Income Statement, Cash Flows Statement) are consistent with the auditor’s understanding of the entity.
ISA 520 – Definition:
Analytical Procedures: Analytical procedures mean 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.
ISA 520 – Requirements:
Substantive Analytical Procedures
When designing and performing substantive analytical procedures, either alone or in combination with tests of details, as substantive procedures in accordance with ISA 330, the auditor shall:
- Determine the suitability of particular substantive analytical procedures for given assertions, taking account of the assessed risks of material misstatement and tests of details, if any, for these assertions;
- Evaluate the reliability of data from which the auditor’s expectation of recorded amounts or ratios is developed, taking account of source, comparability, nature and relevance of information available, and controls over preparation;
- Develop an expectation of recorded amounts or ratios and evaluate whether the expectation is sufficiently precise to identify a misstatement that, individually or when aggregated with other misstatements, may cause the financial statements to be materially misstated; and
- Determine the amount of any difference of recorded amounts from expected values that is acceptable without further investigation.
Analytical Procedures that Assist When Forming an Overall Conclusion
The auditor shall design and perform analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of the entity.
Investigating Results of Analytical Procedures
If analytical procedures performed in accordance with this ISA identify fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount, the auditor shall investigate such differences by:
- Inquiry of management and obtaining appropriate audit evidence relevant to management’s responses; and
- Performing other audit procedures as necessary in the circumstances.