Revenue is up 8%. The sales force is the same size, prices are flat, and the industry shrank 3%. Every test of detail will pass. The story still does not add up, and an analytical procedure is what flags it.
HIGH-FREQUENCY: Analytical procedures appear at three points in an audit. The exam loves to swap one for another or claim only one is required.
Risk assessment (required, AU-C 315). Performed during planning. The auditor compares current-year balances to prior periods, budgets, or industry data to identify accounts with unexpected fluctuations or unexpected stability. The output is not audit evidence: it is a risk signal pointing to where misstatement is more likely. Required on every audit.
Substantive (optional, AU-C 520). Performed during fieldwork to provide audit evidence about a relevant assertion. The auditor builds an expectation, compares it to the recorded amount, and investigates significant differences. Optional in the sense that the auditor chooses SAP or tests of details. When the expectation is precise and the population predictable, SAP is often more efficient.
Common mistakes
- Treating risk-assessment analytics as audit evidence. Risk-assessment APs identify where to look; they do not constitute evidence about the assertion. The exam will offer "concluded revenue was reasonable based on the risk-assessment fluctuation analysis." That is wrong.
- Building the expectation after seeing the recorded amount. If the auditor looks at the GL number first and constructs an expectation that lands near it, the procedure tests nothing: it confirms the number. Expectations must be developed independently, before viewing the client figure.
- Accepting a management explanation without corroboration. "Per the controller, the variance is from a customer mix shift" is not an investigation. AU-C 520 requires corroborating evidence. The right answer always pairs inquiry with documentary support.
Bottom line
- AU-C 520 governs analytical procedures and names three uses: risk assessment (required, planning), substantive (optional), and final overall review (required, near end)
- A substantive analytical procedure has five steps: develop expectation, set significant difference threshold, compute and compare, investigate differences, document
- The expectation must be developed independently and before viewing the recorded amount, or the procedure merely confirms the client figure
- Expectation precision is driven by disaggregation, independence of source data, predictability of the relationship, and type of comparison
Exam shortcut
When a question describes an analytical procedure performed during planning, the answer involves risk assessment, identifying where misstatement is more likely. When it describes an analytic performed near the end of the engagement, the answer involves final overall review, checking that the financial statements as a whole are consistent with the auditor's understanding. Map the timing to the use.
The full lesson (about 4,405 words, 29 min read) adds 8 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- III.D2
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