Audit and Assurance · Audit procedures

Analytical Procedures under ISA 520 for ACCA AA

Updated 11 October 2026 · Fact-checked

Analytical procedures (ISA 520) are evaluations of financial information through analysis of plausible relationships between financial and non-financial data. You compare figures with expectations, investigate unexpected differences, and use the results at planning, as substantive evidence, and in the final review.

Understand Analytical Procedures

Analytical procedures mean studying numbers for sense. You look at ratios, trends and relationships, such as revenue against last year or gross margin against the industry. You also include investigation of any fluctuation that is inconsistent with other information or differs from expected values by a significant amount.

The idea is simple. Financial data usually moves in predictable ways. If sales rise 10% and costs of sales fall 5%, something is odd. It might be an error, fraud, a change in business, or a valid explanation. The auditor must find out which.

ISA 520 expects analytical procedures at two required stages and one optional stage. They are required as risk assessment procedures (planning) and in the overall review near the end of the audit. They are optional as substantive procedures, where they can replace or supplement tests of detail.

At planning, you use them to spot unusual items and areas of higher risk of material misstatement. The data is often high level, so the evidence is limited. As substantive procedures, you build a precise expectation, set an acceptable difference, compare, and investigate. The more reliable and disaggregated the data, the better the evidence. At the final review, you check that the financial statements agree with your understanding of the entity and that no new risks have appeared.

The key is the expectation. Without a prior expectation you are just reading numbers. Expectations come from prior periods, budgets, industry data, and non-financial data such as staff numbers, units sold or floor space.

Key rules to remember

Gross profit margin: Gross profit ÷ Revenue × 100; Compare with prior year and industry. A change suggests pricing, cost or cut-off issues, or misstatement.
Operating profit margin: Operating profit ÷ Revenue × 100; Shows whether overheads moved in line with sales.
Receivables days: Trade receivables ÷ Revenue × 365; Rising days may suggest overstated receivables, weak collection or irrecoverable debts.
Payables days: Trade payables ÷ Cost of sales × 365; Falling days may point to understated liabilities; rising days may signal cash-flow stress.
Inventory days: Inventory ÷ Cost of sales × 365; Rising days suggest obsolete or overstated inventory.
Current ratio: Current assets ÷ Current liabilities; Relevant to going concern and liquidity.
Gearing: Debt ÷ Equity (or Debt ÷ (Debt + Equity)); State which version you use. Relevant to going concern and covenants.
Percentage change: (Current year − Prior year) ÷ Prior year × 100; Used to measure trends and compare with the expected movement.
ISA 520 uses: Risk assessment (planning) + Overall review (final) = required; Substantive = optional; Know which stages are mandatory.

How to solve Analytical Procedures questions

Use this method for any question that asks you to perform or explain analytical procedures.

1Identify the stage: planning, substantive or final review. This sets the purpose of your comments.
2Calculate the key figures: percentage changes, margins and days. Show the formula and the working briefly.
3Form an expectation from related data, such as sales growth, price changes or the industry, before judging the movement.
4Compare actual to expected. Flag only differences that are significant or inconsistent with other information.
5Suggest possible causes for each difference. Include error, fraud, a business change and a valid explanation.
6Link each cause to a risk and an assertion, such as overstated revenue (occurrence) or understated payables (completeness).
7State the audit response: more work, inquiry of management, tests of detail, or corroboration of explanations with other evidence.
8Conclude on the area: higher risk, no concern, or further work needed.

Quickest way: Calculate, flag, explain, respond

When to use it: Use it in a Section C question with a table of figures and limited time.

Calculate only the 4 to 6 ratios that matter: revenue growth, gross margin, receivables days, inventory days, payables days, and one liquidity measure.
Mark each as up or down against the prior year in a short line.
For each, write one risk (what could be wrong) and one audit action.
Keep each point to a sentence or two. Put the ratio, the movement, the risk and the action in that order.
Finish with the overall conclusion on the areas of highest risk.

Common mistakes in Analytical Procedures

Calculating ratios but not interpreting them.
Students think the marks are for the arithmetic.
Fix: For every ratio, state the movement, a possible cause, the risk and the audit response.
Saying analytical procedures are only used at the planning stage.
They are strongly linked to risk assessment.
Fix: Remember the three uses: risk assessment, substantive (optional), and overall review at the end.
Accepting management's explanation without corroboration.
The explanation sounds plausible.
Fix: Say you will obtain other evidence, such as contracts, price lists or sales data, to support the explanation.
Treating every fluctuation as fraud or error.
Students look for problems only.
Fix: Also consider genuine business reasons, such as a new product, price change or acquisition, then test them.
Using the wrong denominator for days ratios.
Memorising the formulas loosely.
Fix: Receivables use revenue; inventory and payables use cost of sales. Say which figure you used.
Ignoring non-financial data and the industry.
Questions give mainly financial figures.
Fix: Mention units sold, staff numbers and industry averages as expectation sources where relevant.

Worked examples

Example 1

A client's revenue was $8,000,000 last year and $9,200,000 this year. Cost of sales was $5,200,000 last year and $6,440,000 this year. Trade receivables were $1,000,000 last year and $1,840,000 this year. Calculate the key ratios and explain the audit implications.

Show the solution

Revenue growth = (9,200,000 − 8,000,000) ÷ 8,000,000 = 15%.
Last year gross profit = 8,000,000 − 5,200,000 = 2,800,000, margin = 35%.
This year gross profit = 9,200,000 − 6,440,000 = 2,760,000, margin = 30%.
Last year receivables days = 1,000,000 ÷ 8,000,000 × 365 = 45.6 days.
This year receivables days = 1,840,000 ÷ 9,200,000 × 365 = 73 days.
Gross margin fell 5 percentage points despite growth. Possible causes: discounts, cost increases, understated revenue, or cost of sales overstated or cut-off errors. Response: test pricing and costs, and perform cut-off testing.
Receivables days rose by about 27 days. Possible causes: overstated or fictitious sales, weaker credit control, or irrecoverable debts needing an allowance. Response: receivables confirmations, after-date cash receipts and an ageing review of the allowance.

Answer: Revenue grew 15%, gross margin fell from 35% to 30%, and receivables days rose from about 46 to 73. Revenue and receivables are higher-risk areas, so extend substantive work on occurrence, valuation and cut-off.

Example 2

Explain how analytical procedures are used at the risk assessment, substantive and final review stages of an audit.

Show the solution

Risk assessment: required under ISA 315 and used with ISA 520 principles. Compare data to prior years, budgets and industry data to identify unusual relationships and areas of higher risk. Data is high level, so the evidence is limited.
Substantive: optional. Develop a precise expectation, define the acceptable difference, compare, and investigate any larger difference. Reliable, disaggregated data gives stronger evidence. Examples are payroll cost against headcount and rent against floor space.
Final review: required. Check that the financial statements are consistent with your understanding of the entity and the audit evidence. Identify previously unrecognised risks, such as going concern problems.
If new unexpected results appear, revisit the assessment and perform more procedures.

Answer: Risk assessment and the final review are required. Substantive analytical procedures are optional and need a precise expectation. Planning highlights risks; the final review confirms the overall picture.

Exam tips

Always link a ratio movement to a specific risk and assertion, then to an audit action. Calculation alone earns few marks.
In OT questions, remember that risk assessment and final review uses are required and substantive use is optional.
Show formulas with figures in Section C so marks are available even if arithmetic slips.
Look for hidden clues in the scenario, such as a new product, price change or acquisition, that explain a movement. Then say you would verify it.
Finish with a short conclusion identifying the two or three highest-risk areas.

Analytical Procedures in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Analytical Procedures: frequently asked questions

Are analytical procedures mandatory under ISA 520?

They are required as risk assessment procedures and in the overall review near the end of the audit. Using them as substantive procedures is optional. You may rely on tests of detail instead or combine both.

What is the difference between substantive and risk assessment analytical procedures?

Risk assessment procedures use high-level data to spot risks and plan work. Substantive procedures use a precise expectation and reliable data to gather evidence on an assertion. The second gives much stronger evidence.

What should I do if there is an unexpected fluctuation?

Ask management for an explanation, then corroborate it with other evidence. If it cannot be explained, perform further audit procedures. Consider whether error or fraud may be the cause.

Which ratios should I calculate in the exam?

Choose the ones relevant to the data given. Common ones are revenue growth, gross margin, operating margin, receivables, inventory and payables days, the current ratio and gearing. Always state the formula you use.