Advanced Audit and Assurance (International) · Audit procedures and obtaining evidence

Analytical Procedures under ISA 520 for ACCA AAA

Updated 11 October 2026 · Fact-checked

Analytical procedures evaluate financial information by studying plausible relationships between financial and non-financial data. Under ISA 520 you use them at planning (required, risk assessment), as substantive tests (optional), and in the overall review (required). To answer, compare, spot unusual movements, investigate causes and corroborate explanations.

Understand Analytical Procedures (ISA 520)

Analytical procedures are evaluations of financial information through analysis of plausible relationships among financial and non-financial data. They include comparisons with prior periods, budgets, industry data, and expected figures the auditor builds. They also include investigating fluctuations or relationships that are inconsistent with other information or differ from expected values by a significant amount.

The idea is simple. Numbers in a set of financial statements should move in predictable ways. If revenue rises 10% and costs of materials rise 10%, gross margin should stay stable. If it does not, something has changed. That may be a real business event, or it may be a misstatement or fraud.

You use them at three points. At planning, they help you understand the entity and identify risks of material misstatement. ISA 315 (Revised 2019) requires them as a risk assessment procedure. During the audit, they can be substantive procedures to respond to assessed risks. ISA 520 does not make them mandatory here. Near the end, ISA 520 requires them in forming an overall conclusion on whether the financial statements are consistent with your understanding of the entity.

The strength of the evidence depends on how precise your expectation is. A rough comparison with last year gives weak evidence. A detailed expectation built from reliable data, such as rooms available × occupancy × average rate for a hotel, gives much stronger evidence. The more risky the area, the more precise you need to be.

Analytical procedures are not a replacement for judgement. The key step is the follow-up. An unexplained fluctuation is not evidence. An explanation from management is not enough on its own. You must corroborate it with other audit evidence.

Key rules to remember

Gross profit margin: Gross profit ÷ Revenue × 100; Unexpected change suggests pricing, cost, cut-off or inventory problems.
Operating profit margin: Operating profit ÷ Revenue × 100; Use to spot unusual expense movements.
Receivables days: Trade receivables ÷ Credit revenue × 365; Longer days may indicate irrecoverable debts, or revenue cut-off or fictitious sales.
Payables days: Trade payables ÷ Cost of sales (or credit purchases) × 365; Longer days may suggest cash flow problems or unrecorded liabilities; shorter days may suggest early settlement or purchases cut-off errors.
Inventory days: Inventory ÷ Cost of sales × 365; Longer days may indicate obsolete inventory needing write-down.
Current ratio: Current assets ÷ Current liabilities; Relevant to going concern and classification.
Gearing: Debt ÷ Equity (or Debt ÷ (Debt + Equity)); State which version you use. Link to covenants and going concern.
Interest cover: Profit before interest and tax ÷ Finance costs; Low cover signals going concern risk.
Expectation test (ISA 520): Expected value vs recorded value; investigate if difference > threshold; Before you start, set the acceptable difference having regard to materiality and tolerable misstatement, and the level of assurance you need. The threshold should be below tolerable misstatement. Investigate anything above it.

How to solve Analytical Procedures (ISA 520) questions

Use this method for any question on analytical procedures, whether the data is given as ratios, trends or a narrative.

1Identify the stage asked: planning, substantive or final review. The purpose differs, so the answer differs.
2Calculate the key ratios and trends from the data given. Show brief workings and use the same basis for both years.
3Identify unusual movements or relationships. Say what you expected and why, using the scenario facts.
4Give possible causes for each movement. Include genuine business reasons and error or fraud explanations.
5Link each cause to a risk of material misstatement and the relevant assertion, such as occurrence, valuation or completeness.
6Recommend specific follow-up procedures that corroborate explanations with other evidence, for example inspecting post year-end receipts or invoices.
7Conclude briefly on the impact: the area's risk level, effect on audit approach, or whether the financial statements are consistent with your understanding.

Quickest way: Ratio, reason, risk, response

When to use it: Use this when the question gives data and limited time, such as a 10 to 15 mark requirement.

Spot the three or four biggest movements first. Ignore minor ones.
For each, write one line: the movement, a likely reason from the scenario, and a possible misstatement.
Name the assertion at risk.
Add one specific audit response per point.
Finish with a one-line overall conclusion for professional skills marks.

Common mistakes in Analytical Procedures (ISA 520)

Only calculating ratios and not interpreting them.
Calculation feels safe and earns quick marks in practice questions.
Fix: For each ratio, state the change, the possible cause, the risk and the response. Interpretation earns the marks.
Accepting management's explanation for a fluctuation.
The explanation sounds reasonable and matches the scenario.
Fix: Treat explanations as claims. Corroborate them with independent evidence such as contracts, correspondence or post year-end events.
Saying analytical procedures are mandatory at every stage.
Students mix up the required stages with the optional one.
Fix: They are required at risk assessment and at the overall review. As substantive procedures they are a choice.
Using only prior year comparison with no expectation.
Last year's figure is the easiest benchmark.
Fix: Build an expectation using the year's known changes, such as price rises, new stores, or headcount, then compare.
Ignoring the reliability of the data used.
Students focus on the numbers rather than their source.
Fix: Comment on whether the data is independent, audited last year, or from a system with strong controls. Weak data gives weak evidence.
Giving only innocent explanations or only fraud explanations.
Students pick one story and stick to it.
Fix: Consider both business reasons and error or manipulation, then say how you would tell them apart.

Worked examples

Example 1

Planning stage. A retailer's figures are: revenue $50m (prior year $40m), cost of sales $35m (prior year $26m), trade receivables $0.5m (prior year $0.4m), inventory $9m (prior year $5m). Identify the key analytical findings and the audit risks.

Show the solution

Gross margin this year: (50 − 35) ÷ 50 = 30%. Prior year: (40 − 26) ÷ 40 = 35%. Margin fell by 5 percentage points.
Revenue growth: (50 − 40) ÷ 40 = 25%. Cost of sales growth: (35 − 26) ÷ 26 = 34.6%, so costs grew faster than sales.
Inventory days this year: 9 ÷ 35 × 365 = 93.9 days. Prior year: 5 ÷ 26 × 365 = 70.2 days. Inventory days rose by about 24 days.
Interpretation of margin: the lower margin could result from discounting, higher purchase costs, or cost of sales being overstated. Cost of sales could be overstated through purchases cut-off errors or closing inventory being understated. Inventory rose sharply, so understatement of closing inventory is less likely. Purchases cut-off errors remain possible.
Interpretation of inventory: it grew 80% (9 ÷ 5 − 1), against cost of sales growth of 34.6% and sales growth of 25%. Inventory is growing much faster than both, which points to possible slow-moving or obsolete stock, or overstated counts or costing. The risk is valuation and existence.
Revenue growth of 25% with receivables up 25% (0.5 ÷ 0.4) is consistent. Retail sales are mostly cash, so the receivables ratio is of limited use here.
Responses: attend the inventory count, test net realisable value on slow lines, review post year-end sales prices and discounts, and test cost of sales cut-off.

Answer: Gross margin fell from 35% to 30% and inventory days rose from about 70 to 94. The main risks are inventory valuation and existence, and cost of sales accuracy and cut-off. Plan extra work on inventory counting, net realisable value and margin by product line.

Example 2

Substantive stage. A hotel has 100 rooms open 365 days. It reports room revenue of $2,300,000. Average occupancy per management is 70% and the average room rate is $90. Use an analytical procedure to assess revenue. Tolerable misstatement for revenue is $150,000. Because revenue is a presumed fraud risk and you want high assurance, the auditor sets the acceptable difference at $100,000 and will investigate any difference above it.

Show the solution

Build the expectation: rooms × days × occupancy × rate = 100 × 365 × 70% × $90.
100 × 365 = 36,500 room nights available. At 70% occupancy, that is 25,550 room nights sold.
25,550 × $90 = $2,299,500 expected revenue.
Compare with recorded revenue of $2,300,000. The difference is $500, well below the $100,000 threshold.
Consider data reliability: occupancy and rate come from management, so test them. Agree occupancy to booking system reports and test a sample of rates to invoices or rate cards. Check that the system reports are complete.
Check that the threshold is appropriate. The $100,000 is below tolerable misstatement of $150,000, which leaves a margin for undetected error and reflects the high assurance needed. Because revenue is a presumed fraud risk, you may need further tests anyway.

Answer: Expected revenue is $2,299,500 against recorded $2,300,000. The $500 difference is below the $100,000 threshold, which is set below tolerable misstatement of $150,000. No further investigation of the difference is needed, provided the occupancy and rate data are shown to be reliable. Because revenue is a presumed fraud risk, you would still perform other tests, such as cut-off.

Exam tips

Always state the stage asked. A planning answer talks about risk identification. A final review answer talks about whether the statements are consistent with your understanding.
In Section A cases, compute only the ratios that the data supports, then spend most time on explanation and response.
Link every finding to an assertion and a named audit procedure. Generic phrases like 'investigate further' earn little.
Write short, professional comments on data reliability and on management's explanations. This supports scepticism and analysis marks.
At the final review, say what you do if the results contradict earlier evidence: extend procedures and reconsider the risk assessment.

Practice questions from Audit procedures and obtaining evidence

Analytical Procedures (ISA 520) 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 (ISA 520): frequently asked questions

Are analytical procedures mandatory under ISA 520?

Yes at the overall review stage near the end of the audit. They are also required as risk assessment procedures under ISA 315 (Revised 2019). As substantive procedures they are optional, and you choose them when they are an efficient way to respond to a risk.

What is the difference between analytical procedures at planning and at the final review?

At planning you look for unusual items to identify and assess risks. At the final review you check that the financial statements, as drafted, are consistent with your understanding of the entity. A final review may reveal previously unrecognised risks, which means you reassess and add procedures.

How do I perform a substantive analytical procedure?

Develop an expectation, test the reliability of the data you use, and define the acceptable difference. Compare the expectation with the recorded figure. Investigate differences above the threshold and corroborate the explanations with other evidence.

What should I do if analytical procedures show unusual results?

Ask management for explanations, then test them with other evidence. If the results suggest a possible misstatement, extend your audit procedures. If they point to fraud or non-compliance, consider the effect on your risk assessment and reporting.