Auditing and Ethics · Audit Evidence

Analytical Procedures (SA 520) for CA Intermediate Auditing

Updated 4 October 2026 · Fact-checked

Analytical procedures are evaluations of financial information by studying plausible relationships among financial and non-financial data. Under SA 520 you use them for risk assessment, as substantive tests, and at the overall review stage. To solve a question, set an expectation, compare it with the recorded amount, and investigate any significant difference.

Understand Analytical Procedures (SA 520)

Analytical procedures mean evaluating financial information through analysis of plausible relationships between financial and non-financial data. They also include investigating identified fluctuations or relationships that are inconsistent with other relevant information or differ from expected values by a significant amount. Examples: comparing gross profit ratio with last year, or comparing payroll cost with headcount.

The idea is simple. In a stable business, numbers move in predictable ways. If sales rise 20% but freight cost falls, something does not fit. That gap points you to where misstatement may exist.

You use analytical procedures at three stages. First, as risk assessment procedures at planning, to understand the entity and spot areas of higher risk (SA 315 requires this). Second, as substantive analytical procedures during fieldwork, to gather evidence on assertions, either alone or along with tests of details. Third, at the overall review near the end of the audit, to check that the financial statements are consistent with your understanding of the entity. The overall review is mandatory. The substantive use is optional, and you choose it when it is more effective or efficient than tests of details.

For substantive use, the auditor must consider how suitable the procedure is for the assertion, the reliability of the data, whether the expectation is precise enough to identify a material misstatement, and the amount of difference from expectation that is acceptable. Analytical procedures work best with large volumes of predictable transactions, such as payroll, interest on fixed-rate loans or rent on fixed leases. They work poorly where data is unreliable or relationships are unstable.

If analysis shows fluctuations that are inconsistent with other information or differ greatly from expected values, you must investigate. You ask management, obtain appropriate audit evidence for the answers, and perform other audit procedures where needed. Management's explanation alone is not enough. Also note that analytical procedures are not a substitute for tests of details where the risk is high, and they give weaker evidence on their own.

Key rules to remember

Definition (SA 520): Analytical procedures = evaluation of financial information through plausible relationships among financial and non-financial data; Includes investigating fluctuations or relationships that are inconsistent with other information or differ significantly from expected values.
Three uses: Risk assessment (planning) + Substantive (fieldwork) + Overall review (end); Overall review is required; substantive use is a choice.
Fluctuation in amount: Change % = (Current year − Previous year) ÷ Previous year × 100; Use it to spot items needing investigation.
Gross profit ratio: Gross profit ratio = Gross profit ÷ Net sales × 100; A common ratio for checking sales, purchases and inventory.
Difference from expectation: Difference = Recorded amount − Auditor's expectation; Compare it with the acceptable difference you set; investigate anything beyond it.
Investigation rule: Unusual difference → inquire of management + corroborate with evidence + do other procedures; Management's reply alone is not audit evidence.

How to solve Analytical Procedures (SA 520) questions

Use this method for any SA 520 question, whether it asks about stages, a ratio case or an unusual fluctuation.

1Identify the stage: risk assessment, substantive, or overall review. This sets the purpose of the answer.
2State the relationship you will test, such as gross profit ratio, or sales against units sold.
3Form an expectation using prior data, budgets, industry data or non-financial data like headcount.
4Check that the data is reliable: its source, whether it was independently produced, and whether controls over it work.
5Compare the recorded amount with the expectation and compute the difference or ratio.
6Decide whether the difference is significant against the acceptable difference, linked to materiality.
7Investigate: ask management, corroborate the answer with evidence, and perform further procedures.
8Conclude on the effect on risk assessment, further procedures, or the opinion, and document it.

Quickest way: Expect, compare, investigate, conclude

When to use it: Use it in both MCQs and written answers when time is short.

MCQs: remember that overall review is mandatory and substantive use is optional. Options saying analytical procedures are always required as substantive tests are wrong.
MCQs: eliminate options saying management's explanation alone is sufficient. SA 520 needs corroborating evidence.
Numerical MCQs: compute the ratio or percentage change first, then match the option. Check the arithmetic once.
Written answers: use four headings, namely Purpose, Expectation and comparison, Investigation, and Conclusion. Each earns step marks.
Name the SA in your first line, for example SA 520, and SA 315 for the risk assessment stage.
Keep each point to one sentence and link the fluctuation to a possible cause and an assertion.

Common mistakes in Analytical Procedures (SA 520)

Saying analytical procedures are optional at every stage.
Students remember that substantive use is a choice and apply it to all stages.
Fix: Remember the overall review near the end is required. Risk assessment use is also required under SA 315. Only the substantive use is optional.
Accepting management's explanation for a fluctuation without further checks.
It feels practical to rely on the person who knows the business.
Fix: Write that you inquire of management and then obtain appropriate audit evidence to corroborate the answer, plus other procedures as needed.
Using analytical procedures on unreliable data or unstable relationships.
Students focus on the calculation and skip the quality of the inputs.
Fix: State that you assess the source and reliability of data and whether the expectation is precise enough before relying on the result.
Treating analytical procedures as a full replacement for tests of details in high-risk areas.
They are quick and cheap, so students over-rely on them.
Fix: Say that at higher risk of material misstatement the evidence from analytical procedures alone is usually not enough and tests of details are needed.
Computing a ratio but giving no conclusion.
Students stop after the arithmetic.
Fix: Always add what the change suggests, such as possible cut-off error or inventory misstatement, and what you would do next.

Worked examples

Example 1

For the year ended 31 March 2027, a trader's sales were ₹80,00,000 and gross profit was ₹16,00,000. The previous year's sales were ₹60,00,000 and gross profit was ₹15,00,000. The business and pricing have not changed. How would the auditor use analytical procedures here?

Show the solution

Current gross profit ratio = 16,00,000 ÷ 80,00,000 × 100 = 20%.
Previous year ratio = 15,00,000 ÷ 60,00,000 × 100 = 25%.
Expectation: since the business and pricing are unchanged, the ratio should be near 25%. At 25% on ₹80,00,000, gross profit would be ₹20,00,000.
Difference = ₹20,00,000 − ₹16,00,000 = ₹4,00,000 lower than expected. This is a 5 percentage point fall, which is significant.
Possible causes: sales recorded but cost of goods sold overstated, closing inventory understated, purchases cut-off errors, or unrecorded discounts.
Investigate: inquire of management, then corroborate with purchase and sales records, stock count results, and cut-off testing.
Conclude: if the explanation is not supported by evidence, treat it as a risk of misstatement and extend tests of details on inventory and purchases.

Answer: The gross profit ratio fell from 25% to 20%. At the expected 25%, gross profit would be ₹20,00,000, so the shortfall is ₹4,00,000. The auditor must investigate, corroborate management's answers with evidence, and extend tests if the cause is not supported.

Example 2

Explain the stages at which an auditor uses analytical procedures under SA 520 and what the auditor does when analysis shows an unexpected fluctuation.

Show the solution

Risk assessment stage: the auditor uses analytical procedures at planning to understand the entity and identify areas of higher risk, such as unusual transactions or trends.
Substantive stage: the auditor may use them as substantive procedures, alone or with tests of details, for assertions where they are suitable. The auditor considers suitability, data reliability, precision of the expectation and the acceptable difference.
Overall review stage: near the end, the auditor uses them to form a conclusion on whether the financial statements are consistent with the auditor's understanding of the entity. This is required.
On an unexpected fluctuation: the auditor inquires of management and obtains appropriate audit evidence relevant to the replies.
The auditor also performs other audit procedures as necessary, and considers the effect on the risk assessment and the opinion.

Answer: Analytical procedures are used at risk assessment, as optional substantive procedures, and at the required overall review. For a significant unexpected fluctuation, the auditor inquires of management, corroborates the replies with evidence, and performs further procedures as necessary.

Exam tips

Learn the three stages with one line each. Questions often ask 'when are analytical procedures used' and expect all three.
In MCQs, watch for the words 'mandatory' and 'optional'. Overall review is mandatory; substantive use is a choice.
In a ratio case, show the computation, the expected figure, the gap and a next step. Even if your final number slips, the steps earn marks.
Write that management's explanation must be corroborated. This single point is tested often.
Link a fluctuation to a specific assertion, such as completeness of purchases or cut-off of sales, to make your answer sharper.

Practice questions from Audit Evidence

Analytical Procedures (SA 520) in other exams

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

CMA IntermediateAnalytical Procedures

Analytical Procedures (SA 520): frequently asked questions

What are analytical procedures under SA 520?

They are evaluations of financial information through plausible relationships among financial and non-financial data. They also include investigating fluctuations that are inconsistent with other information or differ significantly from expected values.

When are analytical procedures used in an audit?

They are used at the risk assessment stage, as substantive procedures during fieldwork, and at the overall review stage near the end. The overall review use is required, while the substantive use depends on the auditor's judgment.

Can analytical procedures replace tests of details?

Sometimes they can for low-risk areas with predictable, reliable data, but not always. Where the risk of material misstatement is higher, the auditor usually needs tests of details too.

What should an auditor do if there is an unusual fluctuation?

The auditor inquires of management and obtains audit evidence relevant to the replies. If needed, the auditor performs other procedures and considers the effect on the risk assessment and the audit opinion.