Corporate Accounting and Auditing · Audit Sampling, Audit Techniques and Analytical Procedure

Analytical Procedures in Audit under SA 520

Updated 10 October 2026 · Fact-checked

Analytical procedures are evaluations of financial information made by studying plausible relationships among financial and non-financial data. You use them at three stages: risk assessment, substantive testing and final review. To solve a question, set an expectation, compare it with the recorded amount, investigate big differences and conclude.

Understand Analytical Procedures

An analytical procedure means you look at the numbers as a whole and ask, "Do these make sense?" You compare figures with each other, with earlier years, with budgets, with industry data, or with non-financial data such as units produced or number of employees. Ratio analysis and trend analysis are the common tools.

The idea works because relationships among data usually continue unless something has changed. SA 520 says planned analytical procedures rest on the expectation that relationships among data exist and continue in the absence of known conditions to the contrary. If the actual figure departs from what you expected, something may be wrong, or something may have changed in the business.

You use analytical procedures at three points. First, in risk assessment, to understand the entity and spot areas of higher risk. Second, as substantive analytical procedures, to gather evidence about an assertion. Third, near the end of the audit as a final review, to check that the financial statements agree with your understanding of the entity.

Substantive procedures at the assertion level may be tests of details, substantive analytical procedures, or a combination. Per SA 520, the choice rests on your judgment about the expected effectiveness and efficiency of the available procedures in reducing audit risk to an acceptably low level.

Substantive analytical procedures suit large volumes of transactions that are predictable over time. Even a simple model can work. If an entity has a known number of employees at fixed pay rates throughout the period, you can estimate total payroll with high accuracy and reduce tests of details on payroll. Widely recognised trade ratios, such as profit margins for types of retail entities, can also support the reasonableness of recorded amounts.

Key rules to remember

Difference to investigate: Difference = Recorded amount − Expected amount; Investigate if the difference is larger than the threshold you set. A small difference may still matter if the area is high risk.
Gross profit ratio: Gross profit ratio = (Gross profit ÷ Net sales) × 100; A sudden change may signal sales or closing stock errors, or a change in pricing or product mix.
Current ratio: Current ratio = Current assets ÷ Current liabilities; Useful for going concern and liquidity concerns.
Debtors turnover period: Average collection period (days) = (Trade receivables ÷ Credit sales) × 365; A rising period may point to overstated receivables or weak recoveries.
Trend (percentage change): Change % = (Current year − Previous year) ÷ Previous year × 100; Compare with the change you expect from business facts.
Choice of procedure (SA 520, A4): Tests of details, substantive analytical procedures, or both; Chosen by judgment on expected effectiveness and efficiency in reducing audit risk to an acceptably low level.
When analytical procedures are less suitable (SA 520, A9): Weak controls → rely more on tests of details; Example in SA 520: weak controls over sales order processing mean more reliance on tests of details for receivables.

How to solve Analytical Procedures questions

Use this order for any written question on analytical procedures, whether it asks for a definition, a stage-wise use or a numerical interpretation.

1State what the procedure is and name the stage asked: risk assessment, substantive or final review.
2Identify the data and relationship: ratio, trend, budget comparison or non-financial data.
3Set an expectation before looking at the recorded figure, using business facts and past data.
4Compute the figure or ratio and the difference from the expectation. Show the working.
5Decide whether the difference is acceptable against the threshold you set, linked to materiality.
6Investigate unusual differences by asking management and checking their answers with other evidence.
7If the explanation is missing or inadequate, perform further audit procedures.
8Conclude on risk assessment or on the assertion tested, and note it in the working papers.

Quickest way: Expect, compare, explain, act

When to use it: Use it when a short numerical question gives two years of figures and asks what the auditor should do.

Compute the percentage change or ratio for each year.
Say which items moved and which did not move as business facts would suggest.
Name the possible reasons: error, fraud, or a genuine business change.
Write the audit response: enquire, corroborate, extend tests of details if unexplained.
Finish with the stage and the conclusion in one line.

Common mistakes in Analytical Procedures

Treating analytical procedures as only a ratio calculation.
Students learn the ratios and stop at the numbers.
Fix: Always add the expectation, the investigation of differences and the audit conclusion.
Forgetting that analytical procedures are used at three stages.
Notes often stress the substantive use.
Fix: List risk assessment, substantive procedures and final review whenever the question asks about use.
Accepting management's explanation without corroboration.
The explanation sounds reasonable.
Fix: Obtain audit evidence relevant to the explanation. If it is inadequate, perform other audit procedures.
Relying on analytical procedures where controls are weak.
Students assume they are always cheaper.
Fix: Remember the SA 520 example: weak controls over sales order processing mean more reliance on tests of details for receivables.
Applying them to unpredictable items.
Students ignore the nature of the data.
Fix: They suit large volumes of predictable transactions. For one-off or subjective items, tests of details are usually more suitable.
Comparing the figure with last year without checking what changed.
Trend analysis looks simple.
Fix: Adjust the expectation for known changes such as new products, price changes or acquisitions.

Worked examples

Example 1

Sales of Kaveri Traders Ltd were ₹4,00,000 thousand in the previous year and ₹5,20,000 thousand this year. Gross profit was ₹1,00,000 thousand last year and ₹1,04,000 thousand this year. Selling prices and product mix did not change. Apply an analytical procedure and state the audit response.

Show the solution

Sales change = (5,20,000 − 4,00,000) ÷ 4,00,000 × 100 = 30%.
Last year gross profit ratio = 1,00,000 ÷ 4,00,000 × 100 = 25%.
This year gross profit ratio = 1,04,000 ÷ 5,20,000 × 100 = 20%.
Expectation: with no change in prices or mix, the ratio should stay near 25%. Expected gross profit = 25% × 5,20,000 = ₹1,30,000 thousand.
Difference = 1,30,000 − 1,04,000 = ₹26,000 thousand lower than expected.
This difference is large and unexplained by known facts, so investigate. Possible causes: overstated sales, understated closing stock, or unrecorded or wrongly valued purchases.
Ask management, then corroborate with evidence such as stock records, sales cut-off and purchase invoices. If unexplained, extend tests of details.

Answer: The gross profit ratio fell from 25% to 20%, ₹26,000 thousand below expectation. The auditor should investigate and perform further procedures if the explanation is inadequate.

Example 2

Explain how the auditor uses analytical procedures as substantive procedures for payroll, and when he should prefer tests of details instead.

Show the solution

Substantive analytical procedures suit large volumes of predictable transactions. Payroll is a good example.
Set an expectation. If the entity has a known number of employees at fixed pay rates throughout the period, the auditor can estimate total payroll cost with a high degree of accuracy.
Compare the estimate with recorded payroll. If the difference is within the threshold, this evidence can reduce the tests of details on payroll.
If the difference is above the threshold, investigate, corroborate explanations and perform other procedures if needed.
Prefer tests of details when the assertion is high risk, controls are weak, or data are unpredictable. SA 520 gives the example that weak controls over sales order processing lead to more reliance on tests of details for receivables.
The choice is a matter of judgment on expected effectiveness and efficiency in reducing audit risk to an acceptably low level.

Answer: Estimate payroll from headcount and pay rates, compare it with the recorded amount, and investigate differences. Use tests of details where risk is high, controls are weak or the data are not predictable.

Exam tips

Write the three stages of use whenever the question says "use of analytical procedures".
In numerical questions, show the expectation and the difference. Do not stop at ratios.
Always state the next step after an unusual result: enquire, corroborate and extend procedures if the explanation is inadequate.
For "substantive analytical procedures vs tests of details", give the choice as a judgment on effectiveness and efficiency, and add the weak-controls example.
In MCQs, watch for statements that say analytical procedures are always sufficient or never needed. Both are wrong.

Practice questions from Audit Sampling, Audit Techniques and Analytical Procedure

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.

CA IntermediateAnalytical Procedures (SA 520)

Analytical Procedures: frequently asked questions

What are analytical procedures under SA 520?

They are evaluations of financial information through analysis of plausible relationships among financial and non-financial data. They include comparisons, ratios and trends. You use them to assess risk, obtain substantive evidence and review the financial statements at the end.

What is the difference between substantive analytical procedures and tests of details?

Substantive analytical procedures test reasonableness through relationships in the data. Tests of details check individual items or balances. Either or both can be used, and the choice is based on judgment about which is more effective and efficient at reducing audit risk.

When should an auditor prefer tests of details?

Prefer them when controls are weak or the assertion is high risk, or where data are not predictable. SA 520 gives the example of weak controls over sales order processing, which calls for more reliance on tests of details for receivables.

What if management cannot explain an unusual fluctuation?

Then you need other audit procedures. This also applies if the explanation, together with the evidence you obtain on it, is not adequate. Record the work and the conclusion in the working papers.