Skip to content

ACCA Strategic Professional · Advanced Audit and Assurance (International) · Audit procedures and obtaining evidence

Delta Foods Co reports revenue of $50m and a gross profit margin of 30% this year. Last year's margin was 40%, and the auditor had expected a similar margin because there were no changes in pricing or product mix. Management explains the fall verbally as 'general market pressure'. What should the auditor do under ISA 520?

The auditor should investigate the unexpected fall in gross margin by asking management and then obtaining appropriate corroborating evidence for the explanations, performing further procedures if needed. A verbal explanation alone is not sufficient audit evidence under ISA 520.

  1. AAccept the explanation as it is consistent with the economic environment and record it as audit evidence
  2. BInvestigate the difference by inquiring of management and obtaining appropriate audit evidence relevant to management's responses, and perform other audit procedures as necessaryCorrect
  3. CIgnore the difference because gross margin is a ratio and not a substantive test
  4. DReport the difference directly to shareholders in the auditor's report as a key audit matter

Explanation

Where analytical procedures identify fluctuations inconsistent with expectations, ISA 520 requires the auditor to investigate by inquiring of management and obtaining appropriate evidence relevant to responses, plus other procedures where necessary. A verbal explanation alone is insufficient, and reporting as a KAM is not the first response.

Did you get it right without looking?

One question tells you little. A timed set on Audit procedures and obtaining evidence shows your real accuracy, how long you take and where you lose marks.

Practise Audit procedures and obtaining evidenceFree diagnostic mock

More Audit procedures and obtaining evidence questions