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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Planning, materiality and assessing the risk of material misstatement

During planning of Norvale Retail's audit, a senior notes that revenue rose 12% while the cost of sales rose only 3%, and the gross margin moved from 30% to 36%. No change in pricing or product mix is known to management. How should the auditor use this result in the planning analytical procedures under ISA 315 (Revised 2019)?

The unexplained margin jump is an unusual relationship that may indicate a risk of material misstatement, so the auditor should factor it into the risk assessment and follow up with further inquiry and procedures. It is not a conclusion on the opinion, and it cannot simply be accepted from management.

  1. ATreat it as a potential indicator of risk of material misstatement and design further inquiries and risk assessment responsesCorrect
  2. BIgnore it because analytical procedures at planning cannot influence risk assessment
  3. CConclude that revenue is overstated and issue a modified opinion immediately
  4. DAccept management's verbal explanation as sufficient evidence without corroboration

Explanation

Analytical procedures at the risk assessment stage identify unusual or unexpected relationships that may indicate risks of material misstatement, such as revenue overstatement or cost cut-off errors. The auditor investigates further and does not conclude on the opinion at planning. Uncorroborated management explanations are insufficient.

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