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CA Intermediate · Auditing and Ethics · Completion and Review

In the audit of Western Alloys Ltd, CA Tanvi has drafted her report with an unmodified opinion. At the final analytical review stage, she notes that the gross profit ratio has risen from 18% to 27% with no explanation from management, though earlier analytical procedures in risk assessment showed stable margins and no change in business. Which response best conforms to SA 520 (Analytical Procedures)?

The auditor should investigate the unexplained rise in gross profit ratio, corroborate management's explanation with sufficient appropriate audit evidence, perform further procedures as needed, and reconsider the assessed risks of material misstatement. Relying on mere oral assurance, removing the analysis, or issuing a premature disclaimer would not conform to SA 520.

  1. AAccept management's oral assurance, since analytical procedures at the overall review stage are only indicative
  2. BInvestigate the fluctuation, obtain sufficient appropriate audit evidence for the explanation, and perform further procedures if needed before concluding, reconsidering risks of material misstatementCorrect
  3. CDelete the analytical review from the working papers because it conflicts with the earlier results
  4. DIssue a disclaimer of opinion immediately

Explanation

SA 520 requires analytical procedures near the end of the audit to help form an overall conclusion. Where they reveal unexpected fluctuations, the auditor must investigate by inquiring of management and obtaining appropriate audit evidence for the responses, and perform other procedures if necessary. Oral assurance alone is insufficient. Removing the analysis is improper and a disclaimer is premature.

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