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CA Intermediate · Auditing and Ethics · Completion and Review

While completing the audit of Lotus Retail Ltd, CA Prakash performs final analytical procedures and finds that the gross profit ratio has moved unexpectedly in a way not consistent with his understanding of the entity. What is the proper use of this result under SA 520?

The auditor should evaluate whether the unexpected gross profit movement signals a previously unrecognised risk of material misstatement and, if so, revise the risk assessment and planned procedures. SA 520 requires final analytical procedures to support the overall conclusion, so they cannot be disregarded.

  1. ADisregard it, as final analytical procedures are optional and cannot change the risk assessment
  2. BEvaluate whether it indicates a previously unrecognised risk of material misstatement and, if so, revise the risk assessment and the planned audit proceduresCorrect
  3. CReport the ratio change directly to the stock exchange
  4. DInclude the ratio in the report as a key audit matter automatically

Explanation

SA 520 requires analytical procedures near the end of the audit to help form an overall conclusion on whether the financial statements are consistent with the auditor's understanding. If results reveal a previously unrecognised risk, the auditor revises the risk assessment and modifies planned procedures. Reporting to the exchange or automatic key audit matter treatment is not required.

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