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CA Intermediate · Auditing and Ethics · Audit Evidence

While performing analytical procedures near the end of the audit of Vishwa Cements Ltd, the auditor notes that the gross margin has risen sharply compared with the prior year, which cannot be explained by price or cost data. What is the auditor's correct response under SA 520?

The auditor should investigate the unexplained fluctuation by asking management, obtaining corroborating evidence for the explanations, and performing further procedures if needed. Under SA 520, analytical procedures are used at the overall review stage too, and uncorroborated oral explanations or ignoring the variance are not acceptable responses.

  1. AIgnore it, as analytical procedures are only used at the planning stage
  2. BAccept management's oral explanation without corroboration
  3. CInvestigate the fluctuation by enquiring of management, obtaining appropriate audit evidence for the responses, and performing other audit procedures as necessaryCorrect
  4. DWithdraw from the engagement immediately

Explanation

When analytical procedures identify fluctuations or relationships inconsistent with other information, SA 520 requires the auditor to investigate by enquiring of management and obtaining appropriate evidence relevant to the responses, and to perform other procedures as necessary. Oral explanations alone are insufficient, and such procedures are also required near the end of the audit as an overall review.

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