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CA Intermediate · Auditing and Ethics · Completion and Review

While performing final analytical procedures on Orion Auto Components Ltd, the auditor notes that the gross margin has risen from 18% to 27% without any change in product mix or pricing, which contradicts the earlier understanding of the business. Under SA 520, what should the auditor do?

The auditor should investigate the unexpected margin increase, corroborate management's explanation with sufficient appropriate evidence, and reconsider the risk of material misstatement. Final analytical procedures under SA 520 test whether the statements fit the auditor's understanding of the entity, so inconsistent results cannot be accepted on oral explanation alone.

  1. AAccept management's oral explanation, as final analytical procedures are only a formality
  2. BReduce the sample size of detailed tests since margins have improved
  3. CInvestigate the unexpected relationship, obtain sufficient appropriate audit evidence for the explanation, and consider whether it indicates a previously unrecognised risk of material misstatementCorrect
  4. DReport the variance directly to the Registrar of Companies

Explanation

SA 520 requires final analytical procedures, near the end of the audit, to help form an overall conclusion that the statements agree with the auditor's understanding of the entity. Where fluctuations are inconsistent with other information, the auditor must investigate them by inquiring of management, corroborating the responses, and performing other procedures. The auditor must also reconsider the risk assessment.

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