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CA Intermediate · Auditing and Ethics · Completion and Review

While performing final analytical procedures on Sagar Pharma Ltd, the auditor notices that the gross profit margin has jumped from 22% to 31% although selling prices and input costs were stable and no change in product mix occurred. Management gives no convincing explanation. Under SA 520, what should the auditor do?

The auditor should investigate the unexplained jump by performing additional audit procedures to assess whether it points to a misstatement risk not previously identified. SA 520 requires inquiry and further procedures when final analytical procedures show unexpected relationships, rather than accepting vague management explanations.

  1. AAccept the result as an improvement in efficiency and conclude the audit
  2. BInvestigate the difference by performing additional audit procedures to determine whether it indicates a previously unrecognised risk of material misstatementCorrect
  3. CReport the matter to the Registrar of Companies immediately
  4. DAdjust the gross profit to the prior year margin in the audit working papers

Explanation

SA 520 requires analytical procedures near the end of the audit to help form an overall conclusion. When results reveal unexpected relationships or inconsistency with other information, the auditor investigates through additional procedures. Accepting without explanation is wrong, and the auditor does not adjust figures themselves.

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