HKSA 520 - Analytical Procedures
HKSA 520 - Analytical Procedures
Introduction
Scope of this HKSA
This Hong Kong Standard on Auditing (HKSA) 520 deals with the auditor's use of analytical procedures in two specific contexts:
Important distinction: HKSA 315 (Revised 2019) deals with the use of analytical procedures as risk assessment procedures, while HKSA 330 covers the nature, timing and extent of audit procedures in response to assessed risks, which may include substantive analytical procedures.
Effective Date
This HKSA is effective for audits of financial statements for periods beginning on or after 15 December 2009.
Objectives
The auditor's objectives under HKSA 520 are:
| Objective | Description |
|---|---|
| (a) | To obtain relevant and reliable audit evidence when using substantive analytical procedures |
| (b) | To design and perform analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion as to whether the financial statements are consistent with the auditor's understanding of the entity |
Definition (Paragraph 4)
"Analytical procedures" means evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. Analytical procedures also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.
Key Components of the Definition (Ref: Para. A1-A3)
Comparisons included in analytical procedures:
Relationships considered in analytical procedures:
Methods used:
Requirements
1. Substantive Analytical Procedures (Paragraph 5)
When designing and performing substantive analytical procedures, either alone or in combination with tests of details, the auditor shall:
(a) Determine Suitability for Given Assertions (Ref: Para. A6-A11)
The auditor must consider:
Factors influencing suitability:
| Factor | Explanation |
|---|---|
| Nature of assertion | Different assertions may require different approaches |
| Risk assessment | Higher risk may require more reliance on tests of details |
| Predictability | More applicable to large volumes of transactions that tend to be predictable over time |
| Effectiveness | How effective the procedure will be in detecting material misstatements |
Examples of suitability:
Levels of assurance from different analytical procedures:
Combination with tests of details:
Public Sector Considerations (Ref: Para. A11):
(b) Evaluate Reliability of Data (Ref: Para. A12-A14)
The auditor must evaluate the reliability of data from which expectations are developed, considering:
| Factor | Description |
|---|---|
| Source of information | More reliable when from independent sources outside the entity |
| Comparability | Broad industry data may need supplementation for specialized products |
| Nature and relevance | Whether budgets are results to be expected rather than goals to be achieved |
| Controls over preparation | Controls designed to ensure completeness, accuracy and validity |
Testing controls over data preparation:
Interim date considerations:
(c) Develop Sufficiently Precise Expectations (Ref: Para. A15)
The auditor must develop an expectation of recorded amounts or ratios and evaluate whether it is sufficiently precise to identify a material misstatement.
Matters relevant to precision evaluation:
| Matter | Explanation |
|---|---|
| Accuracy of prediction | Greater consistency expected for gross profit margins vs. discretionary expenses (research, advertising) |
| Degree of disaggregation | More effective when applied to individual sections or components rather than entity as a whole |
| Availability of information | Both financial (budgets, forecasts) and non-financial (units produced or sold) |
| Reliability of information | As discussed in paragraphs A12-A13 |
(d) Determine Acceptable Difference (Ref: Para. A16)
The auditor must determine the amount of difference from expected values that is acceptable without further investigation.
Factors influencing acceptable difference:
Key principle: As the assessed risk increases, the amount of difference considered acceptable without investigation decreases in order to achieve the desired level of persuasive evidence.
2. Analytical Procedures for Overall Conclusion (Paragraph 6)
The auditor shall design and perform analytical procedures near the end of the audit that assist when forming an overall conclusion.
Purpose (Ref: Para. A17-A19):
If previously unrecognized risk is identified:
Similarity to risk assessment procedures:
3. Investigating Results of Analytical Procedures (Paragraph 7)
If analytical procedures identify fluctuations or relationships that are:
The auditor shall investigate such differences by:
| Step | Action |
|---|---|
| (a) | Inquiring of management and obtaining appropriate audit evidence relevant to management's responses |
| (b) | Performing other audit procedures as necessary in the circumstances |
Obtaining audit evidence (Ref: Para. A20-A21):
Conformity and Compliance (Paragraph 8)
As of January 2024, this HKSA conforms with International Standard on Auditing (ISA) 520, Analytical Procedures. Compliance with HKSA 520 ensures compliance with ISA 520.
Application and Other Explanatory Material - Detailed Analysis
Definition of Analytical Procedures (A1-A3)
Types of comparisons:
Types of relationships:
Methods and scope:
Substantive Analytical Procedures (A4-A16)
Decision framework (A4):
Management inquiries (A5):
Suitability factors (A6-A11):
Examples of effectiveness (A7-A8):
Risk considerations (A9):
Combination approaches (A10):
Reliability of Data (A12-A14)
Four factors:
Testing controls:
Precision of Expectations (A15)
Three key matters:
Acceptable Difference (A16)
Relationship with risk:
Overall Conclusion Procedures (A17-A19)
Purpose:
Risk revision requirements:
Investigation of Results (A20-A21)
Evaluation of management responses:
Need for other procedures:
Key Takeaways Summary Table
| Aspect | Key Requirement | Critical Points |
|---|---|---|
| Definition | Evaluation of financial information through plausible relationships | Includes both financial and non-financial data; requires investigation of inconsistencies |
| Substantive Procedures | Determine suitability, evaluate data reliability, develop precise expectations, determine acceptable difference | Higher risk = smaller acceptable difference; more persuasive evidence needed |
| Overall Conclusion | Perform near end of audit | Corroborates individual conclusions; may identify previously unrecognized risks |
| Investigation | Inquire of management and perform other procedures | Required when fluctuations are inconsistent or differ significantly from expectations |
| Data Reliability | Consider source, comparability, nature, and controls | Independent sources more reliable; effective controls increase confidence |
| Suitability | Based on assertions, risks, and other procedures | More suitable for predictable, large-volume transactions |
| Public Sector | Consider alternative relationships | Traditional business relationships may not apply |
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