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In-Depth Study Complete
HKSA 520 - Analytical Procedures (Condensed)
๐ PDF โ HKICPA Handbook Vol III
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| Section | Key Concept | Brief Description |
|---|---|---|
| Scope & Objectives | Two contexts for analytical procedures | Substantive procedures at assertion level; near end of audit for overall conclusion |
| Definition | Plausible relationships | Evaluations of financial info through analysis of plausible relationships among financial and non-financial data |
| Substantive Analytical Procedures | Four-step requirement | Determine suitability, evaluate data reliability, develop precise expectations, determine acceptable difference |
| Overall Conclusion Procedures | Corroboration & risk identification | Perform near end of audit to corroborate conclusions and identify previously unrecognized risks |
| Investigation of Results | Inquiry & other procedures | Investigate fluctuations inconsistent with other info or differing significantly from expectations |
| Data Reliability | Four factors | Source, comparability, nature/relevance, controls over preparation |
| Public Sector Considerations | Alternative relationships | Traditional business relationships may not apply; consider alternative relationships like cost per km |
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Scope & Objectives (Para 1-3)
Scope & Objectives
Two Contexts for Analytical Procedures
HKSA 520 deals with the auditor's use of analytical procedures in two specific contexts:
- As substantive procedures ('substantive analytical procedures') โ to obtain audit evidence at the assertion level
- Near the end of the audit โ to assist when forming an overall conclusion on the financial statements
Important Distinction: HKSA 315 (Revised 2019) deals with analytical procedures as risk assessment procedures; HKSA 330 covers nature, timing, and extent of audit procedures in response to assessed risks.
Effective Date
Effective for audits of financial statements for periods beginning on or after 15 December 2009.
Objectives
| 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 when forming an overall conclusion as to whether the financial statements are consistent with the auditor's understanding of the entity |
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Definition of Analytical Procedures (Para 4, A1-A3)
Definition of Analytical Procedures
Key Definition (Para 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
| Component | Details |
|---|---|
| Comparisons included | Prior periods; anticipated results (budgets, forecasts); auditor expectations; similar industry information |
| Relationships considered | Among elements of financial info (e.g., gross margin); between financial and non-financial info (e.g., payroll costs to number of employees) |
| Methods used | From simple comparisons to complex analyses using advanced statistical techniques |
| Scope | May be applied to consolidated financial statements, components, and individual elements of information |
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Substantive Analytical Procedures โ Suitability (Para 5(a), A6-A11)
Substantive Analytical Procedures โ Suitability
Determine Suitability for Given Assertions
When designing and performing substantive analytical procedures, the auditor shall determine the suitability of particular procedures for given assertions, taking account of:
- Assessed risks of material misstatement
- Tests of details, if any, for these assertions
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
- High suitability: Estimating total payroll costs using known number of employees at fixed rates of pay
- Moderate suitability: Using widely recognized trade ratios (e.g., profit margins for retail entities)
- Lower suitability: When controls over sales order processing are deficient, more reliance on tests of details for receivables
Levels of Assurance: Predicting total rental income using rental rates, number of apartments, and vacancy rates can provide persuasive evidence. Calculation and comparison of gross margin percentages provides less persuasive but useful corroboration.
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Substantive Analytical Procedures โ Data Reliability & Expectations (Para 5(b)-(d), A12-A16)
Substantive Analytical Procedures โ Data Reliability & Expectations
Evaluate Reliability of Data (Para 5(b), 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 |
Develop Sufficiently Precise Expectations (Para 5(c), A15)
The auditor must develop an expectation of recorded amounts or ratios and evaluate whether it is sufficiently precise to identify a material misstatement.
| 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 |
Determine Acceptable Difference (Para 5(d), A16)
The auditor must determine the amount of difference from expected values that is acceptable without further investigation.
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.
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Analytical Procedures for Overall Conclusion (Para 6, A17-A19)
Analytical Procedures for Overall Conclusion
Requirement (Para 6)
The auditor shall design and perform analytical procedures near the end of the audit that assist when forming an overall conclusion.
Purpose (A17-A19)
- Corroborate conclusions formed during the audit of individual components or elements
- Assist in drawing reasonable conclusions on which to base the auditor's opinion
- May identify previously unrecognized risk of material misstatement
If Previously Unrecognized Risk is Identified
- HKSA 315 (Revised 2019) requires revision of risk assessment
- Modify further planned audit procedures accordingly
Similarity to Risk Assessment Procedures: These analytical procedures may be similar to those used as risk assessment procedures.
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Investigating Results of Analytical Procedures (Para 7, A20-A21)
Investigating Results of Analytical Procedures
Requirement (Para 7)
If analytical procedures identify fluctuations or relationships that are:
- Inconsistent with other relevant information, OR
- Differ from expected values by a significant amount
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 (A20-A21)
- Evaluate management's responses considering auditor's understanding of the entity and its environment
- Consider other audit evidence obtained during the course of the audit
- Other procedures may be needed when management cannot provide an explanation or the explanation is inadequate
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Public Sector Considerations & Conformity (Para 8, A11)
Public Sector Considerations & Conformity
Public Sector Considerations (A11)
In the audit of public sector entities, traditional relationships between financial statement items may not be relevant. Key considerations include:
- Little direct relationship between revenue and expenditure in many public sector entities
- Expenditure on asset acquisition may not be capitalized
- Industry data may not be available
- Alternative relationships may be relevant (e.g., cost per kilometer of road construction)
Conformity and Compliance (Para 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.
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