Analytical procedures (ISA 520): how does the auditor calculate a figure in advance, compare it with the books and what does it do if there is a difference?

In Uzbekistan the international standards on auditing are applied as the standards of auditing activity (Law "On Auditing Activity", ZRU-677, Article 9). One of them, ISA 520 "Analytical Procedures", deals with the auditor testing a figure by using the relationships between financial and non-financial data.

1. What is an analytical procedure? Instead of opening documents one by one to test an amount in the financial statements, the auditor independently calculates an expected value and compares it with the amount in the books. Two simple formulas: rental income = area × price × months; interest expense = average loan balance × rate.

1. Which stages does the standard cover? ISA 520 governs the use of analytical procedures as substantive procedures (that is, evidence that a figure is correct) and, at the end of the audit, for an overall conclusion on whether the financial statements are consistent with the auditor's understanding. Analytical procedures at the risk assessment stage are dealt with in ISA 315.

1. First question: is the procedure suitable? The method works well where the relationship is stable and predictable (headcount and wages, area and rent). One large transaction or irregular transactions cannot be tested this way.

1. Second question: is the data reliable? Whatever data the expectation is built from, the source of that data and the controls over it are assessed. It is more reliable to take the leased area not from the accounting records but from signed lease agreements and building documents: two independent sources check each other.

1. Third step: the expectation and the acceptable difference. The expectation must be precise enough to detect a material misstatement. The acceptable difference (threshold) is set before the comparison: looking at the result and then "adjusting" the threshold makes the procedure worthless. The auditor chooses the threshold using professional judgement and taking materiality into account.

1. Fourth step: if the difference is above the threshold. The auditor inquires of management, obtains appropriate evidence for the response and, if necessary, performs other procedures too. The response itself is not evidence. A difference below the threshold that looks unusual is not ignored either.

1. Everything in the working papers. A practical tip: record how the expectation was built, the data source, the threshold, the difference, management's explanation and the documents that corroborated it. A reviewing auditor can then retrace what the conclusion was based on.

Example (hypothetical). "Mezon Audit" LLC is auditing the annual rental income of "Nurzamin Savdo Markazi" LLC. According to the register of lease agreements, 4 200 square metres were leased throughout the year, at a monthly price of 60 000 soum per square metre in January–June and 66 000 soum from July. The acceptable difference was set in advance in the work plan at 25 000 000 soum.

The difference is above the threshold. The chief accountant explained: a 200-square-metre shop stood empty in September–December. The auditor does not simply take this on trust: it examines the agreement with the tenant terminating the lease and the certificate of return of the premises. The corroborated part is 200 × 66 000 × 4 = 52 800 000 soum. Even after the explanation, an unexplained difference of 32 400 000 soum remains, and it is above the threshold. So the analytical procedure did not provide sufficient evidence: the auditor moves on to detailed testing of rental income, comparing invoices for each tenant with the agreements and recording the findings in the working papers.