Analytical procedures under AU-C 520
When analytical procedures are used as substantive procedures, AU-C 520 asks the auditor to determine that they suit the assertion, evaluate the reliability of the data used, develop an expectation precise enough to identify a misstatement, and determine the amount of difference from the expectation that is acceptable without further investigation (AU-C 520.05). When a difference exceeds that amount, or fluctuations are inconsistent with other information, the auditor investigates by inquiring of management, corroborating the answers, and performing other procedures (AU-C 520.07).
This tool does the arithmetic and the flagging: expectation = prior year × (1 + expected change), difference = actual − expectation, and the line is flagged when the difference is over the dollar threshold or the percent threshold. The judgment sits in the two columns you fill: the driver behind the expected change, and the source that supports it. A bare prior-year number with no driver is a weak expectation. A common way to set the dollar threshold is a fraction of performance materiality; the standard leaves the amount to the auditor.
Common questions
What is an analytical procedure?
An evaluation of financial information through analysis of plausible relationships among financial and nonfinancial data, including investigating fluctuations that are inconsistent with other information or differ from expected values (AU-C 520).
How precise does an expectation need to be?
Precise enough to identify a misstatement that, individually or with others, could cause the financial statements to be materially misstated. A relationship that is stable and predictable, such as payroll against headcount and pay rates, supports a tighter expectation than one that moves with many factors.
How do I set the acceptable difference?
AU-C 520 leaves the amount to the auditor. In practice it is set at or below performance materiality, and lower when the assessed risk is higher or the expectation is less precise. Write down how you set it before comparing to actuals.
Is last year's balance a good expectation by itself?
Rarely. Adjust it for known changes such as price, volume, headcount, rates and one-off items, and say where each driver came from. An unadjusted prior-year figure only tests whether the account moved.
What if a line is within the threshold?
No investigation is required for that difference, but the file should still hold the expectation, its basis, the data reliability work and the result.
Runs in your browser. The figures you type are not sent to CORAA or stored. Check the result against your firm's methodology before relying on it.