SA 520 governs the use of analytical procedures — evaluating financial information through plausible relationships among both financial and non-financial data — as a source of substantive audit evidence, not just a risk-assessment tool used at planning. For an analytical procedure to actually provide evidence, the auditor has to develop an independent expectation of what the figure should be, set a threshold for what difference from that expectation would require investigation, and then genuinely investigate any difference that exceeds it — in that order. Reviewing the actual result first and then deciding what counted as an acceptable variance defeats the purpose of the procedure entirely.
What makes an expectation defensible
- 01Base it on a plausible, predictable relationshipRevenue expected to move with units sold and average price; payroll expected to move with headcount and the known rate changes — a relationship with a real business logic behind it, not an arbitrary year-over-year comparison.
- 02Set it before looking at the actual recorded figureThe expectation has to be built independently, from its own inputs, not reverse-engineered to match what the ledger already shows.
- 03Consider the reliability of the data the expectation is built onAn expectation built on unaudited internal data is weaker evidence than one built on externally sourced or already-tested data.
- 04Set a threshold for investigation in advanceTied to performance materiality, not picked after seeing how close the actual figure happens to land.
A sophisticated-looking analytical model loses its evidential value entirely if the threshold for "acceptable" was set, even informally, after the preparer already knew the actual recorded figure — the independence of the expectation is what the whole procedure rests on.
When a fluctuation exceeds the threshold
| Does satisfy SA 520 | Doesn't satisfy it |
|---|---|
| Corroborating the explanation with evidence independent of the person who gave it | Accepting a verbal explanation from the department involved with no corroboration |
| Considering whether the explanation is consistent with other evidence obtained elsewhere in the audit | Treating each fluctuation as an isolated question, unconnected to findings elsewhere in the engagement |
| Re-performing or extending procedures if the explanation doesn't hold up | Documenting the explanation and moving on even though it doesn't fully account for the size of the variance |
How we think about this
Analytical procedures are attractive because they're efficient — a single calculation can stand in for testing many individual transactions. That efficiency only holds if the expectation, threshold and investigation are each done with real rigor; a loosely built expectation and a rubber-stamped explanation turn an efficient procedure into an undocumented assumption dressed up as evidence.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
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