SUPPLEMENT TO EXPOSURE DRAFT, PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS This supplement to the International Auditing and

Assurance Standards Board (IAASB) Exposure Draft, proposed ISA 520 (Redrafted), Analytical Procedures has been prepared by IAASB staff to demonstrate how the material in extant ISA 520 has been reflected in proposed ISA 520 (Redrafted). Exhibit 1 identifies sentences describing auditor actions in the present tense and other relevant statements in extant ISA 520 and indicates whether they are treated as a requirement or as application and other explanatory material in proposed ISA 520 (Redrafted). Exhibit 2 maps the text of extant ISA 520 (which may have been reworded as necessary) to proposed ISA 520 (Redrafted). The highlighted text identifies material that is proposed to be deleted. An explanation of the proposed deletion and other comments are provided, where appropriate. Exhibit 3 presents proposed ISA 520 (Redrafted) and shows the source of the text from extant ISA 520 (which may have been reworded as necessary). The material included herein is provided only to assist readers of the Exposure Draft of proposed ISA 520 (Redrafted). It is for information purposes only and does not form part of the Exposure Draft. The IAASB has not approved, disapproved, or otherwise acted upon this supplement. It is neither authoritative nor an official pronouncement nor statement of the IAASB.

Exhibit 1
Proposed Disposition of the Present Tense and Other Statements in the Draft Redrafted ISA 520 I. Those That Have Been Elevated to a Requirement
New para. ref.
8

Para.

Statements in extant ISA 520

Rationale and comment (as necessary)

12

When designing and performing analytical procedures as substantive procedures, the auditor will need to consider a number of factors such as the following:

The suitability of using substantive analytical procedures given the assertions (paragraphs 12a and 12b). The reliability of the data, whether internal or external, from which the expectation of recorded amounts or ratios is developed (paragraphs 12c and 12d). Whether the expectation is sufficiently precise
1

8(a)

8(c)

Essential to the achievement of the proposed objective in paragraph 6(a) of EDISA 520 (Redrafted). Specifically, it is necessary that each of the matters identified in extant paragraph 12 be considered to achieve the rigor and consistency of performance expected when analytical procedures are

SUPPLEMENT TO PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS

Para.

Statements in extant ISA 520

New para. ref.

8(d)

Rationale and comment (as necessary)

to identify a material misstatement at the desired level of assurance (paragraph 12e).

The amount of any difference of recorded amounts from expected values that is acceptable (paragraph 12f).

8(e)

performed as substantive procedures, such as to be effective in responding to assessed risks. Applicable in virtually all cases. Each of the considerations identified are essential matters to be taken account of in order to achieve consistent application of the proposed requirement in paragraph 8(a) of EDISA 520 (Redrafted). Applicable in virtually all cases. Each of the considerations identified are essential matters to be taken account of in order to achieve consistent application of the proposed requirement in paragraph 8(c) of EDISA 520 (Redrafted). Applicable in virtually all cases.

12b

In determining the suitability of substantive analytical procedures given the assertions, the auditor considers the following: (a) The assessment of the risk of material misstatement... (b) Any tests of details directed toward the same assertion

8(a)

12c

In determining whether data is reliable for purposes of designing substantive analytical procedures, the auditor considers the following: (a) Source of the information available (b) Comparability of the information available (c) Nature and relevance of the information available (d) Controls over information the preparation of the

8(c)

18.

The investigation of unusual fluctuations and relationships ordinarily begins with inquiries of management, followed by: (a) Corroboration of managements responses (b) Consideration of the need to apply other audit procedures based on the results of such inquiries.
10(b)

While extant paragraph 18(a) explains further the extant requirement (and therefore need not be elevated to a

SUPPLEMENT TO PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS

Para.

Statements in extant ISA 520

New para. ref.

Rationale and comment (as necessary)

requirement), paragraph 18(b) is an essential consideration to ensure appropriate action (in addition to inquiry and corroboration) is taken in the circumstances where analytical procedures identify unusual relationships requiring further investigation.

II. Those That Have Been Treated as Application and Other Explanatory Material and Redrafted
New para. ref. Rationale and comment (as necessary)

Para.

Statements in extant ISA 520

11

The auditor will ordinarily inquire of management as to the availability and reliability of information needed to apply substantive analytical procedures and the results of any such procedures performed by the entity.

A2

Inquiry of management may assist the auditor in understanding the work, if any, already done, but it is not essential to the effective design and performance of analytical procedures to be performed by the auditor. Accordingly, not considered necessary to elevate as a requirement. Proposed ISA 500 (Redrafted) establishes requirements relevant to the relevance and reliability of evidence to be used for audit purposes. Accordingly, not considered necessary to elevate as a requirement.

It may be efficient to use analytical data prepared by the entity, provided the auditor is satisfied that such data is properly prepared.

SUPPLEMENT TO PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS

Para.

Statements in extant ISA 520

New para. ref.

Rationale and comment (as necessary)

12b

In determining the suitability of substantive analytical procedures given the assertions, the auditor considers the following: (a) The assessment of the risk of material misstatement. The auditor considers the understanding of the entity and its internal control, the materiality and likelihood of misstatement of the items involved, and the nature of the assertion in determining whether substantive analytical procedures are suitable

A6

Application guidance in nature, explaining the components of the auditors risk assessment. ISA 315 (Redrafted) establishes the relevant requirements in this regard and, accordingly, it is unnecessary to repeat the requirements in ED-ISA 520 (Redrafted). Matters covered by related requirements established in ISA 330 (Redrafted); unnecessary to repeat in ED-ISA 520 (Redrafted).

12d

The auditor considers testing the controls, if any, over the entitys preparation of information used by the auditor in applying substantive analytical procedures. When such controls are effective, the auditor has greater confidence in the reliability of the information and, therefore, in the results of substantive analytical procedures In determining the audit procedures to apply to the information upon which the expectation for substantive analytical procedures is based, the auditor considers the guidance in paragraph 11 of ISA 500, Audit Evidence.

A10

12d

A10

Reference guidance; unnecessary to establish as a requirement in EDISA 520 (Redrafted) as proposed ISA 200 (Revised and Redrafted) requires the auditor to comply with all ISAs relevant to the audit. The factors identified are not necessarily applicable in virtually all cases when performing analytical procedures; their relevance will vary depending on the circumstances. Accordingly, they are considered application

12e

In assessing whether the expectation can be developed sufficiently precise to identify a material misstatement at the desired level of assurance, the auditor considers factors such as the following:

A12

The accuracy with which the expected results of substantive analytical procedures can be predicted The degree to which information can be

SUPPLEMENT TO PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS

Para.

Statements in extant ISA 520

New para. ref.

Rationale and comment (as necessary)

disaggregated

The availability of the information, both financial and non-financial

material in nature, supporting the related proposed new requirement in paragraph 9(d) of EDISA 520 (Redrafted). A13 Application material in nature, supporting the related proposed new requirement in paragraph 9(e) of EDISA 520 (Redrafted). Application material in nature, supporting the related proposed new requirement in paragraph 9(e) of EDISA 520 (Redrafted). In addition, ISA 330 (Redrafted) already establishes a requirement for the auditor to obtain more persuasive evidence the higher the auditors assessment of risk. Application material in nature.

12f

In designing and performing substantive analytical procedures, the auditor considers the amount of difference from expectation that can be accepted without further investigation. This consideration is influenced primarily by materiality and the consistency with the desired level of assurance The auditor increases the desired level of assurance as the risk of material misstatement increases by reducing the amount of difference from the expectation that can be accepted without further investigation.

12f

A13

12g

When the auditor performs substantive procedures at an interim date and plans to perform substantive analytical procedures with respect to the intervening period, the auditor considers how the matters discussed in paragraphs 12a-12f affect the ability to obtain sufficient appropriate audit evidence for the remaining period. This includes considering whether the period end balances of the particular classes of transactions or account balances are reasonably predictable with respect to amount, relative significance, and composition. See ISA 330, paragraphs 56-61, for additional guidance.

A14

Requirements relevant to audit procedures performed at an interim date are established in ISA 330 (Redrafted); unnecessary to repeat in

SUPPLEMENT TO PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS

Para.

Statements in extant ISA 520

New para. ref.

Rationale and comment (as necessary)

ED-ISA 520 (Redrafted).

SUPPLEMENT TO PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS

Exhibit 2
Mapping Document This mapping document demonstrates how the material in the extant ISA 520 has been reflected in the proposed redrafted ISA. Highlight material identifies material that is proposed to be eliminated or repositioned as a result of redrafting. An explanation of the proposed deletion and other comments are provided, where appropriate. Comment on proposed deletion or repositioning of highlighted material, significant edits, and other notes

Extant ISA 520 Introduction 1. 2. The purpose of this International Standard on Auditing (ISA) is to establish standards and provide guidance on the application of analytical procedures during an audit. The auditor should apply analytical procedures as risk assessment procedures to obtain an understanding of the entity and its environment and in the overall review at the end of the audit. Analytical procedures may also be applied as substantive procedures.

New para. ref.

1 6 See Explanatory Memorandum accompanying ED-ISA 520 (Redrafted) with respect to the deletion of reference to analytical procedures as risk assessment procedures.

3.

Analytical procedures means evaluations of financial information made by a study of plausible relationships among both financial and non-financial data. Analytical procedures also encompass the investigation of identified fluctuations and relationships that are inconsistent with other relevant information or deviate significantly from predicted amounts.

SUPPLEMENT TO PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS

Extant ISA 520 Nature and Purpose of Analytical Procedures 4. Analytical procedures include the consideration of comparisons of the entitys financial information with, for example: Comparable information for prior periods. Anticipated results of the entity, such as budgets or forecasts, or expectations of the auditor, such as an estimation of depreciation. Similar industry information, such as a comparison of the entitys ratio of sales to accounts receivable with industry averages or with other entities of comparable size in the same industry.

New para. ref.

Comment on proposed deletion or repositioning of highlighted material, significant edits, and other notes

5.

Analytical procedures also include consideration of relationships: Among elements of financial information that would be expected to conform to a predictable pattern based on the entitys experience, such as gross margin percentages. Between financial information and relevant non-financial information, such as payroll costs to number of employees.

6.

Various methods may be used in performing the above audit procedures. These range from simple comparisons to complex analyses using advanced statistical techniques. Analytical procedures may be applied to consolidated financial statements, financial statements of components (such as subsidiaries, divisions or segments) and individual elements of financial information. The auditors choice of audit procedures, methods and level of
8

SUPPLEMENT TO PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS

Extant ISA 520 application is a matter of professional judgment. 7. Analytical procedures are used for the following purposes: (a) (b) As risk assessment procedures to obtain an understanding of the entity and its environment (paragraphs 8-9). As substantive procedures when their use can be more effective or efficient than tests of details in reducing the risk of material misstatement at the assertion level to an acceptably low level (paragraphs 10-19). As an overall review of the financial statements at the end of the audit (paragraph 13).

New para. ref.

Comment on proposed deletion or repositioning of highlighted material, significant edits, and other notes

Deleted; no longer necessary as a result of restructuring the ISA in accordance with the Clarity conventions.

(c)

Analytical Procedures as Risk Assessment Procedures 8.1 The auditor should apply analytical procedures as risk assessment procedures to obtain an understanding of the entity and its environment. Deleted; see Explanatory Memorandum accompanying ED-ISA 520 (Redrafted). Repositioned to ISA 315 (Redrafted); see proposed conforming amendments indicated in ED-ISA 520 (Redrafted).

8.2

Application of analytical procedures may indicate aspects of the entity of which the auditor was unaware and will assist in assessing the risks of material misstatement in order to determine the nature, timing and extent of further audit procedures.

SUPPLEMENT TO PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS

Extant ISA 520 9. Analytical procedures applied as risk assessment procedures use both financial and nonfinancial information, for example, the relationship between sales and square footage of selling space or volume of goods sold. Paragraph 10 of ISA 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement contains additional guidance on applying analytical procedures as risk assessment procedures.

New para. ref. -

Comment on proposed deletion or repositioning of highlighted material, significant edits, and other notes First sentence repositioned to ISA 315 (Redrafted); see proposed conforming amendments indicated in ED-ISA 520 (Redrafted). Second sentence deleted accordingly.

Analytical Procedures as Substantive Procedures 10. The auditor designs and performs substantive procedures to be responsive to the related assessment of the risk of material misstatement at the assertion level. The auditors substantive procedures at the assertion level may be derived from tests of details, from substantive analytical procedures, or from a combination of both. The decision about which audit procedures to use to achieve a particular audit objective is based on the auditors judgment about the expected effectiveness and efficiency of the available audit procedures in reducing the assessed risk of material misstatement at the assertion level to an acceptably low level. 10. The auditor will ordinarily inquire of management as to the availability and reliability of information needed to apply substantive analytical procedures and the results of any such procedures performed by the entity. It may be efficient to use analytical data prepared by the entity, provided the auditor is satisfied that such data is properly prepared. When designing and performing analytical procedures as substantive procedures, the auditor will need to consider a number of factors such as the following:
10

Deleted; duplicative of guidance in ISA 330 (Redrafted).

A1

A2

11.

SUPPLEMENT TO PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS

Extant ISA 520

New para. ref.

Comment on proposed deletion or repositioning of highlighted material, significant edits, and other notes

The suitability of using substantive analytical procedures given the assertions (paragraphs 12a and 12b). The reliability of the data, whether internal or external, from which the expectation of recorded amounts or ratios is developed (paragraphs 12c and 12d). Whether the expectation is sufficiently precise to identify a material misstatement at the desired level of assurance (paragraph 12e). The amount of any difference of recorded amounts from expected values that is acceptable (paragraph 12f).

Suitability of Using Substantive Analytical Procedures Given the Assertions 12a. Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time. The application of substantive analytical procedures is based on the expectation that relationships among data exist and continue in the absence of known conditions to the contrary. The presence of these relationships provides audit evidence as to the completeness, accuracy and occurrence of transactions captured in the information produced by the entitys information system. However, reliance on the results of substantive analytical procedures will depend on the auditors assessment of the risk that the analytical procedures may identify relationships as expected when, in fact, a material misstatement exists. 12b. In determining the suitability of substantive analytical procedures given the assertions, the auditor considers the following:
11

A3

SUPPLEMENT TO PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS

Extant ISA 520 (a) The assessment of the risk of material misstatement. The auditor considers the understanding of the entity and its internal control, the materiality and likelihood of misstatement of the items involved, and the nature of the assertion in determining whether substantive analytical procedures are suitable. For example, if controls over sales order processing are weak, the auditor may place more reliance on tests of details rather than substantive analytical procedures for assertions related to receivables. As another example, when inventory balances are material, the auditor ordinarily does not rely only on substantive analytical procedures when performing audit procedures on the existence assertion. ISA 330, The Auditors Procedures in Response to Assessed Risks indicates that, when the approach to significant risks consists only of substantive procedures, the audit procedures appropriate to address such significant risks consist of tests of details only, or a combination of tests of details and substantive analytical procedures.

New para. ref. 8(a), A6

Comment on proposed deletion or repositioning of highlighted material, significant edits, and other notes Deleted as it is duplicative of ISA 315 (Redrafted).

Deleted as it is duplicative of ISA 330 (Redrafted).

(b) Any tests of details directed toward the same assertion. Substantive analytical procedures may also be considered appropriate when tests of details are performed on the same assertion. For example, when auditing the collectibility of accounts receivable, the auditor may apply substantive analytical procedures to an aging of customers accounts in addition to tests of details on subsequent cash receipts. The Reliability of the Data 12c. The reliability of data is influenced by its source and by its nature and is dependent on the circumstances under which it is obtained. In determining whether data is reliable for purposes of designing substantive analytical procedures, the auditor considers the following: (a) Source of the information available. For example, information is ordinarily more
12

8(a), A7

A9

8(c),

SUPPLEMENT TO PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS

Extant ISA 520 reliable when it is obtained from independent sources outside the entity. (b) Comparability of the information available. For example, broad industry data may need to be supplemented to be comparable to that of an entity that produces and sells specialized products. Nature and relevance of the information available. For example, whether budgets have been established as results to be expected rather than as goals to be achieved. Controls over the preparation of the information. For example, controls over the preparation, review and maintenance of budgets.

New para. ref. A9 8(c), A9 8(c), A9 8(c), A9 A10

Comment on proposed deletion or repositioning of highlighted material, significant edits, and other notes

(c) (d)

12d. The auditor considers testing the controls, if any, over the entitys preparation of information used by the auditor in applying substantive analytical procedures. When such controls are effective, the auditor has greater confidence in the reliability of the information and, therefore, in the results of substantive analytical procedures. The controls over nonfinancial information can often be tested in conjunction with other tests of controls. For example, an entity in establishing controls over the processing of sales invoices may include controls over the recording of unit sales. In these circumstances, the auditor could test the operating effectiveness of controls over the recording of unit sales in conjunction with tests of the operating effectiveness of controls over the processing of sales invoices. Alternatively, the auditor may consider whether the information was subjected to audit testing in the current or prior period. In determining the audit procedures to apply to the information upon which the expectation for substantive analytical procedures is based, the auditor considers the guidance in paragraph 11 of ISA 500, Audit Evidence.

13

SUPPLEMENT TO PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS

Extant ISA 520 Whether the Expectation is Sufficiently Precise 12e. In assessing whether the expectation can be developed sufficiently precise to identify a material misstatement at the desired level of assurance, the auditor considers factors such as the following:

New para. ref.

Comment on proposed deletion or repositioning of highlighted material, significant edits, and other notes

A12

The accuracy with which the expected results of substantive analytical procedures can be predicted. For example, the auditor will ordinarily expect greater consistency in comparing gross profit margins from one period to another than in comparing discretionary expenses, such as research or advertising. The degree to which information can be disaggregated. For example, substantive analytical procedures may be more effective when applied to financial information on individual sections of an operation or to financial statements of components of a diversified entity, than when applied to the financial statements of the entity as a whole. The availability of the information, both financial and non-financial. For example, the auditor considers whether financial information, such as budgets or forecasts, and nonfinancial information, such as the number of units produced or sold, is available to design substantive analytical procedures. If the information is available, the auditor also considers the reliability of the information as discussed in paragraphs 12c and 12d above.

Amount of Difference of Recorded Amounts from Expected Values that is Acceptable 12f. In designing and performing substantive analytical procedures, the auditor considers the amount of difference from expectation that can be accepted without further investigation.
14

A13

SUPPLEMENT TO PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS

Extant ISA 520 This consideration is influenced primarily by materiality and the consistency with the desired level of assurance. Determination of this amount involves considering the possibility that a combination of misstatements in the specific account balance, class of transactions, or disclosure could aggregate to an unacceptable amount. The auditor increases the desired level of assurance as the risk of material misstatement increases by reducing the amount of difference from the expectation that can be accepted without further investigation. Paragraphs 17 and 18 below discuss the auditors response when the amount of difference between the expected value and the reported value exceeds the amount that can be accepted without further investigation. 12g. When the auditor performs substantive procedures at an interim date and plans to perform substantive analytical procedures with respect to the intervening period, the auditor considers how the matters discussed in paragraphs 12a-12f affect the ability to obtain sufficient appropriate audit evidence for the remaining period. This includes considering whether the period end balances of the particular classes of transactions or account balances are reasonably predictable with respect to amount, relative significance, and composition. See ISA 330, paragraphs 56-61, for additional guidance. Analytical Procedures in the Overall Review at the End of the Audit 13. The auditor should apply analytical procedures at or near the end of the audit when forming an overall conclusion as to whether the financial statements as a whole are consistent with the auditors understanding of the entity. The conclusions drawn from the results of such audit procedures are intended to corroborate conclusions formed during the audit of individual components or elements of the financial statements and assist in arriving at the overall conclusion as to the reasonableness of the
15

New para. ref.

Comment on proposed deletion or repositioning of highlighted material, significant edits, and other notes

A14

Deleted as it is duplicative of ISA 330 (Redrafted).

A15, A16

SUPPLEMENT TO PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS

Extant ISA 520 financial statements. However, they may also identify a previously unrecognized risk of material misstatement. In such circumstances, the auditor may need to re-evaluate the planned audit procedures, based on the revised consideration of assessed risks for all or some of the classes of transactions, account balances, or disclosures and related assertions. 14.-16. Paragraphs 14-16 were deleted when the Audit Risk Standards1 became effective. Investigating Unusual Items 17. When analytical procedures identify significant fluctuations or relationships that are inconsistent with other relevant information or that deviate from predicted amounts, the auditor should investigate and obtain adequate explanations and appropriate corroborative audit evidence. The investigation of unusual fluctuations and relationships ordinarily begins with inquiries of management, followed by: (a) Corroboration of managements responses, for example, by comparing them with the auditors understanding of the entity and other audit evidence obtained during the course of the audit; and (b) Consideration of the need to apply other audit procedures based on the results of such inquiries, if management is unable to provide an explanation or if the explanation is
1

New para. ref.

Comment on proposed deletion or repositioning of highlighted material, significant edits, and other notes

Deleted

10

18.

A18

10(b),

The Audit Risk Standards comprise ISA 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, ISA 330, The Auditors Procedures in Response to Assessed Risks, and ISA 500, Audit Evidence. The Audit Risk Standards gave rise to conforming amendments to this and other ISAs. 16

SUPPLEMENT TO PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS

Extant ISA 520 not considered adequate. Public Sector Perspective 1. The relationships between individual financial statement items traditionally considered in the audit of business entities may not always be appropriate in the audit of governments or other non-business public sector entities; for example, in many such public sector entities there is often little direct relationship between revenues and expenditures. In addition, because expenditure on the acquisition of assets is frequently non-capitalized, there may be no relationship between expenditures on, for example, inventories and fixed assets and the amount of those assets reported in the financial statements. In addition, in the public sector, industry data or statistics for comparative purposes may not be available. However, other relationships may be relevant, for example, variations in the cost per kilometer of road construction or the number of vehicles acquired compared with vehicles retired. Where appropriate, reference has to be made to available private sector industry data and statistics. In certain instances, it may also be appropriate for the auditor to generate an inhouse database of reference information.

New para. ref. A19

Comment on proposed deletion or repositioning of highlighted material, significant edits, and other notes

A8

17

SUPPLEMENT TO PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS

Exhibit 3
Mapping Document Paragraph of extant ISA 520 Proposed ISA 520 (Redrafted)

Introduction
Scope of this ISA 1. 1 The purpose of tThis International Standard on Auditing (ISA) is to establish standards and provide guidance on deals with the auditors use the applicationof analytical procedures as substantive procedures in response to assessed risks, and as procedures that assist in arriving at the auditors overall conclusion during in an audit of financial statements. The use of analytical procedures as risk assessment procedures is dealt with in ISA 315 (Redrafted).

Nature of Analytical Procedures 4.1 4 1st bullet 4 2nd bullet 4 3rd bullet 5.1 5 1st bullet 5 2nd bullet 6 4. 3. 2. Analytical procedures include the consideration of comparisons of the entitys financial information with, for example: Comparable information for prior periods. Anticipated results of the entity, such as budgets or forecasts, or expectations of the auditor, such as an estimation of depreciation. Similar industry information, such as a comparison of the entitys ratio of sales to accounts receivable with industry averages or with other entities of comparable size in the same industry.

Analytical procedures also include consideration of relationships, for example: Among elements of financial information that would be expected to conform to a predictable pattern based on the entitys experience, such as gross margin percentages. Between financial information and relevant non-financial information, such as payroll costs to number of employees.

Various methods may be used in to performing the above auditanalytical procedures. These methods range from performing simple comparisons to performing complex analyses using advanced statistical techniques.
18

SUPPLEMENT TO PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS

Paragraph of extant ISA 520

Proposed ISA 520 (Redrafted) Analytical procedures may be applied to consolidated financial statements, financial statements of components (such as subsidiaries, divisions, branches or segments) and individual elements of financial information. The auditors choice of audit procedures, methods and level of application is a matter of professional judgment. Effective Date

New

5.

This ISA is effective for audits of financial statements for periods beginning on or after [December 15, 2009].

Objectives
2.1 2.1 and 2.2 6. The objectives of the auditor should apply are: (a) When using analytical procedures as substantive procedures in response to assessed risks, to design and perform such analytical procedures so that they are effective in responding as risk assessment procedures to obtain an understanding of the entity and its environment andAnalytical procedures may also be applied as substantive proceduresto assessed risks of material misstatement in the financial statements at the assertion level; and To design and perform analytical procedures that assist in arriving at in the overall conclusion review at the end of in an the audit of the financial statements.

2.1

(b)

Definition
3 7. For the purposes of the ISAs, the term analytical procedures means evaluations of financial information made by a study of plausible relationships among both financial and non-financial data. Analytical procedures also encompass the investigation of identified fluctuations and relationships that are inconsistent with other relevant information or deviate that differ from expected values by a significantly from predicted amounts.

Requirements
Analytical Procedures as Risk Assessment Procedures 8.1 The auditor should apply analytical procedures as risk assessment procedures to obtain an understanding of the entity and its environment.

19

SUPPLEMENT TO PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS

Paragraph of extant ISA 520

Proposed ISA 520 (Redrafted) Analytical Procedures as Substantive Procedures

12

8.

In deciding to use, and Wwhen designing and performing, analytical procedures, either alone or in combination with test of details, as substantive procedures in accordance with ISA 330 (Redrafted), the auditor shall will need to consider a number of factors such as the following: (a) Determine tThe suitability of using substantive analytical procedures given the assertions, taking account of the assessed risks of material misstatement and tests of details, if any, directed towards the same assertion (paragraphs 12a and 12b).; Develop an expectation of recorded amounts or ratios;

(b)

(b)(c)EvaluateThe reliability of data, whether internal or external, from which the auditors expectation of recorded amounts or ratios is developed, taking account of source, comparability, and nature and relevance of information available, and controls over preparation (paragraphs 12c and 12d).; (c)(d)Evaluate wWhether the expectation is sufficiently precise to identify a material misstatement that, when aggregated with other misstatements, may cause the financial statements to be materially misstatedat the desired level of assurance (paragraph 12e).; (d)(e)Determine tThe amount of any difference of recorded amounts from expected values that is acceptable without further investigation as required by paragraph 10 (paragraph 12f). Analytical Procedures that Assist in Arriving at the Auditors Overall Conclusion in an Audit of Financial Statements 13.1 9. The auditor should apply analytical procedures at or near the endshall of the audit when design and perform analytical procedures that assist in arriving at the forming an overall conclusion as to whether the financial statements as a whole are consistent with the auditors understanding of the entity.

Investigating Results of Analytical Procedures 17 10. IfWhen analytical procedures identify significant fluctuations or relationships that are inconsistent with other relevant information or that

20

SUPPLEMENT TO PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS

Paragraph of extant ISA 520

Proposed ISA 520 (Redrafted) deviate differ from expected values by a significant amountpredicted amounts, the auditor should shall investigate such differences by and obtain adequate explanations and appropriate corroborative audit evidence.: (a) (b) Inquiring of management and obtaining appropriate audit evidence relevant to managements responses; and Performing other audit procedures as necessary in the circumstances.

Application and Other Explanatory Material

Analytical Procedures as Risk Assessment Procedures 8.2 Analytical procedures may indicate aspects of the entity of which the auditor was unaware and will assist in assessing the risks of material misstatement in order to determine the nature, timing and extent of further audit procedures. [See proposed conforming amendment to ISA 315 (Redrafted)] Analytical procedures applied as risk assessment procedures use both financial and non-financial information, for example, the relationship between sales and square footage of selling space or volume of goods sold. [See proposed conforming amendment to ISA 315 (Redrafted)] Considerations Specific to Smaller Entities IAPS 1005.71 The nature and extent of analytical procedures at the planning stage of the audit of a small entity may be limited by the timeliness of processing of transactions by the entity. Small entities may not have interim or monthly financial information that can be used in analytical procedures at the planning stage. The auditor may, as an alternative, conduct a brief review of the general ledger or such other accounting records as may be readily available. [See proposed conforming amendment to ISA 315 (Redrafted)] Analytical Procedures as Substantive Procedures in Response to Assessed Risks 10.2-3 A1. The auditors substantive procedures at the assertion level may be derived from tests of details, from substantive analytical procedures, or from a combination of both. The decision about which audit procedures to use is based on the auditors judgment about the expected effectiveness and efficiency of the available audit procedures to reduce
21

SUPPLEMENT TO PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS

Paragraph of extant ISA 520

Proposed ISA 520 (Redrafted) audit risk at the assertion level to an acceptably low level.

11

A2.

The auditor will ordinarily may inquire of management as to the availability and reliability of information needed to apply substantive analytical procedures as substantive procedures, and the results of any such procedures performed by the entity. It may be efficient effective to use analytical data prepared by the entity management, provided the auditor is satisfied that such data is properly prepared.

Suitability of Using Substantive Analytical Procedures Given the Assertions 12a A3. Substantive aAnalytical procedures as substantive procedures are generally more applicable to large volumes of transactions that tend to be predictable over time. The application of substantive analytical procedures is based on the expectation that relationships among data exist and continue in the absence of known conditions to the contrary. The presence of these relationships provides audit evidence as to the completeness, accuracy and occurrence of transactions captured in the information produced by the entitys information system relevant to financial reporting. However, reliance on the results the suitability of a particular substantive analytical procedures would will depend upon the auditors assessment of the risk how effective it will be in detecting a misstatement that, when aggregated with other misstatements, may cause the financial statements to be materially misstated the analytical procedures may identify relationships as expected when, in fact, a material misstatement exists. In some cases, even an unsophisticated predictive model may be effective as an analytical procedure. For example, where an entity has employed a known number of staff at fixed rates of pay throughout the period, it may be possible for the auditor to use this data to estimate the total payroll costs for the period with a high degree of accuracy, thereby providing audit evidence for a significant item in the financial statements and reducing the need to perform tests of details on the payroll. The use of widely recognized trade ratios (such as profit margins for different types of retail entities) can often be used effectively in analytical procedures to provide evidence to support the reasonableness of recorded items. Different types of analytical procedures provide different levels of assurance. Analytical procedures involving, for example, the prediction of total rental income on a building divided into apartments, taking the rental rates, the number of apartments and vacancy rates into

IAPS 1005.73

A4.

IAPS 1005.75

A5.

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Paragraph of extant ISA 520

Proposed ISA 520 (Redrafted) consideration, can provide be a very persuasive source of evidence and may eliminate the need for further verification by means of tests of details, provided the components are appropriately verified. In contrast, calculation and comparison of gross margin percentages as a means of confirming a revenue figure may provide be a less persuasive source of evidence, but may provide useful corroboration if used in combination with other audit procedures.

12b.1 and 12b(a)

A6.

The In determination of ing the suitability of substantive analytical procedures as substantive procedures given the assertions is influenced by, the auditor may consider the following: Tthe nature of the assertion and the auditors assessment of the risk of material misstatement. The auditor considers the understanding of the entity and its internal control, the materiality and likelihood of misstatements of the items involved, and the nature of the assertion in determining whether analytical procedures are suitable. For example if controls over sales order processing is are weak, the auditor may place more reliance on tests of details rather than substantive analytical procedures for assertions related to receivables; or when inventory balances are material, the auditor may decide not to rely only on substantive analytical procedures when performing audit procedures on the existence assertion. Any tests of details directed toward the same assertion. Substantive aAnalytical procedures as substantive procedures may also be considered appropriate when tests of details are performed on the same assertion. For example when obtaining audit evidence regarding the valuation assertion for auditing the collectibility of accounts receivable balances, the auditor may apply substantive analytical procedures to an aging of customers accounts in addition to tests of details on subsequent cash receipts to determine the collectability of the receivables.

12b(b)

A7.

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Paragraph of extant ISA 520

Proposed ISA 520 (Redrafted) Considerations Specific to Public Sector Entities

PSP.1

A8.

The relationships between individual financial statement items traditionally considered in the audit of business entities may not always be appropriate relevant in the audit of governments or other non-business public sector entities; for example, in many such public sector entities there is often may be little direct relationship between revenues and expenditures. In addition, because expenditure on the acquisition of assets is frequently may not be non-capitalized, there may be no relationship between expenditures on, for example, inventories and fixed assets and the amount of those assets reported in the financial statements. In additionAlso, in the public sector, industry data or statistics for comparative purposes may not be available in the public sector. However, other relationships may be relevant, for example, variations in the cost per kilometer of road construction or the number of vehicles acquired compared with vehicles retired. Where appropriate, reference has to be made to available private sector industry data and statistics. In certain instances, it may also be appropriate for the auditor to generate an in-house database of reference information.

The Reliability of the Data 12c.1-2 A9. The reliability of data is influenced by its source and by its nature, and is dependent on the circumstances under which it is obtained. Accordingly, the following are relevant when In determining whether data is reliable for purposes of designing substantive analytical procedures as substantive procedures, the auditor considers the following: (a) Source of the information available. For example, information may be more reliable when it is obtained from independent sources outside the entity;. (b) Comparability of the information available. For example, broad industry data may need to be supplemented to be comparable to that of an entity that produces and sells specialized products;. (c) Nature and relevance of the information available. For example, whether budgets have been established as results to be expected rather than as goals to be achieved;. and (d) Controls over the preparation of the information that are designed to ensure its completeness, accuracy and validity. For example, controls over the preparation, review and maintenance of budgets.

12c(a)

12c(b)

12c(c)

12c(d)

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Paragraph of extant ISA 520 12d

Proposed ISA 520 (Redrafted) A10. The auditor may considers testing the operating effectiveness of controls, if any, over the entitys preparation of information used by the auditor in applying substantive analytical procedures as substantive procedures in response to assessed risks. When such controls are effective, the auditor generally has greater confidence in the reliability of the information and, therefore, in the results of substantive analytical procedures. The operating effectiveness of controls over non-financial information can may often be tested in conjunction with other tests of controls. For example, an entity in establishing controls over the processing of sales invoices, an entity may include controls over the recording of unit sales. In these circumstances, the auditor could test the operating effectiveness of controls over the recording of unit sales in conjunction with tests of the operating effectiveness of controls over the processing of sales invoices. Alternatively, the auditor may consider whether the information was subjected to audit testing in the current or prior period. In determining the audit procedures to apply to the information upon which the expectation for substantive analytical procedures is based, the auditor considers the guidance in paragraph 11 of Proposed ISA 500 (Redrafted) establishes requirements and provides guidance in determining the audit procedures to apply to the information upon which the expectation for substantive analytical procedures is based.Audit Evidence. Considerations Specific to Smaller Entities

IAPS 1005.73

A11. An unsophisticated predictive model can sometimes be effective as an analytical procedure. For example, where a small entity has employed a known number of staff at fixed rates of pay throughout the period, it may be possible for the auditor to use this data to estimate the total payroll costs for the period with a high degree of accuracy, thereby providing audit evidence for a significant item in the financial statements and reducing the need to perform tests of details on the payroll. The use of widely recognized trade ratios (such as profit margins for different types of retail entities) can often be used effectively in analytical procedures to provide evidence to support the reasonableness of recorded items. The extent of use of analytical procedures as substantive procedures in response to assessed risks in the audit of a smaller entity may be limited because of the non-availability unreliability, or lack, of information on which the analytical procedures are based. Evaluation of whether the Expectation is Sufficiently Precise

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Paragraph of extant ISA 520 12e

Proposed ISA 520 (Redrafted) A12. When the auditor assessesIn evaluating determining whether the expectation can be developed sufficiently precisely to identify a material misstatement that, when aggregated with other misstatements, may cause the financial statements to be materially misstatedat the desired level of assurance, the auditor may consider matters such as the following:

12e 1st bullet

The accuracy with which the expected results of substantive analytical procedures can be predicted. For example, the auditor will ordinarily may expect greater consistency in comparing gross profit margins from one period to another than in comparing discretionary expenses, such as research or advertising. The degree to which information can be disaggregated. For example, substantive analytical procedures may be more effective when applied to financial information on individual sections of an operation or to financial statements of components of a diversified entity, than when applied to the financial statements of the entity as a whole. The availability of the information, both financial and non-financial. For example, the auditor may considers whether financial information, such as budgets or forecasts, and non-financial information, such as the number of units produced or sold, is available to design substantive analytical procedures as substantive procedures. If the information is available, the auditor may also considers the reliability of the information as discussed in paragraphs 12c and 12d A9 and A10 above.

12e 2nd bullet

12e 3rd bullet

Amount of Difference of Recorded Amounts from Expected Values that is Acceptable 12f A13. In designing and performing substantive analytical procedures, tThe auditors determination considers of the amount of difference from expectation that can be accepted without further investigation . This consideration is influenced primarily by materiality and the consistency with the desired level of assurance, taking account of . Determination of this amount involves considering the possibility that a misstatement, when aggregated with other misstatements, may cause the financial statements to be materially misstatedcombination of misstatements in the specific account balance, class of transactions, or disclosure could aggregate to an unacceptable amount. The auditor ISA 330 (Redrafted) requires the auditor to obtain more persuasive audit evidence the higher the auditors assessment of risk. Accordingly, a smaller amount of
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SUPPLEMENT TO PROPOSED ISA 520 (REDRAFTED): MAPPING DOCUMENTS

Paragraph of extant ISA 520

Proposed ISA 520 (Redrafted) difference that would be considered acceptable without investigation is needed to achieve the desired level assurance as the assessed risk increases. increases the desired level of assurance as the risk of material misstatement increases by reducing the amount of difference from the expectation that can be accepted without further investigation. Paragraphs 17 and 18 below discuss the auditors response when the amount of difference between the expected value and the reported value exceeds the amount that can be accepted without further investigation..

12g

A14. When the auditor performed substantive procedures at an interim date and plans to perform substantive analytical procedures with respect to the intervening period, the auditor considers how tThe matters discussed in paragraphs 9 (a)-(d) 12a-12fare relevant irrespective of whether the auditor performs analytical procedures as substantive procedures on the entitys period end financial statements, or at an interim date and plans to perform analytical procedures with respect to the intervening period as part of the period end. affect the auditors ability to obtain sufficient appropriate audit evidence for the remaining period. This includes considering whether the period end balances of the particular classes of transactions or account balances are reasonably predictable with respect to amount, relative significance, and composition. See ISA 330 (Redrafted), paragraphs 56-61 forestablishes requirements and provides guidance on substantive procedures performed at an interim date additional guidance. Analytical Procedures that Assist in Arriving at the Auditors Overall Conclusion in an Audit of Financial Statements

13.2-4

A15. The conclusions drawn from the results of such audit analytical procedures during the overall review stage of the audit are intended to corroborate conclusions formed during the audit of individual components or elements of the financial statements, and assist in arriving at the auditors overall conclusion on whether the financial statements as a whole are free from material misstatementsas to the reasonableness of the financial statements. A16. However, theyThe results of such analytical procedures may also identify a previously unrecognized risk of material misstatement. In such circumstances, the auditor ISA 315 (Redrafted) requires the auditor to revise the auditors assessment of the risks of material misstatement and modify the further planned audit procedures accordingly. may need to reevaluate the planned audit procedures, based on the revised consideration of assessed risks for all or some of the classes of transactions, account

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Paragraph of extant ISA 520

Proposed ISA 520 (Redrafted) balances, or disclosures and related assertions.

IAPS 1005.76 included under general application material as it is not only applicable to smaller entities

A17. The analytical procedures performed as part of the auditors overall review of the financial statementsat this stage of the audit are often very similar to those that would be used as risk assessment proceduresat the planning stage of the audit. These may include the following:

Comparing the financial statements for the current year to those of previous years. Comparing the financial statements to any budgets, forecasts, or management expectations. Reviewing trends in any important financial statement ratios. Considering whether the financial statements adequately reflect any changes in the entity of which the auditor is aware. Inquiring into unexplained or unexpected features of the financial statements.

Investigating Results of Analytical Procedures 18 and 18(a) A18. The investigation of unusual fluctuations and relationships ordinarily begins with inquiries of management, followed by: Corroborating Audit evidence relevant to managements responses for example, by comparing them may be obtained by considering how those responses compare with the auditors understanding of the entity and its environment, or and with other audit evidence obtained during the course of the audit.; and A19. Consideration of tThe need to apply other audit procedures based on the results of such inquiries, if may arise when, for example, management is unable to provide an explanation, or if the explanation is not considered adequate.

18(b)

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