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The Auditor's Guide to Analytical Procedures Under ISA 520
Complete guide: ISA 520 requirements quick reference, decision flowchart for when to use analytical procedures vs. tests of details, industry-specific ratio checklists for 12 sectors, threshold-setting guide by risk level, sample completed working paper, common quality-review findings, and documentation checklist.
ISA 520 Analytical Review for Agriculture & Agribusiness
Agricultural entities present unique analytical review challenges arising from the biological nature of their assets, the impact of weather and natural conditions on output, and the specific accounting requirements of IAS 41 Agriculture. Under ISA 520, the auditor must develop expectations that account for these factors. Agricultural revenue is a function of yield (output per hectare) multiplied by commodity price multiplied by cultivated area. Each factor can vary significantly between periods: weather affects yield, global markets affect price, and operational decisions affect cultivated area. The auditor should decompose revenue changes into these three components. A 15% revenue increase could result from a 20% price increase offset by a 5% yield decline — understanding which factor is responsible has different implications for the audit approach. Yield data should be verified against industry statistics for the region and crop type.
IAS 41 Biological Asset Valuation
IAS 41 requires biological assets (growing crops, livestock) to be measured at fair value less costs to sell, with changes in fair value recognised in profit or loss. This creates significant estimation and volatility in the income statement that the auditor must understand and analyse. Fair value changes on biological assets are inherently volatile — a growing crop gains value as it approaches harvest (biological transformation) and loses value if weather or disease conditions deteriorate. The auditor should analyse biological asset fair value changes against observable market prices, stage of biological transformation, and condition assessments. For livestock, fair value should correlate with market prices per head, adjusted for age and breed. A herd of 1,000 dairy cattle at an average fair value of €1,500 per head should total approximately €1.5M — significant deviations indicate either herd size changes or valuation issues. Agricultural produce is measured at fair value at the point of harvest (IAS 41.13) and subsequently at cost under IAS 2 — the auditor should verify this transition point.
Subsidy Income and Working Capital Cycles
Government subsidies — particularly CAP payments in the EU — represent a significant and sometimes dominant revenue source for agricultural entities. CAP basic payment scheme allocations are based on eligible hectares and payment entitlements. The auditor should verify claimed hectares against field records and satellite data (which cross-compliance inspectors also use). Subsidy income should match the entity's entitlements and compliance history. Changes in subsidy income should be explained by policy changes, eligible area changes, or compliance penalty deductions. Agricultural working capital cycles are extreme: pre-planting requires significant investment in seeds, fertiliser, and fuel; the growing season incurs labour and input costs; and revenue is concentrated in the harvest and post-harvest marketing period. The auditor should understand where in the agricultural cycle the balance sheet date falls when setting expectations for current assets and liabilities.
Key Ratios to Monitor for Agriculture & Agribusiness
- Yield per hectare
- Revenue per hectare
- Input cost per hectare
- Biological asset fair value change as % of total revenue
- Subsidy as % of revenue
- Working capital cycle days
What Drives Account Fluctuations
Crop yield variations from weather, disease, and soil conditions
Commodity price volatility affecting revenue per unit
Biological asset fair value changes under IAS 41
Government subsidy levels and compliance conditions
Seasonal working capital cycles (pre-harvest investment vs. post-harvest revenue)
Seasonal Considerations
Agriculture is HIGHLY seasonal. Revenue is concentrated around harvest periods. Costs are incurred throughout the growing season. Pre-harvest balance sheets show high WIP (biological assets) and low cash; post-harvest balance sheets show inventory and receivables. Always compare same season — year-end timing relative to harvest is critical.
Recommended Investigation Thresholds for Agriculture & Agribusiness
| Account Category | Threshold % |
|---|---|
| Revenue | 10% |
| Cost of Goods Sold | 10% |
| Operating Expenses | 15% |
| Current Assets | 10% |
| Equity | 10% |
Regulatory note: Agricultural entities in the EU are subject to CAP regulations, cross-compliance requirements, and increasingly stringent environmental regulations (nitrogen regulations in the Netherlands, water management directives). CSRD sustainability reporting may apply to larger agribusiness entities.
Worked Example: Agriculture & Agribusiness Analytical Review
An arable farming operation cultivating 800 hectares. Overall materiality €200,000, performance materiality €130,000.
Overall materiality: €200,000 | Performance materiality: €130,000 | Threshold: 10%
| Account | PY | CY | Change | % |
|---|---|---|---|---|
| Crop Revenue FLAG | €2,400,000 | €2,800,000 | €400,000 | +16.7% |
| CAP Subsidies | €290,000 | €280,000 | €-10,000 | -3.4% |
| Biological Asset FV Change FLAG | €-50,000 | €180,000 | €230,000 | +460.0% |
| Input Costs FLAG | €950,000 | €1,100,000 | €150,000 | +15.8% |
| Seasonal Labour | €280,000 | €320,000 | €40,000 | +14.3% |
| Harvested Inventory FLAG | €280,000 | €450,000 | €170,000 | +60.7% |
| Biological Assets FLAG | €200,000 | €380,000 | €180,000 | +90.0% |
| Agricultural Equipment FLAG | €1,050,000 | €1,200,000 | €150,000 | +14.3% |