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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 Energy & Utilities
Energy sector audits require analytical procedures that isolate the impact of commodity price movements from underlying operational performance. Revenue for upstream oil and gas entities is a function of production volume multiplied by realised price — the auditor must disaggregate these components to develop meaningful expectations under ISA 520. A 15% revenue increase could reflect a 20% oil price increase offset by 5% production decline, which has very different implications for the entity's financial position than volume-driven growth. Utility companies with regulated tariffs face different analytical challenges: revenue is largely determined by the regulatory framework, and deviations from expected revenue may indicate metering errors, customer growth/loss, or regulatory true-up mechanisms. The auditor should obtain management's volume and price data and verify key assumptions against independent market data.
Decommissioning and Environmental Provisions
Decommissioning provisions under IAS 37 are among the most significant estimates in energy entity financial statements. These long-dated obligations involve assumptions about future costs, timing, and discount rates that span decades. The auditor should analyse provision movements: changes may result from new obligations (new wells/facilities), changes in cost estimates (inflation, technology), changes in discount rates (unwinding of discount plus rate changes), or asset disposals. A 50 basis point change in the discount rate can move a decommissioning provision by 10-15% for a 20-year obligation. The auditor should develop an independent expectation of the discount rate impact and compare to the reported change. Environmental provisions for site remediation face similar challenges. Energy companies should also consider carbon emission liabilities where cap-and-trade schemes apply.
Hedging and Impairment Considerations
Energy companies frequently use derivative instruments to hedge commodity price exposure. Hedge accounting under IFRS 9 determines whether gains and losses flow through profit or loss or through other comprehensive income. The auditor should analyse hedging gains/losses for consistency with the known hedging programme and commodity price movements. Ineffective hedging creates P&L volatility that should be understood. Impairment of exploration and production assets (IFRS 6/IAS 36) is triggered by reserve revisions, cost overruns, or commodity price declines that affect future cash flow estimates. The auditor should assess whether impairment triggers exist and whether any recorded impairments are consistent with the underlying assumptions about commodity prices, production profiles, and operating costs.
Key Ratios to Monitor for Energy & Utilities
- Revenue per unit produced
- Production cost per unit
- Decommissioning provision as % of assets
- Operating margin
- Reserve replacement ratio
- Capital intensity ratio
What Drives Account Fluctuations
Commodity price movements (oil, gas, electricity) directly impacting revenue
Production volume changes from operational performance or field depletion
Decommissioning provision discount rate and cost estimate changes
Exploration expenditure capitalisation vs. write-off decisions
Hedging programme gains and losses affecting P&L vs. OCI
Seasonal Considerations
Energy demand is seasonal (higher in winter for heating, higher in summer for cooling in some regions). Commodity prices are cyclical. Upstream production may decline naturally from field depletion. Maintenance shutdowns are typically planned for low-demand periods.
Recommended Investigation Thresholds for Energy & Utilities
| Account Category | Threshold % |
|---|---|
| Revenue | 5% |
| Cost of Goods Sold | 10% |
| Operating Expenses | 10% |
| Current Assets | 10% |
| Equity | 5% |
Regulatory note: Energy entities are subject to environmental regulations, carbon trading schemes, and production licensing requirements. CSRD sustainability reporting obligations are particularly significant. Transfer pricing in international energy groups requires attention.
Worked Example: Energy & Utilities Analytical Review
A mid-size oil and gas producer. Overall materiality €6,000,000, performance materiality €3,900,000.
Overall materiality: €6,000,000 | Performance materiality: €3,900,000 | Threshold: 10%
| Account | PY | CY | Change | % |
|---|---|---|---|---|
| Oil & Gas Revenue | €295,000,000 | €320,000,000 | €25,000,000 | +8.5% |
| Production Costs | €138,000,000 | €145,000,000 | €7,000,000 | +5.1% |
| Exploration Write-offs FLAG | €4,000,000 | €12,000,000 | €8,000,000 | +200.0% |
| Depreciation — Production | €40,000,000 | €42,000,000 | €2,000,000 | +5.0% |
| Decommissioning Provision | €78,000,000 | €85,000,000 | €7,000,000 | +9.0% |
| Oil & Gas Properties | €465,000,000 | €480,000,000 | €15,000,000 | +3.2% |
| Hedging Derivatives (Asset) FLAG | €8,000,000 | €15,000,000 | €7,000,000 | +87.5% |