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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 Retail Entities
Retail audits require analytical procedures that reflect the high-volume, thin-margin nature of retail operations. Under ISA 520, the auditor's expectation for retail revenue should be developed using same-store sales growth data, new store openings and closures, and pricing strategy changes. Gross margin consistency is the primary analytical indicator for retail entities — shifts signal markdown activity, supplier term renegotiations, channel mix changes (e.g., shift from physical stores to e-commerce), or inventory shrinkage issues. The auditor should calculate gross margin at both the aggregate level and, where data is available, by product category, sales channel, or store cluster. A retailer with €100M revenue and a 1 percentage point margin decline has lost €1M — this is almost certainly material and demands investigation per ISA 520.7.
Shrinkage and Inventory Considerations
Inventory shrinkage (the difference between book inventory and physical count) typically ranges from 1-2% of retail sales. An increase in the shrinkage rate signals potential control weaknesses, theft, or administrative errors in the inventory management system. The auditor should compare the shrinkage rate to prior periods and industry benchmarks. Inventory turnover is equally important — slowing turnover indicates potential obsolescence or overbuying, while accelerating turnover could signal stock-outs affecting revenue. For fashion and seasonal retailers, the mix between full-price and markdown sales directly impacts gross margin and should be analysed separately where possible. IFRS 16 has significantly affected retail balance sheets — right-of-use assets and lease liabilities for store portfolios are often among the largest balance sheet items. Changes in the lease portfolio (new stores, closures, renewals, rent renegotiations) should correlate with changes in these balances.
Channel Analysis and Seasonal Patterns
Modern retailers operate across multiple channels — physical stores, e-commerce, marketplace platforms, and wholesale. Each channel has different margin profiles, cost structures, and growth trajectories. The auditor should, where data permits, analyse revenue and margin trends by channel. A retailer shifting from physical to online may show stable total revenue but significant underlying movements: declining store revenue, growing online revenue, and changing margin mix (online typically has lower markdown but higher fulfilment costs). Seasonal patterns demand particular attention in retail analytical review. Comparing December year-end balances across years is meaningful; comparing December to June is not. The auditor should set expectations based on seasonal trading patterns, adjusted for known events such as earlier or later holiday periods, weather impacts on seasonal merchandise, and competitive promotional activity.
Key Ratios to Monitor for Retail
- Gross margin
- Inventory turnover
- Revenue per sqm
- Shrinkage rate
- Same-store sales growth
- Staff cost ratio
What Drives Account Fluctuations
Same-store sales growth vs. new store openings driving revenue changes
Markdown activity and promotional cycles affecting gross margin
Inventory shrinkage rates (typically 1-2% of sales)
Seasonal trading patterns (Q4 peak for most retailers)
Lease cost changes under IFRS 16 from portfolio adjustments
Seasonal Considerations
Most retailers experience peak trading in Q4 (holiday season). Fashion retailers have additional seasonal peaks around new collection launches. Year-end inventory counts should consider markdown exposure on end-of-season stock. Compare YoY same-period data rather than sequential quarters.
Recommended Investigation Thresholds for Retail
| Account Category | Threshold % |
|---|---|
| Revenue | 5% |
| Cost of Goods Sold | 5% |
| Operating Expenses | 10% |
| Current Assets | 10% |
| Equity | 10% |
Regulatory note: Retail entities with loyalty programmes must account for revenue deferral under IFRS 15. Gift card liabilities (breakage estimation) require separate analytical consideration.
Worked Example: Retail Analytical Review
A multi-location fashion retailer with 45 stores and growing e-commerce. Overall materiality €1,200,000, performance materiality €780,000.
Overall materiality: €1,200,000 | Performance materiality: €780,000 | Threshold: 10%
| Account | PY | CY | Change | % |
|---|---|---|---|---|
| Store Revenue | €88,000,000 | €85,000,000 | €-3,000,000 | -3.4% |
| Online Revenue FLAG | €24,000,000 | €32,000,000 | €8,000,000 | +33.3% |
| Cost of Sales | €66,000,000 | €68,000,000 | €2,000,000 | +3.0% |
| Store Rent & Occupancy | €13,200,000 | €12,500,000 | €-700,000 | -5.3% |
| Staff Costs | €17,500,000 | €18,000,000 | €500,000 | +2.9% |
| Marketing & Advertising FLAG | €4,200,000 | €5,500,000 | €1,300,000 | +31.0% |
| Inventory | €12,800,000 | €14,000,000 | €1,200,000 | +9.4% |
| Right-of-Use Assets | €31,000,000 | €28,000,000 | €-3,000,000 | -9.7% |
| Lease Liabilities | €10,200,000 | €9,500,000 | €-700,000 | -6.9% |