Analytical Review Tool — South Africa

Analytical Review Under ISA 520 in South Africa

South Africa has adopted ISA 520 Analytical Procedures without modification through the Independent Regulatory Board for Auditors (IRBA). The IRBA is the statutory body responsible for the regulation of the auditing profession in South Africa, established under the Auditing Profession Act 26 of 2005. All registered auditors (RAs) in South Africa must comply with ISAs as adopted by the IRBA, including ISA 520, when performing audit engagements. South Africa's adoption of ISAs without modification means that ISA 520 applies identically to the international version issued by the IAASB. The IRBA's mandate includes the inspection of registered auditors and audit firms, the investigation of complaints, and the disciplinary process for auditors found to have breached professional standards. The Companies Act 71 of 2008, as amended, establishes the requirements for financial reporting and audit in South Africa, including the categories of companies that must have their annual financial statements audited. Public companies, state-owned companies, and companies that meet certain public interest score thresholds are required to have their financial statements audited by a registered auditor. The IRBA has identified analytical procedures as a significant area for improvement in South African audit quality, reflecting findings from its ongoing inspection programme that cover both firms auditing JSE-listed entities and those auditing smaller public interest entities.

IRBA Inspection Findings on Analytical Procedures

The IRBA's inspection programme is one of the most active in Africa and has produced detailed findings on the quality of analytical procedures performed by South African audit firms. The IRBA publishes an annual Public Inspections Report that provides aggregated findings from its inspection cycle, and analytical procedures have been highlighted as an area of significant concern in successive reports. The IRBA has reported that analytical procedures are one of the areas where the highest proportion of unsatisfactory findings are recorded. Key IRBA inspection findings include the following recurring themes. Auditors do not develop expectations with sufficient precision — expectations are often based on prior-year balances or management budgets without incorporating independent data or entity-specific operational information. The investigation of differences between expected and recorded amounts is inadequate, with auditors frequently accepting management explanations without obtaining corroborating evidence. The threshold for investigation is not always clearly documented or established before the procedure is performed. Analytical procedures at the completion stage are sometimes performed perfunctorily without contributing to the auditor's overall conclusion. The IRBA has also noted that the quality of analytical procedures is a particular concern in the audit of smaller listed entities and public interest entities, where audit firms may have less sophisticated methodology and fewer resources to devote to developing precise expectations. The IRBA has issued guidance communications and hosted webinars to address these findings and improve practice across the profession.

Companies Act 2008 and King IV Governance Considerations

The Companies Act 71 of 2008 establishes the framework for corporate governance and financial reporting in South Africa and creates specific considerations for analytical procedures. The Act requires public companies and certain categories of private companies to prepare annual financial statements that comply with financial reporting standards (IFRS for listed entities, IFRS for SMEs for qualifying entities). The Act also establishes the Companies and Intellectual Property Commission (CIPC), which monitors compliance with filing requirements. The King IV Report on Corporate Governance for South Africa (2016) establishes governance principles that are applied on an "apply and explain" basis by JSE-listed entities and that influence the quality and transparency of financial reporting. King IV's principles on the governance of financial reporting, including the responsibilities of the audit committee in relation to the quality of financial information, create an expectation that entities will maintain robust financial reporting processes. Auditors performing analytical procedures should consider the quality of the entity's governance framework as an indicator of the reliability of financial data. The JSE Listings Requirements impose additional financial reporting and disclosure obligations on listed entities, including the requirement for a reviewed preliminary results announcement and the timely publication of annual financial statements. These requirements create a reporting calendar that affects the timing and scope of analytical procedures, as auditors may need to perform analytical review at the preliminary results stage as well as the annual audit stage.

South African Economic and Industry Considerations

The South African economic context creates specific considerations for the design and performance of analytical procedures. South Africa's economy is characterised by significant mining and resources activity, a large financial services sector, substantial retail and consumer goods industries, and a growing technology sector. The dual economy — with both developed and developing economic characteristics — creates distinctive patterns in financial data that auditors must understand. The South African Reserve Bank (SARB) publishes macroeconomic data including the repo rate, GDP forecasts, inflation projections, and financial stability assessments that are essential inputs for forward-looking analytical adjustments. Statistics South Africa (Stats SA) provides comprehensive economic, demographic, and industry-specific data that supports analytical expectation development. The Johannesburg Stock Exchange (JSE) publishes market data and sector indices that enable auditors to benchmark entity performance against listed peers. For mining entities, which are a significant component of the South African audit market, analytical procedures must account for commodity price volatility, the impact of Broad-Based Black Economic Empowerment (B-BBEE) compliance costs on profitability, the social and labour plan obligations imposed by the Mineral and Petroleum Resources Development Act (MPRDA), and the environmental rehabilitation obligations that affect provision balances. Currency fluctuations and the exchange rate between the South African rand and major trading currencies significantly affect the financial results of entities with foreign-denominated revenue or costs, and auditors must factor exchange rate movements into their analytical expectations. Load-shedding and energy supply disruptions have created operational impacts across South African industries that should be considered when developing expectations for production volumes, revenue trends, and cost structures.

Common Inspection Findings — IRBA (Independent Regulatory Board for Auditors)

The following are typical findings from IRBA (Independent Regulatory Board for Auditors) inspections relating to analytical procedures:

Auditor's expectation not developed with sufficient precision — reliance on prior-year balances or management budgets without independent data or entity-specific operational information

Investigation of differences between expected and recorded amounts inadequate — management explanations accepted without corroborating evidence

Threshold for investigation not clearly documented or established before the analytical procedure was performed

Analytical procedures at the completion stage performed perfunctorily without contributing to the overall audit conclusion

Quality of analytical procedures particularly deficient for audits of smaller listed entities and public interest entities