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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 Technology Companies
Technology companies — particularly SaaS (Software-as-a-Service) entities — present a distinct analytical review profile characterised by recurring revenue models, high growth rates, and frequent operating losses during scaling phases. Under ISA 520, the auditor must develop expectations that reflect SaaS economics. Annual recurring revenue (ARR) growth should be decomposed into new customer acquisition, existing customer expansion (upsells), and customer churn. A company reporting 30% ARR growth could be achieving this through 45% gross new ARR offset by 15% churn — a very different risk profile from 32% new ARR with only 2% churn. The auditor should analyse net revenue retention rate (NRR): an NRR above 120% indicates strong expansion within existing customers, while NRR below 100% signals contraction that management must offset with new customer acquisition.
Revenue Recognition and Deferred Revenue Analysis
IFRS 15 revenue recognition is the primary risk area for technology companies. Multi-element arrangements combining software licences, implementation services, hosting, and support require careful allocation of transaction price to distinct performance obligations. The auditor should analyse deferred revenue movements — the opening balance plus new billings minus revenue recognised should equal the closing balance. Deferred revenue growth that significantly exceeds revenue growth may indicate aggressive billing practices or future recognition issues. Conversely, declining deferred revenue relative to revenue could signal weakening demand. The ratio of billings to revenue provides insight into revenue quality — billings consistently exceeding recognised revenue indicate a healthy forward book. Professional services revenue should be analysed separately as it typically carries lower margins and different recognition patterns than subscription revenue.
R&D Capitalisation and Operating Cost Analysis
Technology companies typically spend 15-30% of revenue on R&D. The split between expensed and capitalised development costs under IAS 38 is a significant judgment area. The auditor should analyse R&D as a percentage of revenue and compare the capitalisation rate (capitalised costs / total R&D spend) to prior periods. A sudden increase in the capitalisation rate may indicate aggressive treatment — projects that previously did not meet the IAS 38 criteria for capitalisation now somehow do. Sales and marketing costs should be analysed against customer acquisition data: if S&M spend increased 40% but new customer additions only grew 20%, the customer acquisition cost (CAC) is deteriorating, which has implications for the economic model. Share-based payment expense (IFRS 2) can be material for technology companies — new option grants, vesting schedules, and modifications all affect the charge. The auditor should verify the SBP expense against the terms of employee equity plans.
Key Ratios to Monitor for Technology
- ARR growth rate
- Gross margin
- R&D as % of revenue
- Sales & marketing as % of revenue
- Net revenue retention
- Deferred revenue growth
What Drives Account Fluctuations
Customer acquisition and churn rates driving ARR movements
Pricing model changes (subscription vs. usage-based vs. licence)
R&D investment levels and capitalisation decisions under IAS 38
Sales & marketing spend efficiency (CAC payback period)
Deferred revenue movements reflecting billing vs. recognition timing
Seasonal Considerations
SaaS companies may show Q4 strength due to enterprise budget spending patterns. Usage-based revenue models create monthly volatility. Professional services revenue can be lumpy depending on implementation project timing.
Recommended Investigation Thresholds for Technology
| Account Category | Threshold % |
|---|---|
| Revenue | 10% |
| Cost of Goods Sold | 15% |
| Operating Expenses | 15% |
| Current Assets | 10% |
| Equity | 10% |
Regulatory note: Technology companies with government contracts may have specific pricing and cost allocation requirements. Data protection regulations (GDPR) may create provision requirements. Revenue from contracts with variable consideration (usage-based pricing) requires estimation under IFRS 15.
Worked Example: Technology Analytical Review
A B2B SaaS company in growth phase. Overall materiality €800,000, performance materiality €520,000.
Overall materiality: €800,000 | Performance materiality: €520,000 | Threshold: 10%
| Account | PY | CY | Change | % |
|---|---|---|---|---|
| Subscription Revenue FLAG | €21,000,000 | €28,000,000 | €7,000,000 | +33.3% |
| Professional Services FLAG | €3,800,000 | €4,500,000 | €700,000 | +18.4% |
| Hosting & Infrastructure FLAG | €3,900,000 | €5,600,000 | €1,700,000 | +43.6% |
| R&D Expense FLAG | €6,200,000 | €8,500,000 | €2,300,000 | +37.1% |
| Sales & Marketing FLAG | €8,500,000 | €12,000,000 | €3,500,000 | +41.2% |
| Share-Based Payment FLAG | €1,400,000 | €2,200,000 | €800,000 | +57.1% |
| Deferred Revenue FLAG | €6,800,000 | €9,500,000 | €2,700,000 | +39.7% |
| Capitalised Dev. Costs FLAG | €2,400,000 | €3,800,000 | €1,400,000 | +58.3% |