ISA 520 — Analytical Procedures: Complete Guide

Key Takeaways

ISA 520 governs analytical procedures in two roles: as substantive procedures to obtain audit evidence about specific assertions, and as overall review procedures near the end of the audit to corroborate conclusions formed during fieldwork.
Analytical procedures at the planning/risk assessment stage are governed by ISA 315, not ISA 520 — but all three uses share the same underlying technique of analysing plausible relationships among financial and non-financial data.
For substantive analytical procedures, the auditor must follow a structured process: develop an independent expectation, determine an acceptable threshold, compare recorded amounts to expectations, and investigate any significant differences.
The precision of the expectation determines how much assurance the procedure provides. A vague comparison of this year to last year provides far less evidence than a detailed model using non-financial data.
The overall review at the end of the audit is mandatory. It is not designed to obtain additional substantive assurance but to confirm that the financial statements as a whole are consistent with the auditor's understanding of the entity. If it identifies previously unrecognised risks, the auditor must revisit the risk assessment.
When analytical procedures identify fluctuations or inconsistencies, the auditor must investigate by inquiring of management and, critically, corroborating management's explanations with other evidence — inquiry alone is not sufficient.

What is ISA 520?

ISA 520, titled "Analytical Procedures," governs one of the most versatile tools in the auditor's toolkit. Analytical procedures exploit the fact that financial data does not exist in isolation — revenue is related to the number of units sold, payroll costs are related to headcount, depreciation is related to the asset base. When the auditor understands these relationships, deviations from expected patterns become signals that something may be wrong.

The standard covers two specific uses. Analytical procedures as risk assessment tools (at planning) are covered by ISA 315, not ISA 520, though the technique is the same.

The Three Uses of Analytical Procedures

Stage	Governed By	Purpose	Mandatory?
Risk assessment (planning)	ISA 315	Identify areas of potential risk by spotting unusual fluctuations and unexpected relationships	Yes
Substantive procedures (fieldwork)	ISA 520	Obtain audit evidence about specific assertions as an alternative or complement to tests of detail	No — at auditor's discretion
Overall review (completion)	ISA 520	Corroborate conclusions from the audit and confirm consistency of the financial statements with the auditor's understanding	Yes

Substantive Analytical Procedures

ISA 520.5 sets out the requirements for using analytical procedures as substantive procedures. This is where analytical procedures do real evidentiary work — replacing or supplementing tests of detail.

The four-step process

Step 1: Develop an expectation. The auditor builds an independent prediction of what the recorded amount should be, using known relationships. The expectation should be developed before seeing the actual figure, to avoid anchoring bias.

Sources for developing expectations include prior-period comparisons, budgets and forecasts, industry data and benchmarks, relationships between financial items (e.g., gross margin percentage applied to revenue), and relationships between financial and non-financial data (e.g., number of employees × average salary = expected payroll).

Step 2: Define a threshold. Before comparing, the auditor determines the amount of difference from the expectation that can be accepted without further investigation. The threshold must not exceed performance materiality and must be low enough to detect material misstatements.

Step 3: Compare and compute the difference. This is a mechanical step — compare the recorded amount to the expectation and calculate the variance.

Step 4: Investigate significant differences. Any difference exceeding the threshold requires investigation. The auditor inquires of management, obtains corroborating evidence, and performs additional procedures as necessary.

Factors affecting reliability

ISA 520.A5 identifies the factors that determine how much assurance a substantive analytical procedure can provide:

Suitability of the procedure for the assertion. Analytical procedures work well for income statement items that involve large volumes of predictable transactions (revenue, payroll, depreciation). They are less suitable for balance sheet assertions like existence, where direct testing is more effective.

Reliability of the data. The expectation is only as good as the data it is built on. If the underlying data (budgets, non-financial information, industry benchmarks) is unreliable, the expectation will be unreliable.

Precision of the expectation. A highly disaggregated analysis (e.g., revenue by product line by month) is more precise than a gross comparison (e.g., total revenue this year vs. last year). Greater precision means greater assurance and a tighter acceptable threshold.

Acceptable difference. Tied to materiality — the lower the materiality, the tighter the threshold must be, and the more precise the expectation needs to be.

The "eyeball test" is not a substantive analytical procedure

Regulators consistently identify inadequate substantive analytical procedures as a major quality deficiency. Simply comparing this year's balance to last year's and concluding "no significant movement" is not a substantive analytical procedure — it lacks an independent expectation, a defined threshold, and any meaningful precision. If you are relying on analytical procedures as your primary substantive response for an assertion, the expectation must be genuinely independent, sufficiently precise, built on reliable data, and properly documented. If you cannot achieve that level of rigour, use tests of detail instead.

Overall Review at the End of the Audit

ISA 520.6 requires the auditor to design and perform analytical procedures near the end of the audit that assist in forming an overall conclusion about whether the financial statements are consistent with the auditor's understanding of the entity.

This is a mandatory step — it is not optional.

The overall review serves a different purpose from substantive analytical procedures. It is not designed to provide additional substantive assurance about specific assertions. Instead, it is a high-level "sanity check" — do the financial statements, taken as a whole, make sense in light of everything the auditor has learned during the engagement?

If the overall review identifies fluctuations or relationships that are inconsistent with the auditor's understanding, ISA 520.7 requires the auditor to investigate. If the investigation reveals a previously unrecognised risk of material misstatement, the auditor must revise the risk assessment and potentially perform additional procedures — even at this late stage.

Investigating Results

ISA 520.7 applies to both substantive procedures and the overall review. When analytical procedures identify significant or unexpected results, the auditor must:

Inquire of management and obtain appropriate audit evidence relevant to management's responses.
Perform other audit procedures as necessary in the circumstances.

The critical point: management's explanation alone is not sufficient. The auditor must corroborate it. If management says revenue increased 15% because of a new product line, the auditor should verify the new product line's existence and sales data independently.

ISA 520.A21 notes that management may not always be able to provide an adequate explanation — for example, if management is unaware of a misstatement that caused the fluctuation. In such cases, the auditor may need to perform additional substantive procedures to determine whether the fluctuation represents a misstatement.

Common Types of Analytical Procedures

Type	Example	Typical Use
Trend analysis	Compare monthly revenue over 3 years	Risk assessment, overall review
Ratio analysis	Gross margin %, current ratio, receivable days	Risk assessment, substantive, overall review
Reasonableness testing	Employees × average salary = expected payroll	Substantive (high precision)
Regression analysis	Statistical model relating sales to economic indicators	Substantive (very high precision)
Proof in total	Interest rate × average loan balance = expected interest expense	Substantive (high precision)
Comparison to industry	Entity's gross margin vs. sector average	Risk assessment
Comparison to budget	Actual vs. budget by line item	Substantive (if budget is reliable)

ISA 520 in Your Jurisdiction

Netherlands. COS 520 follows ISA 520 closely. AFM inspections have repeatedly cited deficiencies in substantive analytical procedures — particularly the lack of an independent expectation, insufficient precision (too aggregated), reliance on management's explanations without corroboration, and failure to set and document a threshold before performing the comparison.

Germany. IDW PS 520 adapts ISA 520. German practice traditionally favours detailed substantive testing over analytical procedures, but the use of substantive analytics is increasing, particularly for large-volume transaction streams. The WPK's inspections focus on whether analytical procedures are supported by documented expectations and thresholds.

United Kingdom. ISA (UK) 520 is substantively aligned with ISA 520. The FRC's inspections consistently identify substantive analytical procedures as an area of concern — auditors relying on analytics without sufficient precision, failing to investigate unexpected results adequately, and confusing the overall review with substantive work.

France. NEP 520 implements ISA 520. French practice uses analytical procedures (revue analytique) extensively, particularly at the planning stage and as part of the overall review. The H3C's inspections examine whether analytical procedures are properly documented in the dossier de travail and whether their conclusions are consistent with the overall audit approach.

Frequently Asked Questions

Can substantive analytical procedures replace all tests of detail?

For some assertions, yes — particularly for income statement items where the relationship between variables is strong, the data is reliable, and the expectation is sufficiently precise. However, ISA 330 requires tests of detail for significant risks, and for some assertions (particularly existence of assets), tests of detail are inherently more effective.

How precise does the expectation need to be?

Precise enough to detect a misstatement that could be material, individually or when aggregated with other misstatements. The more the auditor relies on the analytical procedure (i.e., the less it is supplemented by tests of detail), the more precise the expectation must be. Disaggregation — breaking down the analysis by location, product, period — is the primary tool for increasing precision.

Is the overall review the same as substantive analytical procedures?

No. The overall review is a mandatory completion procedure that serves as a consistency check. It does not provide targeted evidence about specific assertions. If the overall review reveals a potential issue, the auditor must go back and perform additional procedures — the overall review itself does not resolve the issue.

What if management cannot explain a fluctuation?

The auditor performs additional audit procedures to determine whether the fluctuation represents a misstatement. The inability of management to explain a significant variance should increase the auditor's professional scepticism about the area and may indicate a need for more extensive testing.