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expectation that relationships among data exist and continue in the absence of known conditions to
the contrary. However, the suitability of a particular analytical procedure will depend upon the
auditor’s assessment of how effective it will be in detecting a misstatement that, individually or when
aggregated with other misstatements, may cause the financial statements to be materially misstated.

➢ In some cases, even an unsophisticated predictive model may be effective as an analytical procedure.
For example, where an entity has a known number of employees at fixed rates of pay throughout the
period, it may be possible for the auditor to use this data to estimate the total payroll Costs for the
period with a high degree of accuracy, thereby providing audit evidence for a significant item in the
financial statements and reducing the need to perform tests of details on the payroll. The use of
widely recognized trade ratios (such as profit margins for different types of retail entities) can often
be used effectively in substantive analytical procedures to provide evidence to support the
reasonableness of recorded amounts.

Analytical Procedures- Factor Affecting Reliability Old Course -- (P16M/ SM17/M18M/N18M/N19E/SM20
QNO Bhaskar CNO - SA520.140 /SM21/N22R/M23E)
520.07
New Course -- (SM25)
The reliability of data is influenced by its source and nature and is dependent on the circumstances under
which it is obtained. Accordingly, explain the factors that are relevant when determining whether data is
reliable for purposes of designing substantive analytical procedures.
OR
What are the factors that determine the extent of reliance that the auditor places on results of analytical
procedures? Explain with reference to SA-520 on Analytical procedures.

OR
Extent of Reliance on Analytical Procedures.
OR
CA A, auditor of ABC Ltd. wants to design substantive analytical procedure and for that he wants to check
whether the data is reliable or not. Mention the relevant points which he has to consider whether data is
reliable for purpose of designing the substantive analytical procedures.
Answer ➢ SA 520 on ‘Analytical Procedures’ provides that the reliability of data is influenced by its source and
nature and is dependent on the circumstances under which it is obtained. Accordingly, the following
are relevant criteria when determining whether data is reliable for purposes of designing
substantive analytical procedures-
• Source of the information available. E.g. information may be more reliable when it is
obtained from independent sources outside the
entity;

• Comparability of the information E.g. broad industry data may need to be supplemented
available. to be comparable to that of an entity that produces
and sells specialized products;

• Nature and Relevance of the information E.g. whether budgets have been established as results
available. to be expected rather than as goals to be achieved;
and

• Controls over the preparation of the E.g. controls over the preparation, review and
information that are designed to ensure maintenance of budgets.
its completeness, accuracy and validity.

Author’s Note

• SR NCC cadets are reliable in event of war Criteria to determine reliability of data for substantive
analytical procedures: -
Source of Data / Relevance of Data / Nature of Data / Comparability of Data / Controls over
Preparation of Information to ensure (Completeness / Accuracy / Validity

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