**MCQ 5 — SA 520**

**The difference is ₹3.2 crore. The threshold is ₹4 crore. Is the senior finally right?**

**Zenith Hotels Ltd.** reports room revenue of ₹400 crore.

The auditor develops an expectation of ₹396.8 crore using:

rooms available;
occupancy data;
average room tariff; and
number of operating days.

The data used to develop the expectation has been independently tested and found reliable.

The auditor establishes **₹4 crore** as the amount of difference that can be accepted without further investigation.

Actual room revenue is ₹400 crore.

The audit senior concludes:

“The ₹3.2 crore difference is below the predetermined acceptable difference of ₹4 crore. Accordingly, the analytical procedure has not identified a difference requiring further investigation.”

The engagement partner agrees.

A trainee objects:

“Any difference between the auditor’s expectation and management’s recorded amount means that the auditor has identified a misstatement and must investigate it.”

Which ONE of the following is **correct**?

**A.** The trainee is correct because substantive analytical procedures are intended to identify deviations from expectations, and every deviation represents a potential misstatement requiring investigation regardless of the threshold determined by the auditor.

**B.** The partner and senior are correct.

**C.** The trainee is correct only because the expectation of ₹396.8 crore was developed by the auditor rather than management, and an auditor-developed expectation must be reconciled exactly with the recorded amount before reliance can be placed on the procedure.

**D.** The partner’s conclusion would be acceptable only if the ₹4 crore threshold were calculated as a fixed percentage of revenue in accordance with a prescribed percentage under SA 520; otherwise, the auditor is required to investigate every difference identified through the analytical procedure.