MCQ 5 — SA 520 The difference is ₹3.

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.