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In the video, 4.04 – Audit Evidence: Analytical Procedures – Lesson 2, Roger Philipp, CPA, CGMA, first reiterates that analytical procedures are required during the beginning and end of an audit, but are only recommended during substantive testing. He then describes the steps for analytical procedures that are conducted during substantive testing, which are: determine the suitability of particular substantive analytical procedures for given assertions, evaluate the reliability of data from which the auditor's expectations is developed, develop an expectation for a recorded amount or ratio, evaluate whether the expectation is sufficiently precise to identify a misstatement that may cause the F/S to be materially misstated, determine the amount of discrepancy between the recorded amount or ratio and the auditor's expectation that would not require further investigation, compare the recorded amounts or ratios with the expectations, and investigate any significant differences from the expectations. Roger also explains how analytical procedures may lead the auditor to go back and perform more substantive testing. For example, the auditor may find an unusual increase in inventory over the prior year, make inquiries, and find out if the company has a new manufacturing facility, leading the auditor to conduct an inspection visit of the factory. You may be wondering--are more or less experienced audit engagement team members more suitable for conducting analytical procedures? Roger gives the answer from his own experience plus the answer you're likely to find on the CPA Exam. Connect with us: Website: https://www.rogercpareview.com Blog: https://www.rogercpareview.com/blog Facebook: https://www.facebook.com/RogerCPAReview Twitter: https://twitter.com/rogercpareview LinkedIn: https://www.linkedin.com/company/roger-cpa-review Are you accounting faculty looking for FREE CPA Exam resources in the classroom? Visit our Professor Resource Center: https://www.rogercpareview.com/professor-resource-center/ Video Transcript Sneak Peek: Now, as mentioned earlier, when do you use this? Three different times, planning and you'll see in your notes, yellow in the word required. So in the planning phase, required. As an overall review, required. So at the end of the audit and in planning the audit it is required. What about as a substantive test? So over here, these are our substantive tests as an analytical procedure it's recommended, recommended not required but recommended to use as a substantive test. And you'll see here it says, "The auditor should complete four steps in using it as a substantive test." What are those steps? "Determine the suitability of particular substantive analytical procedures for given assertions. Then evaluate the reliability of data from which the auditor's expectation is developed. Develop an expectation for a recorded amount or ratio and evaluate whether it is adequately precise to identify a misstatement and then determine the amount of the discrepancy between the recorded amount or ratio and the auditor's expectation that would not require further investigation." So, those are kind of the things we're looking at when using it as a substantive test but planning, required. Substantive, recommended, optional. Overall review, required. Who do you think should be doing these? Now and this is one of the things I remember when I was the itty, bitty, kitty in the cribby. I was the new hire when I was working at my job was to go into the controller's office. Hi controller, we're almost done with the audit. Can I ask you a couple of questions? Uh-huh, sure. Okay, inventory went up by 42 percent, why? And then you write notes. This changed by three percent, why? And then you write notes. So we're doing this to kind of ask questions to see. So when doing analytical procedures, we're doing this at the end of the audit as well. This may lead us to go back and do more testive details because I'm going to go back and say, hey, why did inventory go up by 17 percent? Oh, because we bought a new factory. Oh, maybe I need to go out and observe it. Maybe I need to inspect the documentation. So it leads you to go back and do more of this. So doing this in planning, helps to look at what you need to-- You know, accounts that have changed dramatically. Doing it as an overall review is required because it lets you go back and say hey, maybe there's stuff that I missed in the detail testing. Remember, here the detail, you're in the trees. Analytical procedures, ratios, you're stepping back and looking at the forest for the trees. You're looking at the overall picture of it. So it leads you to go back and do more of the detail testing.
