Video: Analytical Procedure Example

In this lesson, Nick Palazzolo walks through an analytical procedure example by comparing and contrasting changes between year one and year two for various financial statement items. With a focus on identifying significant variances in balance changes, Nick discusses the importance of understanding the reasons behind these variances by consulting management and evaluating the related journal entries. Furthermore, he explains how to use these procedures more effectively for revenues and expenses by confirming that corresponding journal entries align with the observed changes in balances.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Here's a nice example which I am going to display for you again later on in the lesson, but just to kind of give you a visual of what this looks like. Now as I mentioned before, we could have, now this could be year one and year two, this could be year two and let's say the industry averages, so the industry average of cash balance is a hundred, or sorry a thousand, this could also just, it could be anything at all. But in this case, let's say it's year one and year two. So here we go, we see what's the difference, what's the change, and we could say in auditor's expectation for this, and this is before looking at the numbers, and we could say based on whatever, balances with a 300% change or more are considered significant variances, and we want to investigate what happened. Now let's see, just taking a look here, obviously I did this in Excel and then displayed that, looks like they decreased their long-term debt significantly, and they also increased their accounts payable significantly, those are out of range. So here everything, whether it's an increase or a decrease, is within range, it looks pretty solid there. However, we'd want to investigate, ask questions of management, what happened, assess this. But like I said, it's when it comes to revenues and expenses that we can really utilize them much more effectively because simple answers here could be, oh, we just got more cash or we just had more expenses, right? It's just something like that. You want to also see that if the corresponding journal entries match up, because what do we do when we have an expenditure? We debit expense and credit accounts payable. So if accounts payable, looks

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