Lesson: Conducting Analytical Procedures

Instructor: Nick Palazzolo

In this lesson, Nick Palazzolo, CPA, discusses the process of conducting analytical procedures as a part of an audit. He explains the importance of comparing current year balances with prior year balances or external data, such as competitor or industry averages. The lesson elaborates on various techniques for developing expectations of balances or ratios, including converting dollar amounts of income statement account balances into percentages of net sales, estimating expenses based on prior years and budgets, and comparing current year financial data with prior year sales volumes, among others. Additionally, the use of analytical procedures as a part of the planning and final review phase is emphasized.

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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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Let's talk about conducting these procedures. Well, these are usually going to compare current year balances to prior year ones or external balances such as those of competitor or the industry average. But you're going to have a good old balance sheet and income statement. Well, let's think just trial balance. You've just got all these items. You've got your 1231 amounts. And as of 1231, you've got cash is a certain amount. Debt's a certain amount. Equity is a certain amount. Etc. Revenue expenses, all of your accounts. And you're going to compare them to, let's say, this is last year. You could also have the industry average, like we said, or a competitor. And you're going to just in Excel, do a nice little formula, compare these two, take the variances, do a percent change formula, do all those different methods in order, like I said, get a percent. What's the difference? Now, if let's say we could say normally, OK, revenue is expected to increase by 5%. Maybe that's what it is in this case. It may be a different amount. But generally speaking, amounts shouldn't change radically. And if they do, obviously, you've got some sort of concern. But when you get to analytical procedures, you form these expectations before you even do the procedures. So if the change was or the variance was more than a certain percent, it stands out and you can assess what happened. Now, these analytical procedures usually use financial and nonfinancial data aggregated at a high level. And these procedures are required to be used during the planning and final review phase, keeping that in mind. What's what's the additional phase we could do them in? Well, that would be the testing phase. And you're not required to use analytical

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