Analytical Procedures in Accounting - dummies

Analytical Procedures in Accounting

By Kenneth W. Boyd

An audit requires a CPA to collect audit evidence. The evidence must be sufficient for the CPA to provide an audit opinion. An audit opinion states whether the financial statements are free of material misstatement.

Analytical procedures are used to gather audit evidence. This topic can be challenging for students taking the CPA exam. Here’s why:

  • Analytical procedures require you to relate account balances to each other. You may be asked how one account balance affects a change in another account.

  • You may also be asked to identify a trend in an account balance over several years. The trend may be expressed as a dollar amount of change, as a percentage change, or both.

Say, for example, that you’re provided with the following balances for sales and accounts receivable for a sporting goods manufacturer:

Sales: 2012 $400,000; 2013 $500,000

Accounts receivable: 2012 $50,000; 2013 $75,000

Note that sales have increased 25 percent ($100,000 increase ÷ $400,000 beginning balance). Accounts receivable, on the other hand, increased 50 percent ($25,000 increase ÷ $50,000 beginning balance).

The exam may ask you how the two increases are related. Using percentages, accounts receivable increased twice as fast as sales (50 percent versus 25 percent). Percentages allow you to make an apples-to-apples comparison between account balances with different dollar amounts. The sporting goods company is selling more goods to customers who are paying more slowly.

As you study for the CPA exam, consider how accounts in the financial statements relate to each other.