In this video, we walk through 5 AUD practice questions teaching about determining the suitability of substantive analytical procedures. These questions are from AUD content area 3 on the AICPA CPA exam blueprints: Performing Further Procedures and Obtaining Evidence
The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.
Also be sure to watch one of our free webinars on the 6 “key ingredients” to an extremely effective & efficient CPA study process here…
Determining the Suitability of Substantive Analytical Procedures
In an audit engagement, analytical procedures can serve multiple purposes. They are required during the planning phase and again during the final overall review. However, their use as substantive procedures—when auditors rely on them to obtain audit evidence supporting a specific assertion—requires careful evaluation. This area is a specific focus within the CPA Exam blueprint for AUD: determining when substantive analytical procedures (SAPs) are appropriate.
This overview outlines key considerations that affect the suitability of SAPs, supported by examples and framed around five core principles.
Suitable Accounts
Substantive analytical procedures are most effective when applied to accounts with predictable and routine characteristics. These accounts typically exhibit stable trends or are calculated based on systematic methods, which makes it easier for the auditor to develop a reliable expectation.
Example: Depreciation expense is often calculated using fixed rates and asset schedules, making it an appropriate candidate for SAPs. In contrast, legal expenses, which vary significantly from year to year based on nonrecurring events, are less predictable and therefore less suitable for this approach.
Data Reliability
The reliability of the underlying data significantly influences the effectiveness of analytical procedures. SAPs are only appropriate when the auditor has confidence in the integrity, completeness, and consistency of the data used to generate expectations and perform comparisons.
Example: If a client’s internal controls over payroll data are strong and the number of employees remains consistent, the auditor can reasonably estimate total payroll expense. If the data is unreliable or affected by frequent changes in calculation methods, SAPs would not be appropriate as a standalone test.
Assertion Alignment
Not all management assertions are well-suited to analytical procedures. SAPs are typically more effective for testing assertions such as completeness, accuracy, and existence. However, assertions that rely heavily on timing or judgment—such as cutoff or valuation—often require more detailed testing.
Example: To test the completeness of rental income, the auditor may use SAPs to estimate monthly revenue based on signed lease agreements. In contrast, testing the cutoff of revenue recognition generally requires reviewing source documents such as shipping records and invoices.
Limiting Conditions
Certain account characteristics or contextual factors limit the usefulness of analytical procedures. These include accounts subject to seasonality, irregular or one-time transactions, and significant management estimates or discretionary judgment.
Example: Sales revenue in a retail business that varies significantly by season may require more granular testing than an analytical procedure can provide. Similarly, accounts with large year-end adjustments may not follow predictable trends, reducing the reliability of SAPs.
Procedural Requirements
For analytical procedures to serve as substantive evidence, the auditor must complete several steps: develop an independent expectation, compare it to the recorded amount, and investigate any significant unexplained differences. Without these steps, the procedure does not satisfy auditing standards.
Example: If an auditor expects interest expense to be $100,000 based on known loan balances and terms, but the recorded amount is $130,000, they must investigate the $30,000 difference. This may involve inquiring about new financing arrangements or reviewing supporting documents.
Required Use of Analytical Procedures
While the focus here is on substantive procedures, it is important to clarify that analytical procedures are required in two specific stages of the audit:
- During the planning phase, to assist in understanding the entity and identifying areas of potential risk.
- During the final review, to assess the overall reasonableness of the financial statements.
Their use as substantive procedures during fieldwork is not required but is permitted if the conditions discussed above are met.
Conclusion
Determining when substantive analytical procedures are suitable requires professional judgment and a clear understanding of the account characteristics, assertion being tested, and quality of available data. When used appropriately, SAPs can be an efficient and reliable source of audit evidence. However, they must be applied rigorously and only in situations where their use is justified.
