 Hello and welcome to this session in which we would look at the evidence mix. Simply put, we looked at the five different types of audit tests such as risk assessment procedure, test of control, substantive test of transaction, test of details of balances, and analytical procedures. So those are the five types that we need to use in order to determine whether the financial statements are fairly presented. And we looked at them in the prior session. In the prior session also we looked at the cost of each type of testing and how do they fit together? How do they fit together? In this session we are going to look at the mix of evidence we can use in an audit. So it's very important if you don't understand what test of control, substantive testing, test of balances, or analytical procedures are, we don't really work about with risk assessment here, you want to go back and view the prior recording because the audit evidence that we're going to be mixing together require you that you understand the importance of each one and when do we use it. Now this topic is extremely important on the CPA exam because this is a scenario-based topic. In other words, you cannot memorize this, you have to understand it and apply it. Therefore, if you are a CPA candidate, I strongly suggest you take a look at my website, farhatlectures.com. Most likely you have a CPA review course, that's great. You need to keep your CPA review course, you need a CPA review course. I can be a useful addition to your CPA review course. I can add 10 to 15 points to your CPA score by adding the knowledge, by ending the understanding of how to treat each topic. Taken for example today, how we mix the evidence. Now your risk is one month of subscription. Your potential gain is passing the exam. Are you willing to take that risk? It's as simple as that and if not for anything, take a look at my website to find out how well your university is doing on the CPA exam and I do have resources for other accounting and finance courses. If you haven't connected with me on LinkedIn, please do so. Like this recording, share it with others, connect with me on Instagram, Facebook, Twitter and please connect with me on Reddit, follow me on Reddit. So again, this is the five type of test. Now we're going to look at the evidence mix. How are we going to mix those tests? Well, the first thing you have to understand, not all companies and not all audits are the same. So the mix will vary widely from audit to audit. It depends on many factors and obviously we should know some of the factors like the internal control. What about internal control? And usually that drives everything else, believe it or not, internal control and inherent risk of the accounts of the company, those are the main things that kind of influence everything else. And you're going to see why in a moment. Okay, now you have to keep in mind that every audit engagement is unique, but within each audit engagement, you're going to have different cycles. So the evidence mix, the evidence mix, it may not apply to every cycle equally. Some cycles, they'll have more inherent risk than the others. For example, sales is more, maybe more risky or they have more inherent risk than the purchase cycle or then the payroll cycle or then the inventory cycle. So it depends on each cycle. So it varies from cycle to cycle. And here we're not here to give you the answer. Here I'm going to give you an illustration of how you would deploy this. So as an individual, you'll never have to worry about all the cycles together unless you are a partner. But the point you have to understand the big picture, you have to understand how we would use the audit test to deploy them in a particular audit. So hopefully it will make more sense in understanding those different audit tests. Okay, so the combination of types of tests to obtain sufficient evidence is to get that sufficient appropriate evidence to deal with the risk identify is called the evidence mix. So when we mix those type of tests to obtain the evidence, this is the definition of evident mix, which evidence mix are we going to use? And the best way to illustrate this is to work some hypothetical examples to illustrate the point. So we're going to look at four different companies or four different audit and I'm going to make assumptions and based on the assumptions we'll decide on what type of evidence or what are we going to do. E means there's an extensive amount of testing for this test, M mean medium amount of testing, S means a small amount of testing and N means we're not going to do any testing using this method. So the first company we're going to assume it's a large company, it's a large company, they have good internal control. And what's going to happen because they have good internal control, we're going to do extensive testing of their internal control. Now why would you say, why would you say we should do this? Well if they have a good internal control, let's confirm it, let's make sure it's good. If their internal control is good, remember what we learned in the prior session. If you can rely on the internal control and the inherent risk is low, what's going to happen is you will do less of substantive testing and less test of details. Why? Because those are more costly. So if the internal control we're going to assuming is good, we're going to do small amount of substantive test of transaction overall and let it go procedure, we can do extensive because analytical procedures, it's easy to do and it's relatively inexpensive. So although, you know, we're not doing a lot of substantive testing of transaction because we have good control. Well, why not? Let's do some analytical procedure, extensive analytical procedures. And here what we do, we do also a small amount of test of details, unless we're starting to find more problems. But here what we're saying, we have good internal control, low inherent risk, publicly traded company. And here what we're doing is we are also doing an integrated audit because it's a public company. We're going to have to really test the internal control. So this is basically the evidence that we, the evidence mix that we will use for company one. This is just an example. Let's look at company two. We're going to assume that company two have few internal controls and few inherent risks. So their internal controls are not great, like company one. So we cannot rely on them, but they have few controls. Therefore, we're going to test medium, medium. We're going to test the medium. That's fine. But as a result, we have to rely more on substantive test of transaction. So it's not going to be small now. It's going to be medium. So we're going to do more substantive work of transaction. Again, analytical procedures we could always do. It doesn't hurt to do a lot of analytical procedures here. And for test of details, we could also do medium test of detail balances. So here, maybe we're talking about a private small size companies. So they have some control, but we do have, we do have some substantive testing and test of details. Let's look at company three. Company three is we're going to assume they have lousy internal control. They have no internal control or if they have, they're not working, right? The design is not good. And if the design is good, they're not working. Therefore, what are we going to do? We're going to ignore. We're going to do no testing of internal control. What is that going to do? Well, you guessed it. We're going to have to do extensive testing of transaction. For analytical procedures, now we can do medium because we're doing extensive test of transaction and for test of details, you guessed it. We're going to do also extensive. Again, those two are expensive. The test of transaction and test of details. And that's why if we can basically internal control, they're exactly like preventive. If you can have a preventive, if you can have preventive control, it's better because they're going to save you money when you do the test of transaction and test of detail balances. So it's a good way to just compare one in three, kind of the opposite of each other. One company, one has really good control. We do less of substantive testing. Three, they have lousy or no internal control. We do more of those testing that cost more money and time. So relatively, it becomes more expensive. And let's look at company four. Company four, we're going to assume they have a medium internal control. So we're going to start that they have medium internal control, just like company two. So notice company two, we said they have a medium internal control. That's what we're going to think. Then we're going to start to test the internal control. And what we find out as we test the internal control, they have more and more problems. Although we assess it as medium initially, but now we have more problems. What are we going to do? If that's the case, we're no longer going to do medium substantive testing. We're going to do extensive substantive test of transaction. Why? Because we thought it's medium, but as we learned later, it's not as good as we thought. Again, here in a little procedure, let's do extensive as well. In test of detail balances, let's do as extensive as well, rather than medium, it's extensive. Although test of control is medium, but kind of we were shocked of how weak it was, how weak it was. Obviously, what's that going to do? It's going to increase the price, increase the hours that we need to spend on the audit. So bear in mind, this is just an overview. And if you can make sense of this, how they all fit together, why? Why if I have a good internal control, I have to do less substantive testing versus if I don't have a good internal control, I have to do more substantive testing. This is the idea that you want to get out of this, because each cycle will have its own test of control and its own substantive test of transaction and test of details. Again, analytical procedures, kind of like a backup in a sense, their backup, you could always do even four, three, why not do extensive test of analytical procedures? It doesn't cost a lot of money. It doesn't cost a lot of time. Frankly, personally, I love analytical procedures. And the reason I do that, because I got very good, I got very good at them because I did a lot of reviews and you would learn about reviews. And when you do reviews rather than audit, the main thing is analytical procedures. So I became an expert in analytical procedures at the beginning, they seem intimidating, they will not make sense, but analytical procedures are very powerful, especially if you understand the business. And if you work with that company for several quarters, if you're doing quarterly, if it's better, if it's several years, and the managers rely on them like partners, partners are very good because they're so experienced with this, they can use analytical procedures much, much more efficiently. And what I did, I would ask the partner I work with a lot of questions about, well, how about this? How about that? And I would work with scenarios with them. Actually, my manager too, she was really good. And she taught me those, the tricks and what to look for when it comes to analytical procedures. At the end of this recording, I'm going to remind you to visit my website, farhatlectures.com. Again, I don't replace your CPA review course. I can't, I simply, I will not be doing you a favor, but I can be a useful addition. I can help you along your CPA review course. Study hard. You only need to study for the exam once in your lifetime. It's a lifetime investment. Don't shortchange yourself. My subscription is nominal. If you don't like it, cancel. That's all you have to do. But give it a try. Many, I have helped many people. I can help you. Good luck. Study hard. And of course, stay safe.