Question

Explain the Four-Phase Process of the analytical review process includ:
1) Phase one – formulate expectations (expectations)
2) Phase two – compare the expected value to the recorded amount (identification)
3) Phase three – investigate possible explanations for a difference between expected and recorded values (investigation)
4) Phase four – evaluate the impact of the differences between expectation and recorded amounts on the audit and the financial statements (evaluation).

note: explain all process in detail.

Answer 1

Phaes One-formulate expectations

The development of an appropriately precise,objective expectation is the most important step in analytical review.An expectation is a prediction of a recorded amount or ratio.The prediction can be specific number,a percentage,a direction or an approximation,depending on the desired precision.

Phase Two-Compare the expected value to the recorded amount

The next phase is the comparison of expected value with the recorded amounts and the identification of significant deifferences,if any.This should be simply a mechanical calculation.It is important to note that the computation of differences should be done after the consideration of an expectation and threshold.

Phase Three- Investigate possible explanations for a difference between expected and recorded values

Third phase is the invetigation of significant difference.Difference indicate an increased likelihood of misstatement;the greater the degree of precision,the greater the likelihood that the difference is a misstatement.

Explanations should be sought for the ful amount of difference,not just the part that exceeds the thresold.There is chance that the unexplained difference may indicate an increased risk of material misstatement.

Phase Four-  Evaluate the impact of the differences between expectation and recorded amounts on the audit and the financial statements

It is important to evaluate the impact of the difference on the audit and financial statements.If the difference is cuased only by the factors previously overlooked then this will not materially affect the fianancial statements.It must ensure that difference should be properly deal with in the audit report and financial statements.

Any difference which caused the financial statements to be materially misstated should be disclosed by the auditor in his report.