Question

Explain the purpose and each of the key components or steps of Phase III, perform substantive analytical procedures and tests of details of balances. Use the subsequent material for each of these steps or components as well as any online sources that you find to help you explain the steps.

Answer 1

The purpose of applying substantial analytical procedures is to to obtain assurance, in combination with other audit testing (such as tests of controls and substantive tests of details), with respect to financial statement assertions for one or more audit areas. These are applied to the transactions which are large in amount and have become predictable over the time over the belief that they have relationships exist among data.

The steps involved in Phase III are:

STEP 1: Develop an independent expectation

Independant expectation means the ratio or time or any figure which is considered as benchmark by the audtior of the required thing. This expectation is mainly based upon experience, knowledge of auditor and trends in the market. For ex. For auditor may take a note of the material used in the consruction of the building with per swqure foot cost of the similar building in the market and compare them both.

STEP 2: Define a significant difference (or threshold)

The threshold is the acceptable amount of potential misstatement and therefore should not exceed planning materiality . Threshold should be defined before proceeding to step 3 so as to have in consideration the deviation which is acceptable.

The thrershold should be seen both individually and in aggregate because what may not seem significant individually may have much effect in aggregate.

For ex. Sales unit deviation of one type of product may not look significant but the overall deviation in units can be significant

STEP 3: Compute difference
The third step is the comparison of the expected value with the recorded amounts and the identification of significant differences, if any. This should be simply a mechanical calculation.

STEP 4: Investigate significant differences and draw conclusions
The fourth step is the the most important of all which requires to figure out ways to chechk the irregularities. Auditor and management both should discuss and try to com up with solutions to investigate the reason for deviations and what can be done to overcome them

Souce :: http://www.accaglobal.com/in/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/analytical-procedures.html