PCAOB CONTINUES ITS MODERNIZATION DRIVE WITH PROPOSAL TO REPLACE OUTDATED STANDARD ON SUBSTANTIVE ANALYTICAL PROCEDURES

Objective:

This proposal aims to make it more likely that auditors will obtain relevant and reliable audit evidence, leaving investors better protected. The deadline for public comment on the proposal is August 12, 2024.

Background:

The Public Company Accounting Oversight Board (PCAOB) issued for public comment a proposal to replace its existing auditing standard related to an auditor’s use of substantive analytical procedures with a new standard: AS 2305, Designing and Performing Substantive Analytical Procedures. If adopted, the new standard would strengthen and clarify the auditor’s responsibilities when designing and performing substantive analytical procedures, increasing the likelihood that the auditor will obtain relevant and reliable audit evidence – improving overall audit quality and leaving investors better protected.

Reason for proposing these changes:

PCAOB standards require the auditor to design and perform substantive procedures i.e., substantive analytical procedures or tests of details, that address the assessed risks of material misstatement for each relevant assertion of each significant account and disclosure.

The current AS 2305 was originally put in place by the American Institute of Certified Public Accountants in 1989 and has not changed substantially since its adoption on an interim basis by the Board in 2003. It predates developments now influencing current auditing practices, as well as updates to PCAOB standards that were made after 2003. As discussed in the proposal, PCAOB oversight activities suggest that auditors do not always design and perform substantive analytical procedures appropriately.

Proposal Seeks to Achieve:

The proposal addresses the challenges outlined above, among others, by incorporating specific requirements regarding risk assessment and audit evidence while also eliminating unnecessary duplicative provisions. The proposed standard would do the following:

1. Strengthen and clarify the requirements for determining whether the relationship(s) to be used in the substantive analytical procedure is sufficiently plausible and predictable;
2. Strengthen and clarify existing requirements for determining when the difference between the auditor’s expectation and the company’s amount requires further evaluation;
3. Strengthen and clarify existing requirements for evaluating the difference between the auditor’s expectation and the company’s amount. This includes determining if a misstatement exists as well as specifying requirements for certain situations the auditor may encounter when evaluating a difference;
4. Clarify the factors that affect the persuasiveness of audit evidence obtained from a substantive analytical procedure;
5. Clarify the elements of a substantive analytical procedure, including the distinction between substantive analytical procedures and other types of analytical procedures; and
6. Modernize the standard by reorganizing the requirements and more explicitly integrating the standard with other Board-issued standards – ultimately making it easier for auditors to follow.

Nitish Kumar, Audit Associate, SW