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As you may know, when the PCAOB was stood up over two decades ago, it adopted the then-existing auditing standards as its own, with the expectation that, over time, the PCAOB would replace those pre-existing auditing standards with its own PCAOB-adopted and SEC-approved auditing standards. The PCAOB’s authority in this regard was driven by concerns with auditing practices in the wake of the corporate scandals of the early 2000s such as Enron and WorldCom. Adopting new and replacement auditing standards is no easy task, so the PCAOB has spent the past twenty-two years working to update and modernize the standards that govern audits of public companies by independent registered public accountants.

The latest modernization efforts involves a recently announced proposal to replace the PCAOB’s 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. The PCAOB notes that, if adopted, the proposed 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 – ultimately improving overall audit quality and leaving investors better protected.” the proposed standard would do the following:

– Strengthen and clarify the requirements for determining whether the relationship(s) to be used in the substantive analytical procedure is sufficiently plausible and predictable;

– Specify that the auditor develops their own expectation and not use the company’s amount or information that is based on the company’s amount (so-called circular auditing);

– Strengthen and clarify existing requirements for determining when the difference between the auditor’s expectation and the company’s amount requires further evaluation;

– 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;

– Clarify the factors that affect the persuasiveness of audit evidence obtained from a substantive analytical procedure;

– Clarify the elements of a substantive analytical procedure, including the distinction between substantive analytical procedures and other types of analytical procedures; and

– 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.

Along with proposed AS 2305, the proposal includes amendments to AS 1105, Audit Evidence, and AS 2301, The Auditor’s Responses to the Risks of Material Misstatement. Comment on the new standard and proposed amendments are due on August 12, 2024.

– Dave Lynn