PCAOB Continues Its Modernization Drive With Proposal To Replace Outdated Standard on Substantive Analytical Procedures

Replacing an interim standard that has not changed significantly since 1989, the proposal aims to make it more likely that auditors will obtain relevant and reliable audit evidence, leaving investors better protected

Washington, DC, Jun. 12, 2024

The Public Company Accounting Oversight Board (PCAOB) today 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 – ultimately improving overall audit quality and leaving investors better protected.

The deadline for public comment on the proposal is August 12, 2024.

The world has changed over the last 30 years, and it is past time this standard caught up. These changes are designed to reduce the risk a material misstatement goes undetected, improve overall audit quality, and leave investors better protected,” said PCAOB Chair Erica Y. Williams.

Why the Board Is Proposing These Changes Now

PCAOB standards require the auditor to design and perform substantive procedures – 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.

A substantive analytical procedure involves comparing a recorded amount (by the company) or an amount derived from the recorded amount (the “company’s amount”) to an expectation of that amount developed by the auditor to determine whether there is a misstatement. Appropriately designed and performed substantive analytical procedures can provide relevant and reliable audit evidence when responding to assessed risks of material misstatement.

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 (e.g., greater use of technology-based tools by auditors, greater availability of information in electronic form) 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. For example, the PCAOB staff has observed instances where the expectation developed for a substantive analytical procedure was not precise enough to identify a difference between the auditor’s expectation and the company’s recorded amount, which may result in a potential material misstatement not being identified.

What the 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 and reorganizing the standard so it is easier to understand and follow.

Specifically, 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 also includes amendments to AS 1105, Audit Evidence, and AS 2301, The Auditor’s Responses to the Risks of Material Misstatement.

The Board is seeking comment on all aspects of the proposal. Throughout the proposal, the Board has included questions soliciting comments on specific aspects of the proposed amendments. Readers are encouraged to answer these questions, to comment on any aspect of the proposal, and to provide reasoning and relevant data supporting their views.

The public can learn more about submitting comments on PCAOB proposals at the Open for Public Comment page. For more information regarding the PCAOB’s standard-setting activity, visit our Standards page.


About the PCAOB

The PCAOB is a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports. The PCAOB also oversees the audits of brokers and dealers registered with the Securities and Exchange Commission, including compliance reports filed pursuant to federal securities laws.


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