Chair Williams’ Statement on Proposal To Replace Standard on Substantive Analytical Procedures

Remarks as prepared for delivery 

Performing substantive analytical procedures is a common approach for auditors to address a relevant assertion of a significant account or disclosure. The requirements for performing such procedures are included in auditing standard AS 2305, Substantive Analytical Procedures. 

Although there have been targeted amendments to the standard over the years by the PCAOB, the main aspects of the standard largely resemble what first became effective in 1989. Consequently, it does not reflect developments that have taken place in the auditing environment in the past 35 years, for example, advancements in technology and a greater availability of information that is being used by the auditing profession in obtaining audit evidence. In addition, there are certain requirements in the existing standard that are duplicative of other Board-issued standards, such as the requirements related to documentation. 

We have observed through our oversight activities that auditors do not always design and perform substantive analytical procedures appropriately. This includes a lack of developing a precise enough expectation to compare to the company’s recorded amount or an amount derived from a recorded amount. As another example, we have observed auditors failing to determine an amount for which differences between the auditor’s expectation and the company’s recorded amount would require further investigation. When these situations occur, there is a strong likelihood that auditors have not obtained sufficient appropriate audit evidence to support their opinions accompanying issuers’ financial statements – leaving investors at risk. 

The proposal that is before us today is designed to address these and other shortcomings. For example, proposed AS 2305 strengthens and clarifies the auditor’s requirements for evaluating the difference between the auditor’s expectation and the company’s recorded amount and requires the auditor to determine if there is a misstatement.  

The proposal also reorganizes the standard in a logical, systematic approach to performing substantive analytical procedures that is intended to make it much easier for auditors to follow.  

Finally, the proposal includes an amendment to AS 2301, The Auditor’s Responses to the Risks of Material Misstatement, that would more explicitly require the auditor to obtain external information as part of performing substantive procedures on a company’s accounts or disclosures that depend on information the company received from one or more external sources. For example, this would typically require the auditor to obtain such external information when testing transactions with third parties. 

The economic impacts of this proposal are thoroughly addressed in the economic analysis section. The world has changed over the last 35 years, and it is past time this standard caught up. Collectively, these updates are intended to lead auditors to obtain the sufficient appropriate audit evidence necessary to support their opinion, ultimately reducing the risk a material misstatement goes undetected, improving overall audit quality, and leaving investors better protected. 

I encourage all our stakeholders to read the proposal and provide your perspectives on our questions and other thoughts you may have on this important project.  

In closing, I would like to thank those individuals that have significantly contributed to this proposal. Specifically, I would like to thank in the Office of the Chief Auditor, Barb Vanich, Dima Andriyenko, Dominika Taraszkiewicz, Donna Silknitter, Karen Wiedemann, and Sarah Madris; in the Office of Economic and Risk Analysis, Martin Schmalz, Erik Durbin, John Cook, Carrie Von Bose, and Dylan Rassier; and in the Office of General Counsel, Connor Raso, Katherine Kelly, Jennifer Williams, and Katie Reilly. 

Thank you once again to my fellow Board Members and their staff for their contributions. In addition, I would like to recognize the support provided by staff from the Division of Registration and Inspections, the Division of Enforcement and Investigations, and the Office of Communications and Engagement. 

Lastly, I would like to thank the Securities and Exchange Commission’s staff, including the staff of the SEC’s Office of the Chief Accountant, for their support and assistance.