Statement in Support of Proposed AS 2305, Designing and Performing Substantive Analytical Procedures, and Amendments to Other PCAOB Standards

Remarks as prepared for delivery

Good afternoon, and thank you, Chair Williams.

I am pleased to support today’s proposal. I believe that proposed AS 2305, Designing and Performing Substantive Analytical Procedures, and the related amendments, do an excellent job of clarifying and streamlining certain aspects of one of the most frequently used audit procedures to promote audit quality.

This proposal exemplifies the importance of the comprehensive approach we are taking in our standard-setting agenda. It takes a standard that is over 30 years old, and has not been substantially changed since being adopted by the PCAOB in 2003, and considers it in light of the observations we have gathered in two decades of oversight activities. Staff has seen the way it interacts with other rules and standards and has proposed to amend it accordingly. The result is a proposal that benefits from hindsight perspective and is also forward-looking to meet the needs of investors well into the future.

In this instance, our inspectors have consistently identified a relatively high rate of findings related to the use of substantive analytical procedures. They have also observed the increased use and importance of these procedures in light of advances in technology. Accordingly, significantly more information is available from companies from which to develop substantive analytical procedures, and more sophisticated tools are available for performing them.

Rigorously designed and properly executed substantive analytical procedures are a powerful way of obtaining audit assurance, and as such, have a strong correlation to audit quality. The amendments propose developing expectations that are plausible, predictable, and precise. They also provide additional clarity for evaluating when the difference between the auditor’s expectation and the company’s amount requires further evaluation, and when this difference represents a misstatement.

This proposed standard offers specific clarity of auditor responsibilities when using substantive analytical procedures, and specifies certain additional requirements to make it more likely that these procedures will be appropriately designed and performed. Clarifications and new requirements that would particularly equip auditors to perform robust procedures include:

• A clear prohibition to avoid circular auditing;
• A clear declaration that inquiry alone is not sufficient to determine the appropriateness of the relationship used;
• An explicit prompt to the auditor to consider potentially disconfirming information when developing an expectation;
• Considerations to minimize the auditor’s overreliance on company-produced information; and
• Guidance on how the auditor can avoid reliance on unreliable relationships between data elements.

Finally, the proposed standard also better integrates itself with the PCAOB’s existing risk assessment standards, and is consistent with the format and terminology of other Board-issued standards. Given the recognized correlation of a thorough and well-designed risk assessment with audit quality, the integration and alignment of this proposed standard is significant. The end product should be a standard that is easier to understand, easier to apply, and results in higher quality audits.

Conclusion

The remaining two items on today’s agenda are votes to adopt. Both of those projects benefited from comments received from the public after they were proposed. I encourage all stakeholders, and particularly those from smaller firms, to submit your thoughts on this proposal. As I noted last week at the Forum for Auditors of Small Businesses and Broker-Dealers, smaller firms have unique and different attributes that should be kept top of mind when considering new standards. It is from a diversity of perspectives that the best results often emerge.

I end with thanks to the staff for all of their hard work on this project. I am particularly grateful for the time they spent answering my questions. I extend my gratitude to Barb Vanich, Dima Andriyenko, Dominika Taraszkiewicz, Donna Silknitter, Karen Wiedemann, and Sarah Madris from the Office of the Chief Auditor; to Martin Schmalz, Erik Durbin, John Cook, Carrie von Bose, and Dylan Rassier from the Office of Economic and Risk Analysis; to Connor Raso, Katherine Kelly, Jennifer Williams, and Katie Reilly from the Office of the General Counsel; and to staff from the Division of Registration and Inspections and the Division of Enforcement and Investigations for their contributions.