Investor Bulletin: Opportunity To Comment on Proposal To Enhance How Auditors Address Certain Assessed Risks of Material Misstatement

Jun. 27, 2024

The Public Company Accounting Oversight Board (PCAOB or the “Board”) Office of the Investor Advocate is alerting investors to the opportunity to comment on the proposal regarding designing and performing substantive analytical procedures and amendments to other PCAOB standards. 

This document represents the views of the PCAOB Office of the Investor Advocate and not necessarily those of other PCAOB staff or the Board. It is not a rule, policy, or statement of the Board.

On June 12, 2024, the Board issued for public comment a proposal to replace the existing standard for substantive analytical procedures (AS 2305) and other related amendments. If adopted, the proposal would clarify and strengthen certain procedures that auditors may use to address certain assessed risks of material misstatement for significant accounts or disclosures and determine if there is a misstatement. The proposal, if adopted, would modernize PCAOB standards to reflect the ever-increasing use of technology by auditors in performing substantive analytical procedures and would better protect investors by increasing the likelihood that auditors obtain relevant and reliable information to support their conclusions in audit opinions.

In 2003, the PCAOB adopted AS 2305 from a standard put in place by the auditing profession in 1989. The existing standard remains substantially the same today. Consistent with existing standards, the proposed standard reiterates that substantive analytical procedures alone are unlikely to be sufficient to address significant risks of material misstatement, including fraud risks.

  • Read the full proposal here.

Background

Auditors may use substantive analytical procedures to address certain assessed risks of material misstatement. In a substantive analytical procedure, the auditor seeks to determine whether there is a misstatement in a company’s recorded financial information.

When performing substantive analytical procedures, the auditor compares (i) a company’s recorded amount (or an amount derived from the recorded amount) to (ii) what the auditor would expect. For example, an auditor could compare (i) a company’s recorded expense for debt interest payments to (ii) an expected expense based on the principal and interest rates of the debt.

The effectiveness of substantive analytical procedures depends on their appropriate design and performance, such as which data and which relationships in the data auditors rely on to form their expectations.

Over the years, the use of technology and data analytics in audits has grown, including when auditors design and perform substantive analytical procedures. For example, some auditors have been able to use more disaggregated data (e.g., at transaction or customer level) to identify previously unknown relationships and develop more precise expectations to test against a company’s recorded financial information. Additionally, PCAOB staff have observed some auditors inappropriately design and perform substantive analytical procedures. Such shortcomings may result in failing to identify a material misstatement of a company’s financial statements or failing to obtain sufficient appropriate audit evidence when performing the audit.

The Proposal

The proposal would clarify and strengthen the standard for substantive analytical procedures, including those involving data analytics. For example, the proposal would:

  • Specify that the auditor may not develop their expectation of the company’s recorded amount using the company’s amount or information that is based on the company’s amount;
  • Require that the relationships in the data on which the procedure is based must be sufficiently plausible and predictable to achieve the procedure’s objective; and
  • Specify certain responsibilities for the auditor to perform when there is a difference between a company’s amount and the auditor’s expectation.

The proposed standard would apply to all substantive analytical procedures.

How to Comment on the Proposal

The Board is seeking public comment – including from investors – on the proposal. Comments are due by August 12, 2024.

Comments can be sent by email (to [email protected]), by paper mail, or through the Board’s website.

The Office of the Investor Advocate encourages investors and others to submit comments on this Board proposal.