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    Between a Rock and a Hard Place: A Path Forward for Using...
    research summary posted June 15, 2016 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent 
    Between a Rock and a Hard Place: A Path Forward for Using Substantive Analytical Procedures in Auditing Large P&L Accounts: Commentary and Analysis
    Practical Implications:

    The results of this study are important because the authors believe that the reduction in the use of appropriately rigorous substantive analytical procedures could diminish overall audit quality, and that the utilization of their approach could keep this from occurring. 


    Glover, S.M., D.F. Prawitt, and M.S. Drake. 2015. Between a Rock and a Hard Place: A Path Forward for Using Substantive Analytical Procedures in Auditing Large P&L Accounts: Commentary and Analysis. Auditing: A Journal of Practice and Theory 34 (3): 161-179.

    substantive analytical procedures, revenue testing, materiality, and audit evidence
    Purpose of the Study:

    Substantive analytical procedures (SAPs) have been one of the common substantive procedures applied to income statement accounts for decades; however, there is a growing trend for public company auditors to forego substantive analytical procedures on large income statement accounts due to criticisms from regulatory inspectors that such procedures are not capable of providing useful substantive evidence. This paper hopes to comment on the concern that discouraging the application of appropriately rigorous substantive analytical procedures may diminish overall audit quality. The authors consider whether rigorous substantive analytical procedures can be designed to provide useful evidence at moderate and low levels of assurance for large income statement accounts even when the significant-difference threshold exceeds overall materiality. It is the belief of the authors that such procedures can provide strong evidence that financial statements are free of massive fraud or unintentional misstatement, and that the moderate or low assurance obtained by such procedures can be combined with assurance from other audit procedures to yield high overall assurance. The authors hope to illustrate how to achieve moderate or low assurance and explain how their approach is consistent with auditing theory and auditing standards. Overall, the primary purpose of this paper is to raise awareness of a practice concern and resulting trend that may have negative effects on audit quality and to provide thought leadership on how the profession may be able to leverage the benefits of SAPs.

    Design/Method/ Approach:

    Public company revenue data and analyst forecast errors are used to illustrate the practical difficulties and inherent limitations of seeking high assurance from a substantive analytical procedure. Possible ways to conceptualize thresholds are outlined and public company data is used to demonstrate the use of substantive analytical procedures to provide moderate or low assurance.

    • The authors find that audit theory, the audit risk model, and recent auditing standards suggest that, when combined with other audit procedures, substantive analytical procedures can provide useful complementary evidence when they provide only moderate or low assurance.
    • The authors find that little or no guidance exists regarding what constitutes moderate or low assurance when conducting the types of substantive analytical procedures that are typically used in practice.
    • Analysis suggests that if auditors can improve expectations via disaggregation, then substantive analytical procedures should be able to be developed to provide some assurance that revenue and other large income statement accounts are fairly stated.
    Auditing Procedures - Nature - Timing and Extent