Between a Rock and a Hard Place: A Path Forward for Using Substantive Analytical Procedures in Auditing Large P&L Accounts: Commentary and Analysis

Posted: 15 Mar 2014 Last revised: 30 Jul 2015

See all articles by Steven M. Glover

Steven M. Glover

Brigham Young University

Douglas F. Prawitt

Brigham Young University

Michael S. Drake

Brigham Young University - Marriott School

Date Written: August 2015

Abstract

Substantive analytical procedures can be an important and effective audit tool to gather evidence and highlight areas of potential misstatement, and for decades have been one of the common substantive procedures applied to income statement accounts. Recently, however, there is a growing trend for public company auditors to forego substantive analytical procedures on large income statement accounts, such as revenue, due to criticisms from regulatory inspectors that such procedures are not capable of providing useful substantive evidence. In this commentary, we address the concern that discouraging the application of appropriately rigorous substantive analytical procedures may diminish overall audit quality. We 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, such as revenue, even when the significant-difference threshold exceeds overall materiality. Such procedures can provide strong evidence that financial statements are free of massive fraud or unintentional misstatement. Further, the moderate or low assurance obtained by such substantive analytical procedures can be combined with assurance provided by other audit procedures to yield high overall assurance. We illustrate one potential approach that may be useful in designing substantive analytical procedures to achieve moderate or low assurance and we explain how our approach is consistent with auditing theory and auditing standards.

Keywords: Substantive analyst procedures, revenue testing, materiality, audit evidence

Suggested Citation

Glover, Steven M. and Prawitt, Douglas F. and Drake, Michael S., Between a Rock and a Hard Place: A Path Forward for Using Substantive Analytical Procedures in Auditing Large P&L Accounts: Commentary and Analysis (August 2015). Auditing: A Journal of Practice & Theory, Vol. 34, No. 3, 2015, Available at SSRN: https://ssrn.com/abstract=2408765 or http://dx.doi.org/10.2139/ssrn.2408765

Steven M. Glover (Contact Author)

Brigham Young University ( email )

Provo, UT 84602
United States
801-422-6080 (Phone)
801-422-0621 (Fax)

Douglas F. Prawitt

Brigham Young University ( email )

Provo, UT 84602
United States
801-422-2351 (Phone)

Michael S. Drake

Brigham Young University - Marriott School ( email )

United States

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