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

SUMMARY:  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 ca...