Refer to Auditing in Action 9-3.

The CPAB report highlights the common deficiencies in applying substantive analytical procedures (SAP) to the analysis of revenue.

Auditing Action 9-3

As highlighted throughout our discussion of analytical procedures, both professional judgment and skepticism play a key role in developing rigorous analytical procedures and evaluating the results. However, CPAB consistently finds that this is an area in which auditors tend to struggle. For instance, in its 2013 report, CPAB noted that substantive analytical procedures (SAP) in the auditing of revenue were inadequately performed for the following reasons:

• Not appropriately setting the precision for the procedure.

• Not adequately assessing factors used to set expectations, including the underlying assumptions and data relied upon.

• Not appropriately corroborating variances between the expectations and actual results. Specifically, variances were usually discussed with management with little or no verification to independent sources. It would appear that CPAB is suggesting that the auditors did not use appropriate or sufficient evidence to form their conclusion as to whether or not the difference between their expectations and the clients was material. Why would this happen? In an experimental study conducted by Steve Glover and his colleagues, biases appeared to play a role. In their study, they found that auditors have "favourable outcome biases" when evaluating the results of aggregate analytical procedures (recall that aggregate analytical procedures tend to produce weak evidence). This means that when there was no significant difference between the expectation and the unaudited numbers, the auditors tended to attribute more strength to the analytical procedure than warranted. When experienced auditors were cued to evaluate the weakness of the aggregate procedure, it helped to counteract this bias. However, this did not aid inexperienced auditors since it appeared they did not have the necessary knowledge base.

CPAB recommended substantive analytical procedures can be improved by providing more guidance around when they can/ should be used as the primary source of audit evidence and, due to the high degree of professional judgment involved, the procedures should be conducted by audit staff with significant experience (manager level or above). The second recommendation is consistent with Glover and his colleagues' findings that experienced auditors do have the knowledge that can enable them to question the results. CPAB also noted that some firms used quality control measures (such as requiring approval from national auditing standards) before SAPs can be used in the audit of revenue.

a. Explain what the first two points mean in terms of the degree of precision in developing the SAP.

b. Explain what the third point means for professional skepticism.

c. Explain why the professional skepticism is so important when developing SAP and evaluating the results for the revenue stream.

d. In both its 2012 an d 2013 reports, CPAB concluded that substantive analytical procedures are only appropriate in relatively limited circumstances. Explain why you think that CPAB came to this conclusion