Are balance sheets unauditable? 2

Previous post raised the question whether it is possible that current accounting rules make a modern balance sheet so complex that it is essentially unauditable.

Another item described by Grumpy Old Accountant Anthony Catanach’ column Is FASB Killing the Auditing Profession? is the PwC audit tool of cumulative audit knowledge and experience.

Audit team experience as substantive assurance?

One astounding thing I learned from the article is the PwC audit model counts as substantive assurance the experience level of the audit team.

Yes, you read that right. I think that means if the audit team has lots of experience in this industry and on this client, you can count that experience as part of the assurance needed to reach audit conclusions.

I didn’t quite believe the professor when he described that, so I read page 14 of the PCAOB report which says:

As described in the preceding paragraphs, the inspection team has identified concerns with significant elements of the audit process, such as the failure to adequately challenge management assumptions, excessive reliance on management’s responses to inquiries, and the failure to respond appropriately to potential issues identified during the audit. In certain instances, in interactions with the inspection team or in responses to comment forms, engagement teams have asserted that cumulative audit knowledge and experience (“CAKE”) 25/ represented a meaningful component of their audit assurance. The aforementioned concerns may indicate that engagement teams rely on CAKE to a greater degree than is appropriate. Although CAKE can be useful in planning and scoping the audit, using CAKE as a source of substantive assurance to address issues that arise during the execution of audit procedures may cause engagement teams to misjudge the level of audit comfort actually obtained. In addition, the Firm’s audit policies do not provide guidance regarding the extent to which CAKE should be documented other than for the purposes of planning and scoping the audit. If CAKE is not sufficiently documented and there are changes in key members of engagement teams, the ability of the supervising members of the engagement team to review and evaluate audit plans and evidence and to make appropriate conclusions based on CAKE may be questionable. Overreliance on CAKE might also cause engagement teams not to exercise sufficient professional skepticism and may lead to inappropriate risk assessments or judgments concerning the nature, timing, and extent of audit procedures to be performed.


Like I said, if the audit team has lots of experience that experience can be used to reduce the extent of substantive testing. In case you think I’m exaggerating, consider the PCAOB’s description of the process:

Footnote 25 says:

25/ According to the Firm’s audit guide, cumulative audit knowledge and experience is “the knowledge and experience we bring to the audit engagement as a result of testing performed in prior years. We use cumulative audit knowledge and experience to assist in making informed judgments about the current year’s audit. Cumulative audit knowledge and experience is largely intangible and reflects the knowledge and experience of the key team members. Its extent and how it impacts the audit is dependent on their professional judgment.”

If you’ve read this far in my post, you will want to read his full discussion. Pay particular attention to the blame he allocates to FASB.

Sure do hope I’m missing something on the CAKE concept. Can anyone enlighten me?

An anonymous commenter at Going Concern indicated PwC has dropped the CAKE concept from their audit methodology since the time these inspections were performed. Tried to find the post, but gave up after about 30 seconds of looking.

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  1. Pingback: Are balance sheets unauditable? | Attestation Update - A&A for CPAs

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