CREATE PROCEDURE sp_test
@a varchar(4) = NULL,
@b  varchar(4) = NULL
AS
UPDATE testtable
SET a =     CASE @a
        WHEN NULL THEN var1
        WHEN 'NULL' THEN NULL
        ELSE @a
        END,
SET b =     CASE @b
        WHEN NULL THEN b
        WHEN 'NULL' THEN NULL
        ELSE @b
        END
GO

CREATE PROCEDURE sp_test
@a varchar(4) = NULL,
@b  varchar(4) = NULL
AS
UPDATE testtable
SET a =     CASE
        WHEN @a IS NULL THEN var1
        WHEN @a = 'NULL' THEN NULL
        ELSE @a
        END,
SET b =     CASE
        WHEN @b IS NULL THEN b
        WHEN @b = 'NULL' THEN NULL
        ELSE @b
        END
GO