Notice2022-13983
Public Company Accounting Oversight Board; Notice of Filing of Proposed Rules on Planning and Supervision of Audits Involving Other Auditors and Dividing Responsibility for the Audit With Another Accounting Firm
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Published
July 1, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 126 (Friday, July 1, 2022)</title>
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[Federal Register Volume 87, Number 126 (Friday, July 1, 2022)]
[Notices]
[Pages 39680-39731]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-13983]
[[Page 39679]]
Vol. 87
Friday,
No. 126
July 1, 2022
Part III
Securities and Exchange Commission
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Public Company Accounting Oversight Board; Notice of Filing of Proposed
Rules on Planning and Supervision of Audits Involving Other Auditors
and Dividing Responsibility for the Audit With Another Accounting Firm;
Notice
Federal Register / Vol. 87 , No. 126 / Friday, July 1, 2022 /
Notices
[[Page 39680]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95159; File No. PCAOB-2022-01]
Public Company Accounting Oversight Board; Notice of Filing of
Proposed Rules on Planning and Supervision of Audits Involving Other
Auditors and Dividing Responsibility for the Audit With Another
Accounting Firm
June 24, 2022.
Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002
(``Act''), notice is hereby given that on June 24, 2022, the Public
Company Accounting Oversight Board (the ``Board'' or the ``PCAOB'')
filed with the Securities and Exchange Commission (the ``Commission''
or the ``SEC'') the proposed rules described in items I and II below,
which items have been prepared by the Board. The Commission is
publishing this notice to solicit comments on the proposed rules from
interested persons.
I. Board's Statement of the Terms of Substance of the Proposed Rules
On June 21, 2022, the Board adopted ``Planning and Supervision of
Audits Involving Other Auditors and Dividing Responsibility for the
Audit with Another Accounting Firm'' and related amendments to its
auditing standards, attestation standards, auditing interpretations,
rules, and a form (collectively, the ``proposed rules''). The text of
the proposed rules appears in Exhibit A to the SEC Filing Form 19b-4
and is available on the Board's website at <a href="https://pcaobus.org/about/rules-rulemaking/rulemaking-dockets/docket-042-proposed-amendments-relating-to-the-supervision-of-audits-involving-other-auditors-and-proposed-auditing-standard">https://pcaobus.org/about/rules-rulemaking/rulemaking-dockets/docket-042-proposed-amendments-relating-to-the-supervision-of-audits-involving-other-auditors-and-proposed-auditing-standard</a> and at the Commission's Public Reference
Room.
II. Board's Statement of the Purpose of, and Statutory Basis for, the
Proposed Rules
In its filing with the Commission, the Board included statements
concerning the purpose of, and basis for, the proposed rules and
discussed any comments it received on the proposed rules. The text of
these statements may be examined at the places specified in Item IV
below. The Board has prepared summaries, set forth in sections A, B,
and C below, of the most significant aspects of such statements. In
addition, the Board is requesting that the Commission approve the
proposed rules, pursuant to Section 103(a)(3)(C) of the Act, for
application to audits of emerging growth companies (``EGCs''), as that
term is defined in Section 3(a)(80) of the Securities Exchange Act of
1934 (``Exchange Act''). The Board's request is set forth in section D.
A. Board's Statement of the Purpose of, and Statutory Basis for, the
Proposed Rules
(1) Purpose
Summary
The Board has adopted amendments to its auditing standards to
strengthen requirements for planning and supervising audits involving
accounting firms and individual accountants (collectively, ``other
auditors'') outside the accounting firm that issues the auditor's
report (the ``lead auditor''). In these audits, the lead auditor issues
the audit report on the company's consolidated financial statements,
but other auditors often perform important work on the audit. The roles
of other auditors have increased as companies' global operations have
grown. In addition, the Board adopted a new auditing standard that will
apply when the lead auditor divides responsibility for an audit with
another accounting firm (``referred-to auditor'').
Working with other auditors and referred-to auditors can differ
from working with people in the same firm, creating challenges in
coordination and communication. These challenges can lead to
misunderstandings about the nature, timing, and extent of their work
and can reduce audit quality. It is important for investor protection
that the lead auditor adequately plan and supervise the work of other
auditors so that the audit is performed in accordance with PCAOB
standards and provides sufficient appropriate evidence to support the
lead auditor's opinion in the audit report.
This rulemaking is intended to increase and improve the lead
auditor's involvement in and evaluation of the other auditors' work.
The Board believed that the heightened attention to other auditors'
work will improve communication among auditors and the lead auditor's
ability to prevent or detect deficiencies in that work, and thus
enhance the quality of audits involving other auditors and promote
investor protection.
The amendments to the Board's auditing standards are intended to
improve PCAOB standards principally by (i) applying a risk-based
supervisory approach to the lead auditor's oversight of other auditors
and (ii) requiring that the lead auditor perform certain procedures
when planning and supervising an audit that involves other auditors.
The amendments have taken into account recent practice developments in
the lead auditor's oversight of other auditors' work, including the
greater use of communication technology. In brief, the amendments:
<bullet> Require that the engagement partner determine whether his
or her firm's participation in the audit is sufficient for the firm to
carry out the responsibilities of a lead auditor and report as such.
The amendments also provide considerations for the engagement partner
to use in making this determination and require that the audit's
engagement quality reviewer review the determination.
<bullet> Require that the lead auditor, when determining the
engagement's compliance with independence and ethics requirements,
understand the other auditors' knowledge of those requirements and
experience in applying them. The amendments also require that the lead
auditor obtain and review written affirmations regarding the other
auditors' policies and procedures related to those requirements and
regarding compliance with the requirements, and a description of
certain auditor-client relationships related to independence. In
addition, the amendments require the sharing of information about
changes in circumstances and the updating of affirmations and
descriptions in light of those changes.
<bullet> Require that the lead auditor understand the knowledge,
skill, and ability of other auditors' engagement team members who
assist the lead auditor with planning and supervision, and obtain a
written affirmation from other auditors that their engagement team
members possess the knowledge, skill, and ability to perform assigned
tasks.
<bullet> Require that the lead auditor supervise other auditors
under the Board's standard on audit supervision and inform other
auditors about the scope of their work, identified risks of material
misstatement, and certain other key matters. The amendments also
require that the lead auditor and other auditors communicate about the
audit procedures to be performed, and any changes needed to the
procedures. In addition, the amendments require the lead auditor to
obtain and review written affirmations from other auditors about their
performance of work in accordance with the lead auditor's instructions,
and to direct other auditors to provide certain documentation about
their work.
<bullet> Provide that, in multi-tiered audits, a first other
auditor may assist the lead auditor in performing certain required
[[Page 39681]]
procedures with respect to second other auditors.
This rulemaking rescinds an interim standard but carries forward
and strengthens some of its requirements in a new standard that applies
to those infrequent situations where the lead auditor divides
responsibility for a portion of the audit with another audit firm and
therefore does not supervise the work performed by that firm. In these
situations, the lead auditor refers in the audit report to the work of
that auditor (i.e., a referred-to auditor). This new standard requires
that in these situations the lead auditor determine that audit
procedures were performed regarding the consolidation or combination of
financial statements of the business units audited by the referred-to
auditor into the company's financial statements. The standard also
requires that the lead auditor obtain the referred-to auditor's written
representation that it is independent and duly licensed to practice,
and that the lead auditor disclose in the audit report the magnitude of
the portion of the financial statements and, if applicable, internal
controls audited by the referred-to auditor.
The Board has adopted the amendments and new standard after three
rounds of public comment. Commenters generally expressed support for
the rulemaking's objective of improving the quality of audits involving
other auditors and referred-to auditors. They also suggested ways to
revise or clarify the proposed amendments and standard. The Board took
into account these comments, as well as observations of the Board and
its staff through PCAOB oversight activities (including audit
inspections and enforcement cases).
The amendments and new standard apply to all audits conducted under
PCAOB standards. Subject to approval by the Securities and Exchange
Commission (``SEC'' or ``Commission''), the amendments and new standard
will take effect for audits for fiscal years ending on or after
December 15, 2024.
(b) Statutory Basis
The statutory basis for the proposed rules is Title I of the Act.
B. Board's Statement on Burden on Competition
Not applicable. The Board's consideration of economic impacts of
the proposed rules is discussed in section D below.
C. Board's Statement on Comments on the Proposed Rules Received From
Members, Participants or Others
The Board released the proposed rule amendment for public comment
in PCAOB Release No. 2016-002 (Apr. 12, 2016). The Board received 23
written comment letters on that release. The Board issued a
supplemental request for public comment in PCAOB Release No. 2017-005
(Sept. 26, 2017). The Board received 22 written comment letters on that
release. The Board issued a second supplemental request for public
comment in PCAOB Release No. 2021-005 (Sept. 28, 2021). The Board
received 19 written comment letters on that release. The Board has
carefully considered all comments received. The Board's response to the
comments it received and the changes made to the proposed rules in
response to the comments received are discussed below.
Background
This rulemaking addresses the responsibilities of the lead auditor
(i.e., the audit firm that issues the auditor's report) in planning and
supervising an audit that involves the work of other auditors. In
formulating the approach, the Board sought public comment several
times. In April 2016, the Board issued a proposal (``2016 Proposal'')
to amend our auditing standards and issue a new standard, to strengthen
the requirements for lead auditors in audits that involve other
auditors and referred-to auditors.\1\ In September 2017, after
considering public comments on the 2016 Proposal, the Board issued a
supplemental request for comment (``2017 SRC'') on certain targeted
revisions to the proposed amendments.\2\ In September 2021, after
considering the public comments on the prior releases, the Board issued
a second supplemental request for comment (``2021 SRC'') to seek
additional public comment on certain revisions to the amendments and
other matters.\3\
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\1\ Proposed Amendments Relating to the Supervision of Audits
Involving Other Auditors and Proposed Auditing Standard--Dividing
Responsibility for the Audit with Another Accounting Firm, PCAOB
Release No. 2016-002 (Apr. 12, 2016).
\2\ Supplemental Request for Comment: Proposed Amendments
Relating to the Supervision of Audits Involving Other Auditors and
Proposed Auditing Standard--Dividing Responsibility for the Audit
with Another Accounting Firm, PCAOB Release No. 2017-005 (Sept. 26,
2017).
\3\ Second Supplemental Request for Comment: Proposed Amendments
Relating to the Supervision of Audits Involving Other Auditors and
Proposed Auditing Standard--Dividing Responsibility for the Audit
with Another Accounting Firm, PCAOB Release No. 2021-005 (Sept. 28,
2021).
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Commenters on the 2016 Proposal, 2017 SRC, and 2021 SRC
(collectively, the ``proposing releases'') generally expressed support
for the rulemaking's objective of improving the quality of audits
involving other auditors and referred-to auditors. They also suggested
ways to revise or clarify the proposed amendments and standard. The
Board considered all of the comments and adopted the amendments and
standard (collectively ``amendments'' or ``final amendments'') for the
reasons discussed below.
Rulemaking History
In the 2016 Proposal, the Board proposed to amend PCAOB auditing
standards to strengthen existing requirements and impose a more uniform
approach to the lead auditor's supervision of other auditors.\4\ The
proposed amendments were intended to increase the lead auditor's
involvement in, and evaluation of, the work of other auditors, enhance
the ability of the lead auditor to prevent or detect deficiencies in
the work of other auditors, and facilitate improvements in the quality
of the work of other auditors. The proposed amendments also included a
proposed new standard that would apply when the lead auditor divides
responsibility for a portion of the audit with another accounting firm
and refers to the referred-to auditor's report in the lead auditor's
report. The Board received 23 comment letters on the 2016 Proposal.\5\
Commenters generally expressed support for the rulemaking's objective
of improving the quality of audits involving other auditors and
referred-to auditors. Some expressed concerns or requested
clarification about certain proposed requirements.
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\4\ See 2016 Proposal at Section II.
\5\ See 2017 SRC at 6-7 (discussing comment letters received on
the 2016 Proposal).
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In response to the input from commenters, the Board issued a
supplemental request for comment on the 2016 Proposal in September
2017.\6\ The 2017 SRC discussed significant comments received and
presented revisions to the proposed amendments while leaving the
overall proposed approach to the supervision of other auditors intact.
The Board received 22 comment letters on the 2017 SRC.\7\ Commenters
generally expressed continued support for the project's objectives, and
a number of commenters also suggested changes to, or requested
clarification or guidance on, certain proposed requirements.
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\6\ 2017 SRC.
\7\ See 2021 SRC at 7 (discussing comment letters received on
the 2017 SRC).
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After consideration of the comments on the 2017 SRC and further
analysis of issues raised by commenters and
[[Page 39682]]
developments in this area, the Board issued a second supplemental
request for comment in September 2021. The proposed revisions in the
2021 SRC were designed to adjust certain requirements to better take
into account the lead auditor's role in the audit, address certain
scenarios encountered in practice, revise certain proposed definitions
to reflect recent amendments to the Board's standards, and improve the
readability of the amended standards. The Board received 19 comment
letters on the 2021 SRC. Commenters continued to generally express
support for the project's objectives, and also suggested some changes
to, or requested clarification or guidance on, certain proposed
requirements. The Board has considered the comments on the 2021 SRC, as
well as on the previous proposing releases, in developing the final
amendments.\8\ The Board has also considered the observations of the
Board and its staff from PCAOB oversight activities.
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\8\ The comment letters received on the 2016 Proposal, 2017 SRC,
and 2021 SRC are available in the docket for this rulemaking on the
PCAOB's website (<a href="https://pcaobus.org/Rulemaking/Pages/Docket042Comments.aspx">https://pcaobus.org/Rulemaking/Pages/Docket042Comments.aspx</a>).
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Overview of Existing Requirements
This section discusses key provisions of existing PCAOB auditing
standards that address lead auditor responsibilities involving the work
of other auditors or referred-to auditors that participate in an audit.
Depending on the circumstances of an audit involving other auditors,
one of two standards applies, as described below.
In 2003, the Board adopted the standard known today as AS 1205,
Part of the Audit Performed by Other Independent Auditors (at that
time, AU sec. 543), when it adopted the auditing profession's standards
then in existence.\9\ AS 1205 imposes requirements on a lead auditor
(or ``principal auditor,'' in the terminology of AS 1205) that uses the
work and reports of other independent auditors that have audited the
financial statements of one or more subsidiaries, divisions, branches,
components, or investments included in the financial statements audited
by the lead auditor. These requirements relate to situations in which
the lead auditor uses the work and reports of other auditors or
referred-to auditors by (i) assuming responsibility for the other
auditors' work or (ii) dividing responsibility for the audit with
referred-to auditors and referring to their work and reports in the
lead auditor's audit report.\10\ Those ``divided-responsibility''
situations, as discussed below, are relatively uncommon.
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\9\ In 1963, the American Institute of Certified Public
Accountants (``AICPA'') issued a codification of auditing standards
that included several paragraphs on using the work of other auditors
or referred-to auditors. In 1971, the AICPA issued Statement on
Auditing Procedure No. 45, Using the Work and Reports of Other
Auditors, and in 1972 it codified the standard in section 543 of the
Statement on Auditing Standards No. 1 (AU sec. 543). In 2003, the
PCAOB adopted the auditing profession's standards in existence at
that time, including AU sec. 543. See Establishment of Interim
Professional Auditing Standards, PCAOB Release No. 2003-006 (Apr.
18, 2003). In 2015, the PCAOB reorganized its auditing standards
using a topical structure and a single, integrated numbering system.
See Reorganization of PCAOB Auditing Standards and Related
Amendments to PCAOB Standards and Rules, PCAOB Release No. 2015-002
(Mar. 31, 2015). As part of that rulemaking, AU sec. 543 was
reorganized as AS 1205. The reorganization did not impose additional
requirements on auditors or substantively change the requirements of
that standard.
\10\ For example, the lead auditor may divide responsibility for
a portion of the audit with another firm if it is impracticable for
the lead auditor to review the other firm's work. See AS 1205.06.
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In 2010, the Board adopted AS 1201, Supervision of the Audit
Engagement (at that time, Auditing Standard No. 10), when it adopted
eight new auditing standards that set forth the auditor's
responsibilities for assessing and responding to risk in an audit.\11\
AS 1201 governs the supervision of the audit engagement, including
supervising the work of engagement team members outside the engagement
partner's firm. Under existing PCAOB standards, the lead auditor
supervises the work of another auditor under AS 1201 in situations not
covered by AS 1205.\12\
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\11\ Auditing Standards Related to the Auditor's Assessment of
and Response to Risk and Related Amendments to PCAOB Standards,
PCAOB Release No. 2010-004 (Aug. 5, 2010). Among other things, these
risk assessment standards established risk-based requirements for
determining the necessary audit work in multi-location audit
engagements.
\12\ See second note to AS 1205.01.
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Figure 1 illustrates an example of a U.S.-based audit that involves
other accounting firms, and the PCAOB auditing standards that apply to
the audit. In the example, Accounting Firm 1 is the lead auditor, and
it involves Accounting Firm 2 by either (A) assuming responsibility for
the work and reports of Accounting Firm 2 in accordance with AS 1205,
or (B) supervising the work of Accounting Firm 2 in accordance with AS
1201. The lead auditor (C) divides responsibility for part of the audit
with Accounting Firm 3 in accordance with AS 1205 and refers to
Accounting Firm 3 in the lead auditor's audit report on the
consolidated financial statements.
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[GRAPHIC] [TIFF OMITTED] TN01JY22.001
The following discusses AS 1205 and AS 1201 in more detail:
(A) Using the work and reports of other auditors under AS 1205. If
an auditor uses, and assumes responsibility for, the work and reports
of other auditors that audited the financial statements of one or more
subsidiaries, divisions, branches, components, or investments included
in the financial statements presented, AS 1205 includes the following
requirements:\13\
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\13\ In addition, in situations governed by AS 1205, the lead
auditor is required by the Board's standard on planning, AS 2101,
Audit Planning, to perform procedures to determine the locations or
business units at which audit procedures should be performed. See AS
2101.11-.13. This also applies to situations in which the auditor
divides responsibility with another accounting firm. See AS 2101.14.
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<bullet> When significant parts of the audit are performed by other
auditors (from the same network of firms as the lead auditor or outside
the network), the auditor is required to decide whether its own
participation in the audit is sufficient to enable it to serve as the
lead auditor (or, in the language of AS 1205, the ``principal
auditor'') and to report as lead auditor on the company's consolidated
financial statements.\14\
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\14\ See AS 1205.02.
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<bullet> Whether or not the lead auditor decides to make reference
to the audit of the other auditor, the lead auditor is required to make
inquiries about the professional reputation and independence of the
other auditor.\15\ In addition, the lead auditor is required to adopt
appropriate measures to assure the coordination of its activities with
those of the other auditor in order to achieve a proper review of the
matters affecting the consolidating or combining of accounts in the
financial statements. Those measures may include procedures to
ascertain through communication with the other auditor:
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\15\ AS 1205.10.
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<bullet> That the other auditor is aware that the financial
statements of the component which it is to audit are to be included in
the financial statements on which the lead auditor will report, and
that the other auditor's report will be relied upon (and, where
applicable, referred to) by the lead auditor;
<bullet> That the other auditor is familiar with the accounting
principles generally accepted in the United States and with the
standards of the PCAOB, and will conduct its audit and issue its report
in accordance with those standards;
<bullet> That the other auditor has knowledge of the SEC's
financial reporting requirements; and
<bullet> That a review will be made of matters affecting
elimination of intercompany transactions and accounts and, if
appropriate, the uniformity of accounting practices among the
components included in the financial statements.\16\
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\16\ AS 1205.10.c.
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<bullet> The lead auditor must obtain, review, and retain certain
information from the other auditor before issuing the report, including
an engagement completion document, a list of significant risks, the
other auditor's responses to those risks, the results of the other
auditor's related procedures, and significant deficiencies and material
[[Page 39684]]
weaknesses in internal control over financial reporting.\17\
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\17\ AS 1205.12.
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<bullet> The lead auditor also should \18\ consider performing one
or more of the following procedures: visiting the other auditor,
reviewing the audit programs of the other auditor (and, in some cases,
issuing instructions to the other auditor), and reviewing additional
audit documentation of significant findings or issues in the engagement
completion document.\19\
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\18\ The word ``should,'' as used in the auditing and related
professional practice standards, indicates responsibilities that are
presumptively mandatory. See Paragraph (a)(2) of PCAOB Rule 3101,
Certain Terms Used in Auditing and Related Professional Practice
Standards. Rule 3101 also defines other terms, such as ``must'' and
``may,'' that describe the degree of responsibility that the
standards impose on auditors.
\19\ AS 1205.12.
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(B) Including the other auditors in the engagement team and
supervising their work under AS 1201. This standard governs the
auditor's supervision of an audit engagement, including the work of
other auditors who are members of the same engagement team, wherever
they are located. AS 1201, as it relates to the supervision of other
auditors on the engagement team, includes the following requirements:
<bullet> The engagement partner is responsible for the engagement
and its performance.\20\ The engagement partner may seek assistance
from appropriate engagement team members in fulfilling his or her
responsibilities for the engagement and its performance.\21\ Engagement
team members can be from the engagement partner's firm or outside the
firm.
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\20\ AS 1201.03.
\21\ AS 1201.04.
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<bullet> The engagement partner and others who assist the
engagement partner in supervising the work of other engagement team
members are required to:
<bullet> Inform the engagement team members of their
responsibilities for the work they are to perform, including the
objective of the procedures they are to perform, the nature, timing,
and extent of those procedures, and matters that could affect those
procedures;
<bullet> Direct the engagement team members to inform the
engagement partner or supervisors of significant accounting and
auditing issues arising during the audit; and
<bullet> Review the work of engagement team members to evaluate
whether the work was performed and documented, the objectives of the
procedures were achieved, and the results of the work support the
conclusions reached.\22\
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\22\ AS 1201.05.
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<bullet> The engagement partner and others who assist the
engagement partner in supervising the audit should determine the extent
of supervision necessary for engagement team members to perform their
work as directed and form appropriate conclusions. Under this standard,
requirements for supervision are risk-based and scalable, and the
necessary extent of supervision varies depending on, for example, the
nature of the assigned work, the risks of material misstatement
associated with that work, and the knowledge, skill, and ability of
each individual involved.\23\
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\23\ AS 1201.06.
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(C) Dividing responsibility for the audit with another accounting
firm. AS 1205 also governs audits in which the lead auditor divides
responsibility for the audit with another accounting firm that issues a
separate auditor's report on the financial statements of one or more
subsidiaries, divisions, branches, components, or investments included
in the company's financial statements.\24\ The requirements of AS 1205
that apply under these circumstances are more limited than the
requirements that apply to the lead auditor's use of the work and
reports of other auditors when the lead auditor assumes responsibility
for the other auditor's work (discussed in item A above).\25\ For
example, AS 1205 does not require the lead auditor to obtain, review,
and retain certain information from the accounting firm with which the
lead auditor divides responsibility for the audit (which is required
when the lead auditor assumes responsibility for another firm's work
under AS 1205).\26\ If the lead auditor refers in its report to the
work of another firm, the lead auditor's report indicates the division
of responsibility and the magnitude of the portion of the financial
statements audited by the other firm.\27\
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\24\ For auditors' reports on non-issuer entities, where the
principal accountant elects to place reliance on the work of the
other accountant and makes reference to that effect in the auditor's
report, SEC rules require that the other accounting firm's report be
filed with the SEC. See Rule 2-05 of Regulation S-X, 17 CFR 210.2-
05.
\25\ AS 1205.06-.09.
\26\ AS 1205.12.
\27\ AS 1205.07-.09.
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Existing Practice
This section describes the state of practice--including the
evolution of audit practices and related inspection findings--that the
Board and its staff have observed in past years through PCAOB oversight
activities (including through observations from audit inspections and
enforcement cases).
Evolution of Auditing Practice at Accounting Firms
Auditors around the world, even when they perform audit procedures
that are required to comply with PCAOB standards, may be influenced by
international and home country auditing standards. With respect to the
use of other auditors, the standards of the International Auditing and
Assurance Standards Board (``IAASB'')--specifically, International
Standard on Auditing (``ISA'') 600 \28\--establishes requirements for
``group audits.'' \29\ ISA 600 was originally developed in the wake of
several significant frauds that involved multinational groups of
companies, audited by multiple accounting firms.\30\ In December 2021,
the IAASB approved amendments to ISA 600 in a project that was informed
by, among other things, persistent deficiencies in group audits
reported by the International Forum of Independent Audit Regulators
(``IFIAR'').\31\
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\28\ ISA 600, Special Considerations--Audits of Group Financial
Statements (Including the Work of Component Auditors) (effective for
audits of group financial statements for periods beginning on or
after December 15, 2009); ISA 600 (Revised), Special
Considerations--Audits of Group Financial Statements (Including the
Work of Component Auditors) (effective for audits of group financial
statements for periods beginning on or after December 15, 2023). See
also AU-C Section 600, Special Considerations--Audits of Group
Financial Statements (Including the Work of Component Auditors)
(standard adopted by the AICPA's Auditing Standards Board
(``ASB'')).
\29\ Under ISA 600, group audits are audits of ``group financial
statements'' consisting of at least two ``components.'' Group audits
generally are performed by a ``group engagement team'' and one or
more ``component auditors'' and may involve a single firm or
multiple firms.
\30\ See, e.g., Koninklijke Ahold N.V. (Royal Ahold), A. Michiel
Meurs, Cees van der Hoeven, Johannes Gerhardus Andreae, and Ture
Roland Fahlin, SEC Accounting and Auditing Enforcement Release
(``AAER'') No. 2124 (Oct. 13, 2004); Lernout & Hauspie Speech
Products, SEC AAER No. 1729 (Mar. 4, 2003); In re Parmalat
Finanziara, S.p.A, SEC AAER No. 2065 (July 28, 2004); see also
Michael J. Jones, ed., Creative Accounting, Fraud and International
Accounting Scandals (2011) (describing, in Part B, 58 high-profile
accounting scandals across 12 countries, including the Royal Ahold
and Parmalat cases).
\31\ See paragraph 7 of IAASB, Invitation to Comment, Enhancing
Audit Quality in the Public Interest: A Focus on Professional
Skepticism, Quality Control and Group Audits (Dec. 2015); see also
IFIAR, 2017 Survey of Inspection Findings (Mar. 8, 2018), at 10
(showing group audits among the inspection themes with frequent
findings in 2014-2017); IAASB, Work Plan for 2015-2016: Enhancing
Audit Quality and Preparing for the Future (Dec. 2014), at 7
(``Concern [with ISA 600] has been expressed about: [t]he extent of
the group auditor's involvement in the work of the component auditor
. . .; [c]ommunication between the group auditor and the component
auditor; [a]pplication of the concept of component materiality;
[i]dentifying a component in complex situations; and [w]ork effort
of the component auditor.'').
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[[Page 39685]]
Meanwhile, the PCAOB has observed through its oversight activities
that, after the PCAOB and IAASB adopted their own standards on risk
assessment, some audit firms, particularly some of the largest firms
that work extensively with other auditors, revised their policies,
procedures, and guidance (``methodologies'') for using other auditors.
The PCAOB has also observed differences among firms' methodologies, for
example, in their approaches to determining whether the firm's
participation in an audit is sufficient for the firm to serve as lead
auditor.
The PCAOB has also noted through its oversight activities that some
audit firms have applied advances in technology to various aspects of
the audit, including the supervision of engagement team members and
other communications.\32\ The PCAOB has taken these practice
developments into account in formulating the amendments.
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\32\ See PCAOB, Spotlight: Data and Technology Research Project
Update (May 2020), at 4-5 (noting that some firms have applied
technology and developed tools to ``improve communications between
the auditor and the company or among members of the engagement team
(including other auditors), track information received during the
audit, automate the documentation of procedures performed, and
facilitate the efficiency of supervisory review.'').
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Observations From Audit Inspections and Enforcement Cases
This section discusses observations based on PCAOB audit
inspections and PCAOB and SEC enforcement cases. PCAOB staff has
inspected the work of auditors who use other auditors, such as by
reviewing the scope of work performed by the other auditor, the
planning and instructions provided to the other auditor, and the degree
of supervision (including review) of the other auditor. The PCAOB has
also inspected the work of other auditors, such as by conducting
inspections abroad and reviewing work performed by non-U.S. auditors at
the request of a U.S.-based lead auditor. In some cases, PCAOB staff
inspected the work performed by both the lead auditor and other
auditors on the same audit. In many cases, but not always, the lead
auditor was a U.S. firm while the other auditor was located in another
jurisdiction. In addition, in 2019 the PCAOB established a ``target
team'' of staff who performed inspection procedures across inspected
firms. The team focused on U.S.-based multi-location audits and on
issuer audits at annually inspected firms in which the U.S. firm was
not the lead auditor.\33\
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\33\ See PCAOB, Spotlight: Staff Update and Preview of 2019
Inspection Observations (Oct. 8, 2020).
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Other Auditors
PCAOB inspections staff has observed significant audit deficiencies
in the work performed by other auditors, including noncompliance with
the lead auditor's instructions and failure to communicate significant
accounting and auditing issues to the lead auditor. Deficiencies have
also been identified in other auditors' compliance with PCAOB standards
governing a variety of audit procedures.\34\
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\34\ See, e.g., 2016 Proposal at 16-17.
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These failures in audit performance occurred in critical audit
areas that are frequently selected for inspection, including revenue,
accounts receivable, internal control over financial reporting, and
accounting estimates including fair value measurements. For example, in
several instances, other auditors failed to perform sufficient
procedures in auditing the revenue of a company's business unit,
including with respect to evaluating the business unit's revenue
recognition policy, testing the occurrence of revenue, and testing the
operating effectiveness of the business unit's controls over revenue.
In recent years, there have been some indications of decreasing
inspection-observed deficiencies, as discussed below.
The Board in its enforcement cases has made similar findings about
failures in audit performance. In one case, the Board found that an
other auditor failed to perform audit procedures and to exercise
supervisory responsibilities in accordance with PCAOB standards.\35\ In
another case, an other auditor failed to exercise due professional care
and failed to obtain sufficient audit evidence for the audit work on
accounts receivable.\36\ In a more recent case, other auditors failed
to exercise due professional care, respond adequately to a known
significant risk, and obtain sufficient appropriate audit evidence, and
they misrepresented their work in communications with the lead
auditor.\37\
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\35\ See In the Matter of Akiyo Yoshida, CPA, PCAOB Release No.
105-2014-024 (Dec. 17, 2014). Unless otherwise indicated, the
enforcement cases discussed in this section were settled
proceedings.
\36\ See In the Matter of Wander Rodrigues Teles, PCAOB Release
No. 105-2017-007 (Mar. 20, 2017).
\37\ See In the Matter of Ricardo Agust[iacute]n Garc[iacute]a
Chagoy[aacute]n, Jos[eacute] Ignacio Valle Aparicio, and
Rub[eacute]n Eduardo Guerrero Cervera, PCAOB Release No. 105-2018-
021 (Oct. 30, 2018).
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Lead Auditor
Over the years, there have been numerous observations from
inspections and from enforcement cases where the lead auditor failed,
under existing PCAOB standards, to appropriately determine the
sufficiency of its participation in an audit to warrant serving as lead
auditor. These failures occurred at large and small firms, domestic and
international. Among the most egregious findings, lead auditors failed
to perform an audit or participated very little in the audit, and
instead issued an audit report on the basis of procedures performed by
other auditors.\38\ In these audits, the auditor failed to
appropriately determine that it could serve as the lead auditor when
all or a substantial portion of the financial statements were audited
by another auditor. In two SEC enforcement cases, one firm failed to
perform any analysis,\39\ and another firm failed to perform an
adequate analysis,\40\ under AS 1205 regarding the sufficiency of its
participation to serve as lead auditor.
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\38\ For findings in PCAOB enforcement cases, see, for example,
In the Matter of Michael T. Studer, CPA, P.C. and Michael T. Studer,
CPA, PCAOB Release No. 105-2012-007 (Sept. 7, 2012), and In the
Matter of Bentleys Brisbane Partnership and Robert John Forbes, CA,
PCAOB Release No. 105-2011-007 (Dec. 20, 2011). Some of the
standards violated in the enforcement cases cited in this release
were predecessor standards to current PCAOB standards. The
descriptions of inspection findings in this release are based on
certain accounting firm inspection reports (portions of which are
available on the PCAOB's website) and on the PCAOB's experience with
inspecting firms.
\39\ See BDO Canada LLP (f/k/a BDO Dunwoody LLP), SEC AAER No.
3926 (Mar. 13, 2018).
\40\ See KPMG Inc., SEC AAER No. 3927 (Mar. 13, 2018).
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There also have been findings in which the lead auditor failed to
assess, or adequately assess, the qualifications of other auditors'
personnel who participated in the audit. For example, PCAOB oversight
activities have revealed situations in which the other auditors'
personnel lacked the necessary industry experience or knowledge of
PCAOB standards and rules (including independence requirements), SEC
rules, and the applicable financial reporting framework to perform the
work requested by the lead auditor.\41\ Other examples identified
through PCAOB and SEC oversight activities include audits in which: (i)
the lead auditor failed to ascertain whether the other auditors, each
of whom played a substantial role in the audit,\42\ were registered
with the PCAOB; \43\ (ii) the
[[Page 39686]]
lead auditor failed to obtain, review, and retain the results of the
other auditor's procedures relating to risks; \44\ (iii) the lead
auditor failed to instruct the other auditor to perform an audit in
accordance with PCAOB standards; \45\ (iv) the lead auditor failed to
supervise the other auditors or provide specific instructions to them,
including detailed audit plans, appropriate modifications to audit
plans based on identified risks, the audit objectives to be
accomplished, or the need to maintain proper documentation; \46\ (v)
the lead auditor failed to adequately supervise the work of foreign
audit staff in circumstances in which the engagement partner did not
speak, read, or write the language used by the foreign staff; \47\ and
(vi) the lead auditor failed to adequately analyze whether it could
serve as the principal auditor, relied on the work of an other auditor
that was not registered with the PCAOB, and failed to determine whether
the other auditor's work complied with PCAOB auditing standards.\48\ In
recent years, there have been indications of increased involvement by
some firms in the supervision of other auditors, as discussed below.
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\41\ See, e.g., In the Matter of Gregory & Associates, LLC, and
Alan D. Gregory, CPA, PCAOB Release No. 105-2019-018 (Aug. 21,
2019).
\42\ See PCAOB Rule 2100, Registration Requirements for Public
Accounting Firms (providing that any firm that plays a substantial
role in the preparation or furnishing of an audit report with
respect to any issuer, broker, or dealer must be registered with the
Board); see also PCAOB Rule 1001(p)(ii), Definitions of Terms
Employed in Rules (defining the phrase ``play a substantial role in
the preparation or furnishing of an audit report'').
\43\ See, e.g., BDO Canada LLP, SEC AAER No. 3926; KPMG Inc.,
SEC AAER No. 3927.
\44\ See In the Matter of Ron Freund, CPA, PCAOB File No. 105-
2009-007 (Jan. 26, 2015), at 1 (Board order summarily affirming
hearing officer's finding of violation and imposition of sanction)
(finding a violation of AU 543.12b, which was reorganized by the
PCAOB in March 2015 as AS 1205.12b, and which required that ``the
principal auditor must obtain, and review and retain, . . . [a] list
of significant fraud risk factors, the auditor's response, and the
results of the auditor's related procedures . . . .'').
\45\ See BDO Canada LLP, SEC AAER No. 3926.
\46\ See, e.g., Anderson Bradshaw PLLC, Russell Anderson, CPA,
Sandra Chen, CPA, and William Denney, CPA, SEC AAER No. 3856 (Jan.
26, 2017); Sherb & Co., LLP, Steven J. Sherb, CPA, Christopher A.
Valleau, CPA, Mark Mycio, CPA, and Steven N. Epstein, CPA, SEC AAER
No. 3512 (Nov. 6, 2013).
\47\ See, e.g., In the Matter of Acquavella, Chiarelli, Shuster,
Berkower & Co., LLP, PCAOB Release No. 105-2013-010 (Nov. 21, 2013);
In the Matter of David T. Svoboda, CPA, PCAOB Release No. 105-2013-
011 (Nov. 21, 2013).
\48\ See In the Matter of Morgan & Company LLP, PCAOB Release
No. 105-2021-002 (Mar. 30, 2021).
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Divided-Responsibility Audits
As noted above, audits in which the lead auditor divides
responsibility with one or more other accounting firms are relatively
uncommon.\49\ For example, division of responsibility between auditors
might occur for an equity method investment or a late-year acquisition
of a company audited by another auditor.
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\49\ According to PCAOB staff analysis of Form AP filings with
the PCAOB, lead auditors currently divide responsibility with
another auditor in about 40 issuer audits per year. Form AP filings
in 2021, 2020, 2019, and 2018 disclosed 36, 41, 37, and 42 divided-
responsibility audits, respectively.
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Evolution of Inspection Findings
As noted above, some firms, particularly larger firms affiliated
with global networks, have increased their supervision of other
auditors in light of other standards. In recent years, some larger U.S.
firms have made further changes to their audit methodologies, perhaps
in response to deficiencies identified by PCAOB inspections,
enforcement cases by regulators, and ongoing rulemaking developments.
Specifically, some firms have encouraged a greater level of supervision
by the lead auditor, such as frequent comprehensive communications with
other auditors and review of other auditors' work papers in the areas
of significant risk.
There have been some indications from PCAOB inspections that these
firms' revisions to methodologies may have contributed to a decline in
inspection-observed audit deficiencies at the firms' foreign affiliates
with respect to work performed at the lead auditor's request.\50\ In
2014, for example, PCAOB inspections staff observed a decrease in the
number of significant audit deficiencies in work performed by other
auditors.\51\ Since 2014, the rate of deficiencies has fluctuated but
remained below the 2013 level. Thus, the changes to the methodologies
of some firms appear to have contributed to some improvements in the
quality of audits.
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\50\ For data regarding deficiencies in audits that involve
other auditors, see discussion below.
\51\ See PCAOB, Staff Inspection Brief: Information about 2017
Inspections, Vol. 2017/3 (Aug. 2017), at 7. The observed decrease is
in comparison to the rate of deficiencies in certain inspected work
in 2011, 2012, and 2013, when inspections staff, in each year
respectively, identified significant audit deficiencies in about 32,
38, and 42 percent of the inspected work performed for lead auditors
by non-U.S. members of the six largest global networks. See Audit
Committee Dialogue, PCAOB Release No. 2015-003 (May 7, 2015), at 9
(graph entitled ``Deficiencies in Non-U.S. Referred Work''). Because
issuer audit engagements and aspects of those engagements are
selected for inspection based on a number of risk-related and other
factors, the deficiencies included in inspections reports are not
necessarily representative of the inspected firms' issuer audit
engagement practice.
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In 2019, some of the Board's inspections focused on certain topics
in audits involving other auditors, including planning and risk
assessment, determining the appropriateness of serving as lead auditor,
and communications between the lead auditor and other auditors. The
inspectors observed improved audit quality when the lead auditor and
other auditors communicated regularly and consistently. They also
observed areas for improvement, including the documentation of required
procedures, reporting of certain audit participants, and compliance
with independence requirements.\52\
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\52\ See PCAOB, Spotlight: Staff Update and Preview of 2019
Inspection Observations (Oct. 8, 2020), at 5-6.
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Reasons To Improve Auditing Standards
The increasing globalization of business, especially among large
public companies, has led to expanded use of other auditors and
increasingly significant roles for other auditors within the audit.
When other auditors participate in an audit, it is important for
investor protection that the engagement partner and, in turn, lead
auditor assure that the audit is performed in accordance with PCAOB
standards and that sufficient appropriate evidence is obtained through
the combined work of the lead auditor and other auditors to support the
lead auditor's opinion in the audit report on the company's
consolidated financial statements. Among other things, this means that
the lead auditor should be appropriately involved in the audit so that
the work of all audit participants is properly planned and supervised,
the results of the work are properly evaluated, and the lead auditor is
in a position to conclude that the financial statements are presented
fairly in all material respects. Lack of adequate lead auditor planning
or supervision can result in deficient audits.
As noted above, some firms have made changes to their audit
methodologies regarding the use of other auditors. However, other firms
that have not made significant improvements to their methodologies
concerning the planning and supervision of audits involving other
auditors may have greater risk of lower quality audits when they use
other auditors.
Additionally, observations from PCAOB oversight activities indicate
that further improvements are needed. PCAOB staff continues to identify
deficiencies in the work of other auditors in critical audit areas,
deficiencies that lead auditors had not identified or sufficiently
addressed. In some cases, these deficiencies occurred even when lead
auditors did not violate existing requirements related to the use of
other auditors, for example, if the lead auditor performed the
procedures described in AS 1205 but did not identify these
deficiencies. Such findings indicate that investor protection could be
improved by, among
[[Page 39687]]
other things, increased involvement in, and evaluation of, the work of
other auditors by the lead auditor.
Areas for Improvement
To enhance audit practice among all firms using other auditors, the
Board identified the following areas for improvement in the current
standards:
<bullet> Applying a risk-based supervisory approach. Applying a
risk-based supervisory approach to the lead auditor's oversight of
other auditors' work should result in more appropriate involvement by
the lead auditor in audits involving other auditors. Unlike the Board's
standards for determining the scope of multi-location audit engagements
and general supervision of the audit, which require more audit
attention to areas of greater risk, the existing standard for using the
work of other auditors does not explicitly require the lead auditor to
tailor its planning and oversight of other auditors for the associated
risks. Applying a risk-based supervisory approach will direct the lead
auditor's attention to the areas of greatest risk.
<bullet> Providing additional specificity. Providing additional
specificity for the lead auditor's application of the principles-based
supervisory requirements of PCAOB standards to the supervision of other
auditors should help address the unique aspects of supervising other
auditors. Additional specificity should also help the lead auditor
assure that its participation in the audit is sufficient for it to
carry out its responsibilities and issue an audit report based on
sufficient appropriate evidence.
<bullet> Taking into account recent changes in auditing practice.
Revising PCAOB auditing standards to take into account recent changes
that some firms have implemented to make their auditing practices more
rigorous for audits that involve other auditors should make those
improved practices more uniform across all accounting firms and enable
the PCAOB to enforce more rigorous provisions across all firms.
Because of the lead auditor's central role in an audit involving
multiple firms, the amendments adopted by the Board seek to strengthen
the existing requirements and impose a more uniform approach to the
lead auditor's oversight of other auditors' work. These improvements
are intended to increase the lead auditor's involvement in and
evaluation of the work of other auditors generally, improve
communication among the lead auditor and other auditors, enhance the
ability of the lead auditor to prevent or detect deficiencies in the
work of other auditors, and thus facilitate improvements in the quality
of audits involving other auditors and promote investor protection.
Comments on the Reasons for Standard Setting
A number of commenters on the proposing releases broadly expressed
support for enhancing PCAOB standards for using the work of other
auditors and referred-to auditors, or stated that the proposed
rulemaking would lead to improvements in audit quality. Some of the
same commenters and others supported the Board's objective of
establishing requirements for overseeing other auditors' work that are
risk-based and more closely aligned with the Board's risk assessment
standards than the existing standards are. Some commenters supported
updating PCAOB standards in light of, among other things, changes in
the business environment, company structure, accounting firm and
network structure, regulation, and financial reporting, and the
increased prevalence of audits involving other auditors. Some other
commenters supported providing a more uniform approach to the lead
auditor's supervision of other auditors. However, in the view of one
commenter, some of the root causes of poor audit performance are not
obvious, they have specific effects that are hard to isolate, and not
all can be remedied by auditors and the PCAOB.
Although commenters generally supported applying a risk-based
approach to the lead auditor's oversight of other auditors' work, some
commenters on the proposing releases expressed concerns about certain
aspects of the amendments and their economic impact. Some recommended
further improvements to the proposed amendments. In the view of some
commenters, the amendments should include additional direction in
certain areas, be more scalable and better aligned with the risk-based
approach, and provide more latitude for the lead auditor to exercise
professional judgment, e.g., in determining the nature, timing, and
extent of supervisory activities. The Board's consideration of the
comments received is discussed further in this document.
In adopting the amendments, the Board took into account the
comments received on the proposing releases. Based on information
available to the Board--including the current regulatory baseline,
observations from the Board's oversight activities, academic
literature, and comments--the Board believes that investors will
benefit from strengthened and clarified auditing standards in this
area. While the Board does not expect that the revisions to the
standards will (or ever could) entirely eliminate audit deficiencies in
this area, the revisions will clarify the auditor's responsibilities,
align the applicable requirements with the PCAOB's risk-based
supervisory standards, and improve the quality of audits.
Overview of Final Rules
The amendments the Board adopted are intended to strengthen the
existing requirements and impose a more uniform approach to the lead
auditor's supervision of other auditors.\53\ As discussed in more
detail in this document, they are designed to increase the lead
auditor's involvement in, and evaluation of, the work of other
auditors, enhance the lead auditor's ability to prevent or detect
deficiencies in the work of other auditors, and facilitate improvements
in the quality of the work of other auditors. In addition, the Board
adopted a new auditing standard that will apply when the lead auditor
divides responsibility for an audit with another accounting firm. The
key aspects of the amendments and new standard include:
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\53\ The amendments apply to audits of issuers, as defined in
Section 2(a)(7) of Sarbanes-Oxley, 15 U.S.C. 7201(7), and also to
audits of brokers and dealers, as defined in Sections 110(3) and (4)
of Sarbanes-Oxley, 15 U.S.C. 7220(3)-(4).
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<bullet> Planning the audit. AS 2101, Audit Planning, as amended
\54\ will provide that:
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\54\ The amendments to AS 2101 and AS 1201 appear in the main
body of each standard and in Appendix A of AS 2101. As originally
proposed, most of the amendments to these standards would have
appeared in a new Appendix B of each standard. As adopted, the
provisions that would have appeared in Appendix B are instead
integrated in the main body of the standards. See 2021 SRC at 9.
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<bullet> In audits involving other auditors or referred-to
auditors, the engagement partner should determine whether the
participation of his or her firm is sufficient for the firm to carry
out the responsibilities of a lead auditor and to report as such on the
company's financial statements.\55\ The amendments also describe
considerations for making the sufficiency determination. (AS 2101.06A)
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\55\ Under the amended standard, in an integrated audit of
financial statements and internal control over financial reporting
(``ICFR''), the lead auditor's participation in the audit of ICFR
must also be sufficient to provide a basis for it to serve as the
lead auditor of ICFR. (AS 2101.06C)
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<bullet> In audits involving referred-to auditors, the Board has
established that participation of the engagement partner's firm is
ordinarily not sufficient for it to serve as lead auditor if more than
50 percent of the assets or revenues are audited by referred-to
auditors. (AS 2101.06A)
[[Page 39688]]
<bullet> Another amended PCAOB standard, AS 1220, Engagement
Quality Review, will expressly require that the engagement quality
reviewer for the audit review the engagement partner's determination
about the sufficiency of his or her firm's participation in the audit
to serve as lead auditor. (AS 1220.10a)
<bullet> In audits that involve work performed by other auditors
regarding locations or business units, the lead auditor's involvement
(through planning and performing audit procedures and supervising other
auditors) should be commensurate with the risks of material
misstatement associated with those locations or business units. (AS
2101.06B)
<bullet> When determining the engagement's compliance with
independence and ethics requirements in audits involving other
auditors, the lead auditor should:
<bullet> Understand the other auditor's knowledge of SEC
independence requirements and PCAOB independence and ethics
requirements (``independence and ethics requirements''), and experience
in applying the requirements. (AS 2101.06Da)
<bullet> Obtain and review written affirmations \56\ regarding (1)
the other auditor's policies and procedures regarding independence and
ethics requirements and, if there are none, a description of how it
determines its compliance; (2) the other auditor's compliance with
independence and ethics requirements, which also describe the nature of
any instances of non-compliance; and (3) a description of all
relationships between the other auditor and the audit client or persons
in financial reporting oversight roles that may reasonably be thought
to bear on independence. (AS 2101.06Db)
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\56\ The terms ``obtain,'' ``retain,'' ``written,'' or ``in
writing'' do not mandate that documents related to the audit be
paper-based. See paragraph .04 of AS 1215, Audit Documentation
(audit documentation may be in the form of paper, electronic files,
or other media).
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<bullet> Inform the other auditor of changes that affect
determining compliance with independence and ethics requirements and
are relevant to the other auditor's affirmations and descriptions. (AS
2101.06Dc(1))
<bullet> Request that the other auditor update its affirmations and
descriptions to reflect any changes in circumstances. (AS 2101.06Dc(2))
<bullet> If the other auditor would play a substantial role in the
audit,\57\ the lead auditor may use the other auditor only if the other
auditor is registered with the PCAOB. (AS 2101.06G)
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\57\ See PCAOB Rule 1001(p)(ii) (defining the phrase ``play a
substantial role in the preparation or furnishing of an audit
report''), including conforming amendments for the term ``lead
auditor'' as revised in this document.
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<bullet> With respect to the other auditor's knowledge, skill, and
ability, the lead auditor should:
<bullet> Understand the knowledge, skill, and ability of the other
auditor's engagement team members who assist the lead auditor with
planning and supervision. (AS 2101.06Ha)
<bullet> Obtain a written affirmation from the other auditor that
its engagement team members possess the knowledge, skill, and ability
to perform the assigned tasks. (AS 2101.06Hb)
<bullet> Determine that it can communicate with other auditors and
gain access to their audit documentation. (AS 2101.06Hc)
<bullet> In multi-tiered audits, a first other auditor may assist
the lead auditor in performing procedures with respect to second other
auditors concerning independence and ethics requirements; the
knowledge, skill, and ability of the second other auditors; and
communications with second other auditors. (AS 2101.06E, .06I)
<bullet> Supervising the audit. AS 1201, Supervision of the Audit
Engagement, as amended will require that the lead auditor:
<bullet> Supervise other auditors under the Board's standard on
supervision of the audit engagement (AS 1201) when the lead auditor
assumes responsibility for the other auditor's work (i.e., does not
divide responsibility for the audit with an other auditor).\58\
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\58\ The work of engaged assistants from outside the firm (e.g.,
leased staff, secondees, staff from a shared service center) will be
governed by the same standards that apply to the work of assistants
inside the firm (e.g., firm partners, shareholders, employees),
including the supervision provisions in AS 1201.05-.06. See, e.g.,
Staff Audit Practice Alert No. 6, at 7-11 (July 12, 2010)
(discussing engaging assistants from outside the firm).
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<bullet> Inform other auditors of the scope of their work and the
following items with respect to the work requested to be performed:
identified risks of material misstatement associated with the location
or business unit, tolerable misstatement, and the amount (if
determined) below which misstatements are clearly trivial and do not
need to be accumulated. (AS 1201.08)
<bullet> Obtain and review the other auditor's written description
of procedures to be performed and discuss with, and communicate in
writing to, the other auditor any needed changes to the planned
procedures. (AS 1201.09-.10)
<bullet> Obtain and review a written affirmation from the other
auditor as to whether the other auditor has performed work in
accordance with the lead auditor's instructions, and, if the other
auditor has not performed such work, a description of the nature of,
and explanation of the reasons for, the instances where the work was
not performed in accordance with the instructions, including (if
applicable) a description of the alternative work performed. (AS
1201.11)
<bullet> Direct other auditors to provide specified documentation
concerning work performed.\59\ (AS 1201.12)
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\59\ Under PCAOB standards, the lead auditor's necessary extent
of review of the other auditors' documentation depends on the
necessary extent of supervision by the lead auditor (see AS
1201.06). The documentation to be reviewed by the lead auditor
should include, at a minimum, the documentation described in AS
1215.19.
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<bullet> Determine whether the other auditor performed the work as
instructed and whether additional audit evidence needs to be obtained.
(AS 1201.13)
<bullet> Evaluate, in a multi-tiered audit where the lead auditor
seeks assistance from a first other auditor to perform any of the above
responsibilities with respect to second other auditors,\60\ the first
other auditor's supervision of second other auditors. (AS 1201.14)
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\60\ For a more detailed discussion of multi-tiered audits, see
discussion below.
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<bullet> Dividing responsibility for the audit. When the lead
auditor divides responsibility for the audit with another accounting
firm, new auditing standard AS 1206, Dividing Responsibility for the
Audit with Another Accounting Firm, will provide that:
<bullet> The lead auditor should determine that audit procedures
are performed to test and evaluate the consolidation or combination of
the financial statements of the business units audited by the referred-
to auditor into the company's financial statements. (AS 1206.03)
<bullet> The lead auditor should communicate in writing to the
referred-to auditor the plan to divide responsibility for the audit.
(AS 1206.04)
<bullet> The lead auditor should obtain written representation from
the referred-to auditor that it is independent under PCAOB and SEC
requirements and duly licensed to practice. (AS 1206.05)
<bullet> The lead auditor may divide responsibility for the audit
with a referred-to auditor only if:
<bullet> The referred-to auditor represents it performed its audit
and issued its report in accordance with PCAOB standards;
<bullet> The lead auditor determines that the referred-to auditor
is familiar with the relevant financial reporting requirements and
PCAOB standards;
[[Page 39689]]
<bullet> The referred-to auditor is registered with the PCAOB if it
played a substantial role in the audit or its report is with respect to
a business unit that is itself an issuer, broker, or dealer;
<bullet> In case of the conversion of business unit financial
statements from another financial reporting framework to the financial
reporting framework of the company, the lead auditor or the referred-to
auditor audits the conversion adjustments, and the lead auditor
indicates in its report which auditor was responsible for that. (AS
1206.06)
<bullet> In situations where the lead auditor is unable to divide
responsibility, the lead auditor should: plan and perform procedures
necessary to issue an auditor's report that expresses an opinion;
qualify or disclaim an opinion; or withdraw from the engagement. (AS
1206.07)
<bullet> The lead auditor's audit report must indicate clearly the
division of responsibility, identify the referred-to auditor by name
and refer to its report, and disclose the magnitude of the portion of
the financial statements (or internal controls over financial
reporting) audited by the referred-to auditor. (AS 1206.08)
<bullet> If the referred-to auditor's report is not a standard
(i.e., unqualified) report, the lead auditor should make reference to
the departure, unless the matter is clearly trivial to the financial
statements. (AS 1206.09)
<bullet> Additional amendments. The amendments the Board adopted
also:
<bullet> Rescind AS 1205, Part of the Audit Performed by Other
Independent Auditors.
<bullet> This change, in effect, requires lead auditors to
supervise (directly or through other auditors) work performed by other
auditors under AS 1201 in all cases, unless the lead auditor divides
responsibility for the audit with another (referred-to) auditor, in
which case AS 1206 applies.
<bullet> Revise AS 1015, Due Professional Care in the Performance
of Work, to emphasize that other auditors are responsible for
performing their work with due professional care.
<bullet> Revise AS 1215 to expressly state that, in an audit
involving other auditors, an other auditor must retain documentation of
the work that it performs, and that its documentation is subject to the
requirements related to subsequent modification.
<bullet> Amend Appendix B, Audit Evidence Regarding Valuation of
Investments Based on Investee Financial Results, of AS 1105, Audit
Evidence, to distinguish it from requirements involving other auditors
or referred-to auditors, by using a more descriptive term, ``investee
auditor'' (including in situations involving equity method investees),
and making certain other clarifying edits.
<bullet> Include definitions of key terms ``engagement team,''
``lead auditor,'' ``other auditor,'' and ``referred-to auditor'' in AS
2101.
<bullet> Revise other PCAOB standards and rules to conform to these
amendments.
Additional Discussion of the Amendments and New Standard
Introduction
The changes to PCAOB standards the Board adopted were intended to
improve the quality of audits that involve one or more public
accounting firms, and accountants at those firms, that are outside the
accounting firm issuing the auditor's report. This section discusses in
more detail amendments to auditing standards and a new auditing
standard adopted by the Board relating to the use of other auditors and
dividing responsibility for the audit with another accounting firm
(collectively, ``amendments'' or ``final amendments''). The Board
adopted these amendments after taking into account public comments that
were received on the requirements proposed in 2016 and in response to
supplemental requests for comment issued in 2017 and 2021 as discussed
in more detail below in connection with the amendments.
In brief, the amendments include:
<bullet> Amendments to AS 1015, Due Professional Care in the
Performance of Work; AS 1105, Audit Evidence; AS 1201, Supervision of
the Audit Engagement; AS 1215, Audit Documentation; AS 1220, Engagement
Quality Review; and AS 2101, Audit Planning;
<bullet> A new auditing standard, AS 1206, Dividing Responsibility
for the Audit with Another Accounting Firm, for situations in which the
accounting firm issuing the auditor's report divides responsibility for
the audit with another accounting firm; and
<bullet> Other related amendments to PCAOB auditing standards.
In general, the amendments extend the risk-based supervision
requirements of PCAOB auditing standards to all situations in which
other auditors participate in an audit, unless the lead auditor divides
responsibility for the audit with another auditor.\61\ The amendments
also strengthen the requirements and provide additional direction to
the lead auditor about its responsibilities. For the relatively
infrequent situations when the lead auditor divides responsibility for
the audit with another auditor, the amendments strengthen the existing
approach under PCAOB standards.
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\61\ For situations involving auditors of the financial
statements of the company's investees, see discussion below.
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The amendments also rescind AS 1205, Part of the Audit Performed by
Other Independent Auditors, and AI 10, Part of the Audit Performed by
Other Independent Auditors: Auditing Interpretations of AS 1205.
The amendments to AS 1201 and AS 2101 appear in the main body of
each standard and in Appendix A of AS 2101. As originally proposed,
most of the amendments to these standards would have appeared in a new
Appendix B of each standard. As proposed in the 2021 SRC, the
provisions that would have appeared in Appendix B were instead
relocated to the body of the two standards (AS 1201 and AS 2101) to
enhance the readability and usability of the amendments and to better
facilitate their implementation. One commenter on the 2021 SRC
commended the PCAOB for relocating the amendments from Appendix B of
each standard to the body of the standards, stating that it improves
usability and clarity.
Definitions of Engagement Team, Lead Auditor, Other Auditor, and
Referred-to Auditor
See paragraphs .A3-.A6 of AS 2101
To operationalize the requirements included in this release, the
amendments define the terms ``engagement team,'' ``lead auditor,''
``other auditor,'' and ``referred-to auditor,'' as discussed below. A
commenter on the 2021 SRC recommended alignment of the terminology used
in the PCAOB's standards with that of the International Auditing and
Assurance Standards Board (``IAASB'') and the American Institute of
Certified Public Accountants Auditing Standards Board (``ASB''). After
considering the comment, the Board adopted the definitions
substantially as proposed, because they are designed for the
requirements of this rulemaking, which differ from those in the
analogous IAASB and ASB standards. These definitions are included in
Appendix A of AS 2101 and referenced in other PCAOB standards, where
applicable.
Definition of ``Engagement Team''
See paragraph .A3 of AS 2101
Under existing PCAOB standards, the engagement partner is
responsible for the engagement and its performance, including the
proper supervision of the work of engagement team members and
[[Page 39690]]
for compliance with PCAOB standards.\62\ The term ``engagement team''
is commonly used in PCAOB auditing standards but has not been defined.
The definition of ``engagement team'' that the Board adopted in AS 2101
will apply to AS 1201 and AS 2101, as amended, and to the new standard,
AS 1206. The term specifies, for example, the persons subject to the
lead auditor's supervision under AS 1201, which standard will now apply
to the relationship between the lead auditor and all other auditors for
whose work the lead auditor assumes responsibility, including those
currently covered by rescinded AS 1205.
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\62\ See AS 1201.03.
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The Board adopted a revised definition to conform to previous
amendments to the Board's standards and to address 2021 SRC comments
received. Subparagraph (2) of the revised definition conforms to
terminology used in Appendix C, Supervision of the Work of Auditor-
Employed Specialists, of AS 1201, which the Board adopted in 2018.\63\
As revised, the definition of ``engagement team'' includes:
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\63\ See Amendments to Auditing Standards for Auditor's Use of
the Work of Specialists, PCAOB Release No. 2018-006 (Dec. 20, 2018).
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(1) Partners, principals, and shareholders of, and accountants \64\
and other professional staff employed or engaged by, the lead auditor
or other accounting firms who perform audit procedures on an audit or
assist the engagement partner in fulfilling his or her planning or
supervisory responsibilities on the audit pursuant to AS 2101 or AS
1201; and
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\64\ See paragraph (a)(ii) of PCAOB Rule 1001, Definitions of
Terms Employed in Rules, which defines the term ``accountant.''
(This footnote referring to Rule 1001 is included in the definition
of ``engagement team'' appearing in AS 2101.A3.)
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(2) Specialists who, in connection with the audit, (i) are employed
by the lead auditor or an other auditor participating in the audit and
(ii) assist that auditor in obtaining or evaluating audit evidence with
respect to a relevant assertion of a significant account or
disclosure.\65\
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\65\ The final amendments add the phrase ``in connection with
the audit'' and replace ``assist their firm'' with ``assist that
auditor'' for clarity.
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The definition excludes:
(1) The engagement quality reviewer and those assisting the
reviewer (to which AS 1220 applies);
(2) Partners, principals, and shareholders of, and other
individuals employed or engaged by, another accounting firm in
situations in which the lead auditor divides responsibility for the
audit with the other firm under AS 1206; and
(3) Engaged specialists.\66\
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\66\ AS 1210, Using the Work of an Auditor-Engaged Specialist,
establishes requirements that apply to the use of specialists
engaged by the auditor's firm. Appendix A of AS 1105 sets forth the
auditor's responsibilities for using the work of a specialist
employed or engaged by the company. (This footnote referring to AS
1210 and AS 1105 is included in the definition of ``engagement
team'' appearing in AS 2101.A3.)
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In general, the engagement team, as defined, encompasses the
engagement partner and individual accountants who perform procedures to
obtain and evaluate audit evidence, as well as specialists employed by
one of the participating audit firms who perform audit procedures. The
following table illustrates the distinction between engagement team
members and parties who are not engagement team members under the
definition the Board adopted.
------------------------------------------------------------------------
Examples of parties who are
Examples of engagement team members NOT engagement team members
------------------------------------------------------------------------
<bullet> Engagement partner <bullet> Auditor-engaged
specialists.\67\
<bullet> Personnel from the engagement <bullet> Engagement quality
partner's firm \68\ who perform audit reviewer and those
procedures on the audit assisting the reviewer.\69\
<bullet> Appendix K or
filing reviewer.\70\
<bullet> Service auditors of
a third-party service
organization.\71\
<bullet> Personnel of accounting firms and <bullet> A firm professional
individual accountants outside the who performs a
engagement partner's firm who perform contemporaneous quality
audit procedures on the audit (supervised control function (e.g.,
under AS 1201) \72\ internal inspection or
quality control review) but
does not perform audit
procedures or help plan or
supervise the audit work
<bullet> A firm professional in the <bullet> Individuals
national office or centralized group in employed or engaged by the
the firm (including within the firm's company being audited, such
network) who performs audit procedures on as a company's internal
the audit or assists in planning or auditors, a company's
supervising the audit specialists, and a
company's consultants.\73\
------------------------------------------------------------------------
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\67\ The term ``engagement partner's firm'' is used in this
rulemaking to describe the registered public accounting firm issuing
the auditor's report. (See first note to AS 2101.A4.)
\68\ See AS 1210.
\69\ AS 1220 applies to those persons.
\70\ Reviewers under Appendix K of SEC Practice Section
(``SECPS'') Section 1000.45, SECPS Member Firms with Foreign
Associated Firms That Audit SEC Registrants, would not be considered
members of the engagement team. Those reviewers, similar to the
engagement quality reviewer, do not make decisions on behalf of the
engagement team or assume any of the responsibilities of the
engagement team.
\71\ AS 2601, Consideration of an Entity's Use of a Service
Organization, sets forth the auditor's responsibilities with respect
to using the work of service auditors who issue reports on the
controls of a third-party service organization.
\72\ This includes personnel of accounting firms described in
rescinded AS 1205 as other auditors for whose work the ``principal
auditor'' (which is the term used in AS 1205) assumes
responsibility. By including these individuals in the engagement
team, the amendments expand the lead auditor's responsibility to
apply the risk-based supervision approach to all accounting firms
involved in the audit, except in situations in which the lead
auditor divides responsibility for the audit with another accounting
firm. (If the lead auditor divides responsibility for the audit with
another accounting firm, that firm is considered a referred-to
auditor under AS 1206.)
\73\ Because of their roles at the company, the work of
individuals employed or engaged by the company is not subject to
supervision under AS 1201; they are not considered members of the
engagement team under the adopted definition. PCAOB standards
include requirements regarding the auditor's use of work performed
by some of these individuals. See, e.g., AS 1105, Appendix A; AS
2201, An Audit of Internal Control Over Financial Reporting That Is
Integrated with An Audit of Financial Statements; AS 2605,
Consideration of the Internal Audit Function.
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A commenter on the 2021 SRC asked whether the Board considered the
potential ramifications of the difference between the proposed
definition of ``engagement team'' and the analogous term ``audit
engagement team'' in SEC independence requirements. One commenter
acknowledged that the Board addressed this question in the 2016
Proposal and recommended that the Board add an explanatory footnote to
the rule text in the definition of ``engagement team.''
The Board purposely adopted a definition of ``engagement team''
that is narrower than the definition of ``audit engagement team'' in
the SEC's independence rules. See Rule 2-01(f)(7)(i) of Regulation S-X,
17 CFR 210.2-01(f)(7)(i). In addition to the individuals within the
Board's definition of ``engagement team,'' the definition in SEC Rule
2-01(f)(7)(i) also encompasses certain individuals who are not included
in the Board's definition, such as the engagement quality reviewer. The
Board noted that neither the definition of ``engagement team'' nor any
other amendments in this
[[Page 39691]]
release affect the definitions within, or the applicability of, the
independence requirements of the SEC.
Another commenter expressed concern that the definition of
``engagement team'' for purposes of AS 2101, AS 1201, and AS 1206 could
have implications for other standards. This commenter cited other
auditing standards outside of these three standards that use the term
``engagement team'' and encouraged the PCAOB to revisit these instances
to determine the implications for those standards of the new
definition. The Board noted that, although the definition is not
repeated across all other PCAOB standards, the term ``engagement team''
in other PCAOB standards has the same meaning as the defined term in AS
2101.A3.\74\
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\74\ See proposed rule text for further amendments made to PCAOB
standards in order to clarify that the term ``engagement team'' has
the same meaning (or, where applicable, analogous meaning) as the
defined term in AS 2101.A3.
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Finally, a couple of commenters recommended clarifying the
definition of ``engagement team'' with respect to auditor-employed
specialists. One commenter suggested specifying that auditor-employed
specialists can be engagement team members only if they participate in
the audit, while the other suggested changing the proposed reference to
``their firm'' to instead employ the defined terms ``lead auditor'' and
``other auditor.'' The Board made corresponding clarifying edits to
subparagraph (2) of the definition. Apart from making these changes and
certain minor clarifying edits, the Board adopted the definition of
``engagement team'' as proposed in the 2021 SRC.
Definition of ``Lead Auditor''
See paragraph .A4 of AS 2101
The amendments introduce the new term ``lead auditor'' for both
types of scenarios addressed by this rulemaking: supervising other
auditors' work under AS 1201, and dividing responsibility for the audit
with another accounting firm under AS 1206.\75\ The term ``lead
auditor'' replaces the term ``principal auditor'' that is currently
used in several PCAOB standards.\76\ Under the amendments, the term
``lead auditor'' means the firm issuing the auditor's report, the
engagement partner of that firm, and other personnel of that firm (or
their functional equivalents) who perform planning or supervisory
responsibilities from that firm.
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\75\ The amendments rescind AS 1205, which uses the term
``principal auditor.''
\76\ See Other Related Amendments to PCAOB Auditing Standards.
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The definition is key to this rulemaking because it identifies the
firm and individuals who are responsible for carrying out the
requirements under the amendments:
Lead auditor--
(a) The registered public accounting firm \77\ issuing the
auditor's report on the company's financial statements and, if
applicable, internal control over financial reporting; and
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\77\ See paragraph (r)(i) of PCAOB Rule 1001, which defines the
term ``registered public accounting firm.'' This footnote is
included within the definition appearing in AS 2101.A4.
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(b) The engagement partner and other engagement team members who
both:
(1) Are partners, principals, shareholders, or employees of the
registered public accounting firm issuing the auditor's report (or
individuals who work under that firm's direction and control and
function as the firm's employees); and
(2) Assist the engagement partner in fulfilling his or her planning
or supervisory responsibilities on the audit pursuant to AS 2101 or AS
1201.\78\
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\78\ See paragraph .05a of AS 2301, The Auditor's Responses to
the Risks of Material Misstatement, which describes making
appropriate assignments of significant engagement responsibilities.
See also AS 1015.06, according to which ``[e]ngagement team members
should be assigned to tasks and supervised commensurate with their
level of knowledge, skill, and ability.'' This footnote is included
within the definition appearing in AS 2101.A4.
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Note: The registered public accounting firm issuing the auditor's
report is also referred to in this standard as ``the engagement
partner's firm.''
Note: Individuals such as secondees \79\ who work under the
direction and control of the registered public accounting firm issuing
the auditor's report would function as the firm's employees.
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\79\ For this purpose, the term ``secondee'' refers to an
individual participating in a secondment arrangement in which, for
at least three consecutive months, (1) a professional employee of an
accounting firm in one country works for a registered public
accounting firm that is located in another country and is issuing an
auditor's report, and (2) the professional employee performs audit
procedures with respect to entities and their operations in that
other country and does not perform more than de minimis audit
procedures in relation to entities or business operations in the
country of his or her employer. A secondee can be either physically
located in that other country or working through a remote work
arrangement. This footnote is included within the definition
appearing in AS 2101.A4.
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Several commenters on the 2021 SRC indicated that the definition of
``lead auditor'' was sufficiently clear. One commenter on the 2021 SRC
stated there was lack of clarity about the use of the term ``lead
auditor'' in circumstances when the audit does not involve other
auditors or referred-to auditors. This commenter suggested that the
proposed standard explicitly acknowledge either: (1) the registered
public accounting firm that issues the auditor's report is always the
lead auditor, including when there are no other auditors or referred-to
auditors or (2) the registered public accounting firm that issues the
auditor's report is only a lead auditor if the audit involves other
auditors or referred-to auditors (and therefore modifications would
need to be made to the definition of engagement team).
In the proposing releases, the Board stated that the term ``lead
auditor'' would apply to these scenarios: supervising other auditors
under AS 1201 and dividing responsibility for the audit under proposed
AS 1206. In addition, the amendments already clearly indicate that the
term will apply when other auditors or referred-to auditors are
involved in the audit.\80\
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\80\ See, e.g., AS 2101.04.
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The description of ``secondee'' was added to the proposed
amendments in the 2021 SRC.\81\ Several commenters said that the
description was too prescriptive, given the flexibility in location
where audit professionals may work, as demonstrated throughout the
COVID-19 pandemic. Most of these commenters were supportive of its
inclusion as an example in the rule text, but recommended that
``secondee'' not be defined so narrowly. They also suggested that
individuals who work at shared service centers be included as an
example in the rule text given the continued increase in their use. In
addition, one commenter said that it did not agree with the Board that
at all times (now and in the future) individuals who work at shared
service centers will work under the direction and control of and
function as employees of the lead auditor firm.
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\81\ See 2021 SRC at A1-16 (proposed footnote 5 of AS 2101.A4).
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After considering the comments received, the Board is revising
footnote 5 of AS 2101.A4 to be similar to revised Form AP staff
guidance \82\ on secondees. Those revisions recognized that, because of
the recent advances in technology and remote work arrangements,
location should not necessarily be a factor in determining whether
secondees work under the direction and control of the firm and function
as their employees. Further, the Board agrees that under the amendments
secondees from other accounting firms and employees of
[[Page 39692]]
shared service centers who both work under the firm's direction and
control (as with other individuals who work in the role of firm
employees) and assist the engagement partner in fulfilling planning or
supervisory responsibilities on the audit are part of the lead auditor.
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\82\ See Staff Guidance, Form AP, Auditor Reporting of Certain
Audit Participants, and Related Voluntary Audit Report Disclosure
Under AS 3101, The Auditor's Report on an Audit of Financial
Statements When the Auditor Expresses an Unqualified Opinion (Dec.
17, 2021).
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Regarding the comment that individuals at shared service centers
would not always function as ``employees of the lead auditor's firm,''
the amendments do not provide that all shared service center staff
would function as employees of the lead auditor firm. For example,
staff at a shared service center could be working on the audit under
the direction and control of an audit firm other than the lead auditor.
In that case, the individuals at the shared service center would
function as employees of the other auditor, not the lead auditor firm.
The Board considered these comments and determined that the
proposed definition of lead auditor is sufficiently clear and, except
for the revision to the footnote regarding secondees discussed above,
adopted it as proposed in the 2021 SRC.
Definitions of ``Other Auditor'' and ``Referred-to Auditor''
For the Term ``Other Auditor,'' See Paragraph .A5 of AS 2101, and For
the Term ``Referred-to Auditor,'' See Paragraph .A6 of AS 2101
Several existing PCAOB standards use the term ``other auditor'' to
encompass any auditors outside the lead auditor that participate in an
audit, regardless of whether the lead auditor supervises them under AS
1201, assumes responsibility for their work under AS 1205, or makes
reference to them under AS 1205.\83\ The amendments define two terms:
``other auditor,'' and ``referred-to auditor.'' These definitions are
as follows:
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\83\ For example, AS 1205 uses the term ``other auditors'' to
describe accounting firms whose work the lead auditor uses or with
which it divides responsibility for the audit. By contrast, AS
1215.18-.19 uses the term ``other auditors'' when describing offices
of the firm issuing the audit report and other firms participating
in the audit.
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Other auditor--
(a) A member of the engagement team who is not:
(1) A partner, principal, shareholder, or employee of the lead
auditor or
(2) An individual who works under the direction and control of the
registered public accounting firm issuing the auditor's report and
functions as that firm's employee; and
(b) A public accounting firm, if any, of which such engagement team
member is a partner, principal, shareholder, or employee.
Referred-to auditor--
A public accounting firm, other than the lead auditor, that
performs an audit of the financial statements and, if applicable,
internal control over financial reporting, of one or more of the
company's business units \84\ and issues an auditor's report in
accordance with the standards of the PCAOB to which the lead auditor
makes reference in the lead auditor's report on the company's financial
statements and, if applicable, internal control over financial
reporting.\85\
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\84\ The term ``business units'' includes subsidiaries,
divisions, branches, components, or investments. This footnote is
included within the definition appearing in AS 2101.A6.
\85\ See AS 1206, which sets forth the lead auditor's
responsibilities regarding dividing responsibility for the audit of
the company's financial statements and, if applicable, internal
control over financial reporting, with a referred-to auditor. This
footnote is included within the definition appearing in AS 2101.A6.
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Several commenters on the 2021 SRC indicated that the definition of
``other auditor'' was sufficiently clear, and no commenters expressed
concern about the definition of ``referred-to auditor.'' Some
commenters on the 2016 Proposal asked whether the term ``referred-to
auditor'' is aligned with the term ``principal accountant'' used by the
SEC. The Board noted that the definitions it adopted do not affect the
applicability of SEC terms or rules to audits involving other auditors
or referred-to auditors, including the definition of ``principal
accountant.''
In addition, one commenter on the 2016 Proposal stated that the
only difference between the definitions of other auditor and referred-
to auditor appears to be divided responsibility, but noted the
definitions are substantially different. The Board notes that these
definitions reflect differences in lead auditor responsibilities with
respect to the other auditor and referred-to auditor. As noted above,
under the amendments, the term ``other auditor'' encompasses both the
individuals participating in the audit and their firm. In contrast, the
lead auditor divides responsibility for the audit with the referred-to
auditor, which issues the auditor's report on the financial statements
(and, if applicable, internal control over financial reporting) of a
company's business unit. Thus, the term ``referred-to auditor'' applies
only to the firm because the firm issues an auditor's report in the
divided-responsibility situation.
The Board considered the comments and determined that the
definitions of ``other auditor'' and ``referred-to auditor'' are
sufficiently clear and adopted them as proposed in the 2021 SRC.
Planning the Audit
See Amendments to AS 2101
In general, the amendments to AS 2101 carry forward and update
certain requirements of AS 1205 and include certain procedures to be
performed by the lead auditor.
This section discusses planning requirements in AS 2101 for audits
in which the lead auditor supervises the work of other auditors in
accordance with AS 1201. It also discusses certain planning
requirements, which appear in AS 2101, for audits in which the lead
auditor divides responsibility for the audit with referred-to auditors
in accordance with AS 1206.\86\ This section on planning requirements
addresses the following topics:
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\86\ In addition, this document discusses requirements for the
lead auditor in AS 1206 relating to the referred-to auditor's (1)
compliance with the SEC independence and PCAOB independence and
ethics requirements, (2) registration pursuant to the rules of the
PCAOB, and (3) knowledge of the relevant accounting, auditing, and
financial reporting requirements.
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<bullet> Serving as the lead auditor in an audit that involves
other auditors or referred-to auditors (determining sufficiency of
participation);
<bullet> Other auditors' compliance with independence and ethics
requirements;
<bullet> PCAOB registration status of other auditors;
<bullet> Knowledge, skill, and ability of and communications with
other auditors; and
<bullet> Determining locations or business units at which audit
procedures should be performed.
Serving as the Lead Auditor in an Audit That Involves Other Auditors or
Referred-to Auditors (Determining Sufficiency of Participation)
See Paragraphs .06A-.06C of AS 2101
Under AS 2101 as amended, in audits involving other auditors or
referred-to auditors, the engagement partner should determine whether
the participation of his or her firm is sufficient for the firm to
carry out the responsibilities of a lead auditor and to report as such
on the company's financial statements. The considerations for
determining the sufficiency of the firm's participation apply to audits
in which the lead auditor supervises other auditors' work, divides
responsibility for the audit with another accounting firm, or both. In
contrast, the 50-percent participation threshold (discussed below)
applies only to audits in which the lead auditor divides responsibility
for the audit with another accounting firm.
[[Page 39693]]
Planning is not a discrete phase of an audit, but rather is a
continual and iterative process that continues until the completion of
the audit.\87\ Therefore the engagement partner is expected to revisit
his or her determination of the sufficiency of the lead auditor's
participation throughout the audit if circumstances change. This may
occur, for example, because of changes due to business combinations,
divestitures, or other events that could affect the audit plan or
allocation of work between the lead auditor and other auditors.
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\87\ See AS 2101.05.
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Considerations for Serving as the Lead Auditor
See First Paragraph of .06A(a-c) of AS 2101
AS 1205, which is being rescinded, provides that when significant
parts of the audit are performed by other auditors (``other auditors''
and ``referred-to auditors'' under the amendments), the principal
auditor (``lead auditor'' under the amendments) must decide whether the
principal auditor's own participation is sufficient to enable it to
serve as the principal auditor and issue the auditor's report on the
company's financial statements. Under AS 1205.02, when determining
whether the firm sufficiently participates in the audit, the principal
auditor is required to consider, among other things, (i) the
materiality of the portion of the financial statements audited in
comparison with the portion audited by other auditors; (ii) the extent
of the auditor's knowledge of the overall financial statements; and
(iii) the importance of the components audited by the auditor in
relation to the enterprise as a whole.
The amendments to AS 2101 strengthen the existing requirement for
determining the sufficiency of participation by: (i) extending the
determination requirement to all audits involving other auditors and
referred-to auditors,\88\ not just audits that have been covered by AS
1205; (ii) imposing the determination requirement specifically on the
engagement partner; and (iii) specifying certain considerations, based
on risk and other factors, that should be taken into account in making
the determination.
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\88\ Below, this document discusses further conditions to be met
in order to divide responsibility with another accounting firm.
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In general, the sufficiency requirement is intended to increase the
likelihood that the firm issuing the auditor's report (i.e., the lead
auditor) meaningfully participates in the audit. The Board believes
that compliance with this requirement should benefit all audits
involving other auditors and referred-to auditors, not only audits that
have been covered by AS 1205. Imposing the sufficiency requirement on
the engagement partner is consistent with the engagement partner's
existing responsibilities under PCAOB standards for planning the audit
\89\ and for assigning tasks to and supervising engagement team
members.\90\
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\89\ See AS 2101.03.
\90\ See AS 1015.06.
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The amendments require that, when making the sufficiency
determination, the engagement partner take into account the following,
in combination, i.e., the engagement partner should take into account
all three considerations:
<bullet> Importance--The importance of the locations or business
units for which the engagement partner's firm performs audit procedures
in relation to the financial statements of the company as a whole,
considering quantitative and qualitative factors;
<bullet> Risk--The risks of material misstatement associated with
the portion of the company's financial statements for which the
engagement partner's firm performs audit procedures, in comparison with
the portions for which the other auditors perform audit procedures or
the portions audited by the referred-to auditors; and
<bullet> Extent of supervision--The extent of the engagement
partner's firm's supervision of the other auditors' work for portions
of the company's financial statements for which the other auditors
perform audit procedures.\91\
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\91\ In a multi-tiered audit (see AS 1201.14), the consideration
regarding extent of supervision applies only to the firm's
supervision of a first other auditor and any other auditor that is
supervised directly by the firm. See discussion of multi-tiered
audits below.
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Of these three considerations, only the risk consideration was
included in the 2016 Proposal. Although it was intended to encompass
both quantitative and qualitative aspects of participation, some
commenters on the 2016 Proposal viewed a determination based solely on
risk as too narrow, and some viewed it as primarily quantitative.
Commenters expressed concern that it might result in denying a firm the
ability to serve as lead auditor if it performed procedures only at the
corporate headquarters and not at the company's operating units (which
were audited by other auditors), even if that firm is otherwise best
positioned to serve as lead auditor.
The importance consideration was added in the 2017 SRC, after
considering comments received on the 2016 Proposal. The addition was
intended to more expressly address circumstances in which the lead
auditor audits the locations or business units where the primary
financial reporting decisions are made and consolidated financial
statements are prepared, even though those locations or business units
might not constitute a significant portion of the company's
operations.\92\ A number of commenters on the 2017 SRC commented
favorably on the importance consideration, noting generally that it
would more directly enable the engagement partner to consider both
quantitative and qualitative factors when determining the sufficiency
of participation.
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\92\ See 2017 SRC at 9.
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Some commenters on the 2017 SRC viewed the sufficiency
determination based on the two proposed considerations (importance and
risk) as too restrictive for certain audits. Examples provided by the
commenters included companies with highly dispersed management and
financial reporting functions, especially those whose operations,
headquarters, and financial reporting functions are primarily outside
the company's corporate domicile. Commenters stated that applicable
laws and regulations might require that the company's audit report be
issued by a firm located in the jurisdiction where the company is
domiciled, regardless of how much of the audit is performed by that
auditor compared to other auditors. To address this issue, the
commenters suggested providing additional considerations for the
sufficiency-of-participation determination, including the firm's extent
of supervision.
The third consideration (extent of supervision) was added in the
2021 SRC. This addition was designed to allow for a more comprehensive
determination of the prospective lead auditor's involvement.
Several commenters on the 2021 SRC generally supported the proposed
addition of the consideration related to the extent of the engagement
partner's firm's supervision of other auditors' work. Some of these
comments also agreed that the sufficiency-of-participation
determination by the engagement partner should be a risk-based
assessment involving quantitative and qualitative considerations. One
commenter on the 2021 SRC stated its understanding that an engagement
partner may determine that his or her firm can serve as lead auditor by
adjusting the extent of his or her firm's supervision of the other
auditors' work to overcome instances where the other
[[Page 39694]]
auditors are performing audit procedures for significant parts of the
audit. This same commenter said it would be helpful for the Board to
acknowledge that an auditor who performs relatively fewer audit
procedures on global business units can still be considered the lead
auditor based on legal or regulatory requirements and his or her firm's
supervision of other auditors.
Other commenters continued to have concerns similar to those
expressed in 2017 (e.g., regarding jurisdictional matters) even with
the additional consideration. These commenters suggested that the Board
provide further considerations, and therefore additional flexibility,
for the determination.
The Board believes the three considerations will enable engagement
partners to address the multitude of scenarios encountered in practice
when determining their firms' sufficiency of participation. With regard
to the comments on jurisdictional challenges posed by laws and
regulations, if the auditor's report is required to be issued by a firm
licensed in a certain jurisdiction, under the amendments that firm
could serve as lead auditor (subject to certain conditions such as
necessary extent of supervision), even if it does not perform audit
procedures on many of the company's subsidiaries. In addition, a firm
could obtain additional staff to perform audit procedures under the
firm's direction and control functioning as the firm's employees in
order to be able to serve as the lead auditor. Adding more
considerations, as some commenters suggested, could increase the risk
that the firm issuing the auditor's report does not meaningfully
participate in the audit, and thus was the ``lead auditor'' in name
only.\93\ Permitting such arrangements would not achieve the intent of
the amendments.
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\93\ Such arrangements are sometimes referred to as ``letterbox
audits.''
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One commenter pointed out that with respect to divided-
responsibility situations, the lead auditor often may not be able to
fully apply certain considerations (e.g., the concept of
``supervision'' in AS 2101.06Ac). The Board noted that in a divided-
responsibility situation, the overall principles of .06Aa-b are the
relevant considerations, because the consideration in .06Ac does not by
its terms address referred-to auditors. AS 2101.06Ac states that the
``extent of the engagement partner's firm's supervision of the other
auditors' work for portions of the company's financial statements for
which the other auditors perform audit procedures'' (emphasis added).
After considering the comments received, the Board adopted the
requirements substantially as proposed.\94\ The engagement partner will
take into account the three considerations (importance, risk, and
supervision) in combination to determine whether the full range of his
or her firm's involvement in the audit constitutes sufficient
participation to serve as the lead auditor.\95\
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\94\ Footnote 4B to AS 2101.06Ac has been revised to add the
following sentence: ``See also AS 1201.07, which states that for
engagements that involve other auditors, AS 1201.08-.15 further
describe procedures to be performed by the lead auditor with respect
to the supervision of the work of other auditors, in conjunction
with the required supervisory activities set forth in AS 1201.''
\95\ The lead auditor's analysis of its sufficiency of
participation should be documented pursuant to AS 1215.06, which
requires, among other things, that audit documentation contain
sufficient information to enable an experienced auditor, having no
previous connection with the engagement, to understand the nature,
timing, extent, and results of the procedures performed, evidence
obtained, and conclusions reached.
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Fifty-Percent Participation Threshold for Divided-Responsibility Audits
See Second Paragraph of .06A of AS 2101
For divided-responsibility audits,\96\ the Board determined to
adopt, as proposed, amendments to reflect the following ``50-percent
threshold,'' which applies in addition to two of the three
considerations for determining the sufficiency of participation
discussed above (importance and risk):\97\
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\96\ According to PCAOB staff analysis of Form AP filings with
the PCAOB, lead auditors currently divide responsibility with
another auditor in about 40 issuer audits per year. Form AP filings
in 2021, 2020, 2019, and 2018 disclosed 36, 41, 37, and 42 divided-
responsibility audits, respectively.
\97\ This release, below, discusses further conditions to be met
in order to divide responsibility with another accounting firm.
[T]he participation of the engagement partner's firm ordinarily
is not sufficient for it to serve as lead auditor if the referred-to
auditors, in aggregate, audit more than 50 percent of the company's
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assets or revenues.
This 50-percent threshold is intended to reduce the likelihood that
the lead auditor divides responsibility with an accounting firm or
firms that audit a majority of the company's assets or revenue, and is
consistent with the Board's approach to reinforcing the accountability
of the lead auditor in audits involving other auditors.\98\ Including
this threshold in the amendments also preserves a longstanding practice
of the profession.
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\98\ The threshold is similar to a quantitative threshold that
appears in staff guidance set forth in the Financial Reporting
Manual of the SEC Division of Corporation Finance (``Corp. Fin.
Manual''). The Corp. Fin. Manual provides that a lead auditor is
generally expected to have audited or assumed responsibility for at
least 50 percent of the assets and revenues of the consolidated
entity. See SEC, Division of Corporation Finance, Financial
Reporting Manual, Section 4140.1.
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One commenter on the 2021 SRC asserted (with respect to the 50-
percent threshold for divided-responsibility audits) that a firm's
analysis as to whether it can reasonably serve as lead auditor must
consider all the facts and circumstances, rather than simply
consolidated assets or revenues. Another commenter asked that the
wording of the 50-percent threshold be revised when referred-to
auditors are involved because there are scenarios in which either
assets or revenues audited by the referred-to auditor are greater than
the assets or revenues audited by the lead auditor, such as when
consolidated revenues of the company overall are nominal, but the
amounts that do exist are audited by the referred-to auditor. This
commenter believed that use of the term ``or'' will allow for false
positives and restrict the ability of lead auditors to make reference
to referred-to-auditors.
After considering the comments, the Board adopted the 50-percent
threshold as proposed. That threshold creates a presumption (not a
bright line test) that the lead auditor will not divide responsibility
with an accounting firm or firms that audit a majority of the company's
assets or revenues.\99\ A firm could overcome the presumption and serve
as lead auditor in exceptional situations, involving, for example,
late-year acquisitions or other unanticipated events or conditions that
increase the portion of assets or revenues audited by referred-to
auditors beyond the 50-percent threshold. Under PCAOB standards, the
firm would need to document why its participation in the audit was
sufficient to serve as lead auditor, including how the firm satisfied
the criteria based on the importance of the locations or business units
it audited and risks of material misstatement associated with the
portion of the company's financial statements that it audited.
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\99\ Notably, while the comparison based on the importance of
the locations or business units and risks of material misstatement
associated with the portion of the financial statements is made
singly (i.e., with regard to the engagement partner's firm's
participation), the additional threshold based on assets and revenue
is made with regard to all referred-to auditors in the aggregate.
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The description of the 50-percent threshold in the amendments
differs from the analogous description in the Corp. Fin. Manual because
the PCAOB description uses terminology consistent with the amendments
(whereas the
[[Page 39695]]
Corp. Fin. Manual's formulation uses terminology consistent with pre-
amendment standards) and because the PCAOB description is written in
the negative: ``in an audit that involves referred-to auditors . . .
the participation of the engagement partner's firm ordinarily is not
sufficient for it to serve as lead auditor if the referred-to auditors,
in aggregate, audit more than 50 percent of the company's assets or
revenues.''
Supervising Based on Risk
See Paragraph .06B of AS 2101
In some audits, the lead auditor might decide to increase the
extent of its supervision of other auditors' work to provide additional
support for the sufficiency-of-participation determination. Although
this practice would contribute to the lead auditor's participation to
some extent, performing additional supervisory procedures with respect
to the other auditors does not, by itself, relieve the lead auditor of
its own obligation to perform meaningful audit procedures in the audit.
The amendments do not allow an audit firm to serve as lead auditor
when all of the audit procedures are performed by other auditors, even
under the lead auditor's supervision. A determination to serve as lead
auditor under the amendments needs to be supported by a combination of
supervision of other auditors by the lead auditor and the lead
auditor's performance of audit procedures.
In particular, the Board believes that a lead auditor, as the firm
that issues the audit report, should perform audit procedures to a
meaningful extent even if the company's business operations and
financial reporting functions are located in a different country than
the lead auditor. The following are examples \100\ of such procedures:
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\100\ In addition, the lead auditor would perform audit
procedures with respect to locations or business units selected for
testing that the lead auditor assigned to itself.
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<bullet> Procedures related to risks pervasive to the financial
statements, such as risk assessment procedures directed to risks to the
consolidated financial statements as a whole.\101\
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\101\ See AS 2110.59b.
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<bullet> Procedures related to the consolidated financial
statements, such as audit procedures regarding the period-end financial
reporting process \102\ for the consolidated financial statements, and
evaluation of the presentation of the consolidated financial
statements, including the disclosures.\103\
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\102\ See AS 2301.41.
\103\ See paragraphs .30-.31 of AS 2810, Evaluating Audit
Results.
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<bullet> Other procedures related to the overall evaluation of
audit results, such as performing overall analytical review procedures;
\104\ evaluating accumulated misstatements; \105\ evaluating identified
control deficiencies; \106\ evaluating the qualitative aspects of the
overall financial statements, including potential management bias;
\107\ evaluating conditions related to fraud risk assessment; \108\ and
evaluating the sufficiency and appropriateness of the audit evidence
obtained. \109\
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\104\ See AS 2810.07-.09.
\105\ See AS 2810.10-.23.
\106\ See AS 2201.62-.70.
\107\ See AS 2810.24-.27.
\108\ See AS 2810.28-.29.
\109\ See AS 2810.32-.36.
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In these examples, the lead auditor would not need to perform these
procedures exclusively. Rather, it could ask other auditors for
assistance with some aspects of the above procedures, such as obtaining
audit evidence relating to the business units assigned to the other
auditors.
In the amendments, AS 2101.06B, which is intended to be a reminder
concerning existing requirements, provides that in an audit that
involves other auditors performing work regarding locations or business
units, the involvement of the lead auditor (through a combination of
planning and performing audit procedures and supervision of other
auditors) should be commensurate with the risks of material
misstatement associated with those locations or business units. The
requirement draws from existing requirements in AS 1201, AS 2101, and
AS 2301, which require greater involvement in areas of greater
risk.\110\ No commenters opposed the requirement.
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\110\ See footnote 4C of AS 2101.06B, which cites, as examples,
AS 1201.06, AS 2101.11 (``The auditor should assess the risks of
material misstatement to the consolidated financial statements
associated with the location or business unit and correlate the
amount of audit attention devoted to the location or business unit
with the degree of risk of material misstatement associated with
that location or business unit.''), and, more generally, AS 2301.
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The Board adopted this provision as proposed.
Sufficiency Considerations in an Integrated Audit of Financial
Statements and Internal Control Over Financial Reporting
See Paragraph .06C of AS 2101
In the amendments, AS 2101.06C states that in an integrated audit
of a company's financial statements and its internal control over
financial reporting (``ICFR'') that involves other auditors or
referred-to auditors, the lead auditor of the financial statements must
participate sufficiently in the audit of ICFR to provide a basis for
serving as the lead auditor of ICFR. Only the lead auditor of the
financial statements can be the lead auditor of ICFR. This amendment
incorporates an existing requirement from AS 2201 regarding the
sufficiency of the lead auditor's participation in the integrated audit
of financial statements and ICFR.\111\ No commenters objected to this
requirement, and the Board adopted it as proposed.
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\111\ See conforming amendments to AS 2201.C8, .C10, and .C11.
The terminology in these paragraphs has been updated to align with
the amendments, without changing the intent of the requirements in
these paragraphs.
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Other Auditors' Compliance With Independence and Ethics Requirements
See Paragraphs .06D and .06F of AS 2101 <SUP>112</SUP>
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\112\ See discussion below that, in multi-tiered audits,
proposed AS 2101.06E would allow the lead auditor to seek assistance
from the first other auditor in performing the procedures described
in proposed AS 2101.06D. See also AS 1206 for requirements relating
to audits involving referred-to auditors.
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The amendments to AS 2101 relating to auditor independence and
ethics requirements build on the existing, overarching responsibility
of the auditor to determine compliance with independence and ethics
requirements.\113\ The amendments are designed to position the lead
auditor to identify matters that warrant further attention when
determining the other auditor's compliance with those requirements.
Commenters on the proposing releases generally agreed that the lead
auditor should perform procedures regarding other auditors' compliance
with these requirements. Several commenters, however, raised questions
about specific aspects of the provisions, which are discussed below.
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\113\ See AS 2101.06b (requiring the auditor to ``[d]etermine
compliance with independence and ethics requirements'' at the
beginning of the audit and to reevaluate the determination
throughout the audit). As noted above, the use of ``independence and
ethics requirements'' in this release refers to PCAOB independence
and ethics requirements and SEC independence requirements.
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Understanding the Other Auditor's Knowledge and Experience; Obtaining
an Affirmation About Policies and Procedures, Changes in Circumstances
See Paragraphs .06Da, .06Db(1), and .06Dc(1)-(2) of AS 2101
The Board adopted the amendments discussed in this section as they
were proposed in the 2021 SRC. The
[[Page 39696]]
amendments in AS 2101.06D require the lead auditor to perform certain
procedures ``in conjunction with determining compliance with''
independence and ethics requirements, to carry out its responsibilities
pursuant to the existing requirements in paragraph .06b of AS 2101.
AS 2101.06Da requires that the lead auditor obtain an understanding
of the other auditor's knowledge of independence and ethics
requirements and its experience in applying the requirements. AS
2101.06Db(1) requires that the lead auditor obtain from the other
auditor and review a written affirmation \114\ as to whether the other
auditor has policies and procedures that provide reasonable assurance
that it maintains compliance with independence and ethics requirements.
If the other auditor does not have such policies and procedures, the
lead auditor is required to obtain from the other auditor and review a
written description of how the other auditor determines its compliance
with the independence and ethics requirements.
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\114\ The final amendments use the term ``affirmation'' for
certain communications within the engagement team (see, e.g., AS
2101.06Db, AS 2101.06F, and AS 2101.06Hb), to better differentiate
them from certain communications outside the engagement team, which
are described in the amendments as ``representations'' (see, e.g.,
AS 1206).
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The amendments require the lead auditor to (i) inform the other
auditor of changes in circumstances of which the lead auditor becomes
aware, and (ii) request that the other auditor update its affirmations
and descriptions for changes in circumstances of which the other
auditor becomes aware (including changes communicated by the lead
auditor) and provide those documents to the lead auditor upon becoming
aware of such changes.\115\ These amendments are meant to provide the
lead auditor with information necessary for it to reevaluate compliance
with independence and ethics requirements.\116\ Communications required
by the amendments also reflect policies already adopted by a number of
registered firms.
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\115\ See AS 2101.06Dc, which applies to all affirmations and
descriptions required by paragraph .06Db.
\116\ See note to AS 2101.06b regarding reevaluating compliance.
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The Board notes that the nature and extent of the lead auditor's
procedures for obtaining an understanding under paragraph .06Da will
depend on the types of information available to the lead auditor about
the other auditor. The following are examples of types of information
that may be relevant to the lead auditor's understanding of the other
auditor's knowledge of independence and ethics requirements, and the
other auditor's experience in applying the requirements:
<bullet> The type, frequency, and substance of independence and
ethics training that the other auditor provides to its personnel who
participate in the audit;
<bullet> The other auditor's policies and procedures for ensuring
that the firm and its personnel comply with independence and ethics
requirements, including PCAOB Rule 3520, Auditor Independence; \117\
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\117\ See also QC 20, System of Quality Control for a CPA Firm's
Accounting and Auditing Practice.
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<bullet> The other auditor's process for determining that the other
auditor, including the firm and its applicable personnel, does not have
financial or employment relationships that might impair the lead
auditor's independence on the audit; \118\
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\118\ See Rules 2-01(c)(1) and 2-01(c)(2) of Regulation S-X, 17
CFR 210.2-01(c)(1) and 17 CFR 210.2-01(c)(2).
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<bullet> The other auditor's process for obtaining timely
information about the audit client and its affiliates from which the
other auditor firm is required to maintain independence, including an
understanding of all non-audit services initiated or about to be
initiated for the audit client by the other auditor; \119\ and
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\119\ PCAOB and SEC independence rules define ``affiliate of the
audit client.'' See PCAOB Rule 3501(a)(ii); Rule 2-01(f)(4) of
Regulation S-X, 17 CFR 210.2-01(f)(4). For rules regarding the
prohibition of non-audit services, see Rules 2-01(c)(4) and 2-01(b)
of Regulation S-X, 17 CFR 210.2-01(c)(4) and 17 CFR 210.2-01(b);
PCAOB Rule 3522, Tax Transactions; and PCAOB Rule 3523, Tax Services
for Persons in Financial Reporting Oversight Roles. See also PCAOB
Rule 3521, Contingent Fees.
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<bullet> Any business relationships between the other auditor
(including the firm and its applicable personnel) and the audit client,
or persons associated with the audit client in a decision-making
capacity, such as officers, directors, or substantial
stockholders.\120\
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\120\ See Rule 2-01(c)(3) of Regulation S-X, 17 CFR 210.2-
01(c)(3).
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Sources of relevant information about the other auditor may differ
depending, for example, on whether the lead auditor and other auditor
are affiliated with the same network of accounting firms. In practice,
some networks have procedures for sharing among select personnel of
their member firms certain information about the results of internal or
external inspections of the affiliates, conducted either by the network
itself or by outside parties such as the PCAOB.
Commenters on the 2021 SRC generally supported the modifications
made to proposed AS 2101.06D, including the requirement to obtain
written affirmations from the other auditor about whether the other
auditor's policies and procedures provide reasonable assurance of
compliance with independence and ethics, and whether the other auditor
is in compliance. However, some commenters asked the Board to modify
the requirements for the written affirmation and noted that a firm's
quality control assessment with respect to independence is done on an
annual basis. These commenters recommended that the Board align the
amendments in this rulemaking with those of the PCAOB's project
regarding quality control standards.\121\ In the view of one of these
commenters, it was not the Board's intention to require the other
auditor engagement team members to make their own conclusion about an
aspect of their firm's quality control system relative to a particular
engagement.
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\121\ Concept Release: Potential Approach to Revisions to PCAOB
Quality Control Standards, PCAOB Release No. 2019-003 (Dec. 17,
2019).
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Even in circumstances when other auditor engagement team members
rely on their firm's quality control system for independence and ethics
compliance, the Board believes it is appropriate to require the lead
auditor to request and obtain in the context of an audit an affirmation
that the other auditor's firm has the necessary policies and
procedures. In practice, audit engagement teams typically exchange
information with their own firm's quality control function relating to
compliance with certain independence and ethics requirements. However,
if an other auditor does not have policies and procedures that provide
reasonable assurance that it complies with such requirements, it is
appropriate to require that the lead auditor request and obtain a
description of how the other auditor determines its compliance with the
independence and ethics requirements. The Board believes that this
requirement is appropriate today and will remain appropriate after
firms implement the IAASB's newly adopted International Standard on
Quality Management 1 (``ISQM 1''), which will require firms that
perform audits under IAASB standards to evaluate the effectiveness of
its quality control system, or under PCAOB standards if the Board were
to adopt a similar requirement.\122\
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\122\ The IAASB adopted ISQM 1 in December 2020, and it will
become effective on December 15, 2022. See IAASB, ISQM 1, Quality
Management for Firms that Perform Audits or Reviews of Financial
Statements, or Other Assurance or Related Services Engagements (Dec.
17, 2020).
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[[Page 39697]]
In addition, a couple of commenters suggested requiring that the
lead auditor make the other auditor aware of PCAOB and SEC independence
requirements that are relevant to the company.
The requirement for the lead auditor to obtain an understanding
(pursuant to paragraph .06Da) is designed to assist the lead auditor in
determining its course of action regarding the other auditor's
independence and ethics compliance. For example, other auditors with
less knowledge and experience may be less able to provide the
information the lead auditor needs to determine compliance with
independence and ethics requirements. The lead auditor may need to
communicate PCAOB and SEC independence requirements to some other
auditors (e.g., those who are less familiar with the requirements) but
not to others (e.g., those who are more familiar with the
requirements). The Board believes the amendments are sufficiently
principles-based to allow the lead auditor to adjust its procedures
according to the circumstances of the audit, including with respect to:
<bullet> Making other auditors aware of the relevant independence
and ethics requirements for the audit engagement, including affirming
compliance not only with respect to their audit client, but also with
respect to any affiliates of that audit client;
<bullet> Confirming that the other auditors understand the
requirements; and
<bullet> Considering whether additional information for other
auditors is necessary regarding the independence and ethics
requirements that are relevant to the audit engagement.
With respect to AS 2101.06Dc(1)-(2), one commenter stated that it
is not necessary for other auditors to reaffirm in writing every update
that is communicated by the lead auditor. The Board believes that an
informative record of relevant matters is important for determining
compliance with independence and ethics requirements. Auditor
independence is critical for an effective audit; lack of independence
can compromise the effectiveness of audit procedures performed by the
other auditor. The amendments are designed to provide the lead auditor
with timely information indicating that the other auditor's
independence may be compromised, thus enabling the lead auditor to take
any necessary action during the course of the audit.
Obtaining a Written Description of the Other Auditor's Covered
Relationships
See Paragraph .06Db(2) of AS 2101
Under the amendments, the lead auditor should obtain from the other
auditor and review a written description of all relationships between
the other auditor and the audit client or persons in financial
reporting oversight roles at the audit client \123\ that may reasonably
be thought to bear on independence pursuant to the requirements of
paragraph (b)(1) of PCAOB Rule 3526, Communication with Audit
Committees Concerning Independence.\124\ The requirement is designed to
assist the lead auditor in obtaining information for determining
compliance with SEC and PCAOB independence requirements and to
facilitate auditor communications to the audit committee under Rule
3526. The amendments do not change the applicability of Rule 3526 to
the lead auditor's representation, including with respect to
unaffiliated firms.\125\
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\123\ PCAOB Rule 3501, Definitions of Terms Employed in Section
3, Part 5 of the Rules, defines the terms ``audit client'' and
``financial reporting oversight role.'' The terms used in AS
2101.06Db(2) have the same meaning as defined in Rule 3501.
\124\ Rule 3526 requires auditors to make certain communications
to the audit committee of the audit client before accepting an
initial engagement, and annually thereafter, including a
description, in writing, of ``all relationships between the
registered public accounting firm or any affiliates of the firm and
the audit client or persons in financial reporting oversight roles
at the audit client that, as of the date of the communication, may
reasonably be thought to bear on independence.'' See also Staff
Guidance, Rule 3526(b) Communications with Audit Committees
Concerning Independence (May 31, 2019), which addresses questions
that have arisen in practice regarding application of Rule 3526(b)
in certain circumstances.
\125\ See Ethics and Independence Rule 3526, Communication with
Audit Committees Concerning Independence, PCAOB Release No. 2008-003
(Apr. 22, 2008), at 5 note 4, which states that the Board ``expects
the primary auditor's report to either include any covered
relationships of any secondary auditors not affiliated with the firm
or state that it does not do so'' (emphasis added).
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One commenter supported the proposed requirement, noting that PCAOB
Rule 3526 requires communication only from the lead auditor to the
audit committee. The commenter added that the proposed new
requirement--with respect to the lead auditor determining an other
auditor's compliance with independence and ethics requirements rather
than simply inquiring about it (e.g., under extant AS 1205)--aligns the
responsibility to make such determination better with the required
communication.
No commenters opposed this requirement, and the Board adopted it as
proposed.
Obtaining a Written Affirmation About the Other Auditor's Compliance
With Independence and Ethics Requirements
See Paragraph .06Db(3) of AS 2101
Under the amendments, the lead auditor should obtain from the other
auditor and review a written affirmation as to whether the other
auditor is in compliance with independence and ethics requirements with
respect to the audit client, and if it is not in compliance, the lead
auditor should obtain and review a written description of the nature of
the instances of non-compliance. This requirement was originally
introduced in the 2016 Proposal, to strengthen a requirement in AS
1205, which is being rescinded, to make inquiries concerning the other
auditor's independence.\126\ This provision was revised and clarified
in the amendments proposed in the 2017 and 2021 SRCs to require in
addition that the lead auditor obtain and review a description of the
nature of the instances of any non-compliance.
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\126\ See AS 1205.10b.
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One commenter on the 2021 SRC recommended that the Board modify the
proposed requirement to also include the other auditor's conclusion
regarding whether it is capable of exercising objective and impartial
judgment on all issues encompassed in its work. In response, the Board
noted that the lead auditor can determine its course of action based on
the facts and circumstances of the audit engagement, without the Board
prescribing a course of action in the amendments. Therefore, the Board
did not make additional changes to this requirement and adopted it as
proposed.
Following Up on Contrary Information
See Paragraph .06F of AS 2101
The amendments to AS 2101 direct the lead auditor to follow up on
contrary information. The amendments provide that if the lead auditor
becomes aware of information that contradicts the other auditor's
affirmation or description (including information about changed
circumstances), the lead auditor should investigate the circumstances
and consider the reliability of the affirmation or description.
Further, if, after such investigation, or based on the other auditor's
affirmation or description, there are indications that the other
auditor is not in compliance with independence and ethics requirements,
the lead auditor should consider the implications for fulfilling its
own responsibilities under AS 2101.06b and PCAOB Rules 3520 and 3526.
Two commenters on the 2021 SRC expressed concerns with the words
``investigate'' and ``investigation'' in the proposed amendments. The
Board notes that the terms are used in other PCAOB auditing standards
and generally refer to
[[Page 39698]]
taking a closer look at a matter to determine a further course of
action.\127\ After considering the comments, the Board adopted this
requirement as proposed.
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\127\ See, e.g., paragraphs .17, .20-.21 of AS 2305, Substantive
Analytical Procedures (investigation and evaluation of significant
differences from expectations about assertions related to the
financial statements).
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Obtaining Information at the Individual or Firm Level
See Note to Paragraph .06D of AS 2101
The amendments include a note to AS 2101.06D stating that
information required to be provided to the lead auditor under AS
2101.06D may cover the other auditor's firm and engagement team members
who are partners, principals, shareholders, or employees of the other
auditor firm.
Some commenters on the proposing releases questioned the
practicability of applying the requirements to individual engagement
team members. Further, one commenter on the 2021 SRC specifically asked
for clarification regarding the level (i.e., firm, individual, or both)
at which the lead auditor is expected to apply the requirements in
paragraph .06Da (obtaining an understanding of other auditors'
knowledge and experience) and how to interpret the proposed note to
paragraph .06D.
The definition of ``other auditor'' in the amended standards
includes both an other auditor firm and individuals at that firm. The
affirmations and descriptions required by the amendments could be
prepared and provided by the other auditor firm and address all covered
relationships. In our experience, firms typically have the necessary
information available centrally, including information about processes
for determining compliance with independence and ethics requirements,
and about individuals at the firm, including their level of experience
in applying the requirements. Obtaining from a firm a written
affirmation or description that also encompasses relevant individuals
at the firm would satisfy the requirement to obtain a written
affirmation or description ``from the other auditor'' for those persons
at that firm.
PCAOB Registration Status of Other Auditors
See Paragraph .06G of AS 2101
PCAOB Rule 2100, Registration Requirements for Public Accounting
Firms, requires a public accounting firm to be registered with the
PCAOB \128\ if it: (a) prepares or issues any audit report with respect
to any issuer, broker, or dealer or (b) plays a substantial role in the
preparation or furnishing of an audit report with respect to any
issuer, broker, or dealer.\129\ However, there have been examples of
firms that played a substantial role but were not registered with the
PCAOB.\130\
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\128\ See also Section 102(a) of Sarbanes-Oxley, 15 U.S.C.
7212(a).
\129\ An other auditor that is not registered with the PCAOB
(regardless of whether such auditor is required to be registered
with the PCAOB) is nonetheless subject to PCAOB authority when it
acts as a person associated with a registered public accounting
firm. See Section 2(a)(9) of Sarbanes-Oxley, 15 U.S.C. 7201(a)(9));
PCAOB Rule 1001(p)(i) (defining ``person associated with a public
accounting firm''); see also Sections 104(c)(1), 105(b)(1), and
105(c)(4) of Sarbanes-Oxley, 15 U.S.C. 7214(c)(1), 15 U.S.C.
7215(b)(1), and 15 U.S.C. 7215(c)(4) (articulating that PCAOB
authority extends to ``persons associated with a registered public
accounting firm'' in connection with inspections, investigations,
and sanctions, respectively).
\130\ See, e.g., In the Matter of WWC, P.C., PCAOB Release No.
105-2022-006 (Apr. 19, 2022); BDO Canada LLP (f/k/a BDO Dunwoody
LLP), SEC AAER No. 3926 (Mar. 13, 2018); KPMG Inc., SEC AAER No.
3927 (Mar. 13, 2018).
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The amendments provide that the lead auditor may use the work of an
other auditor that plays a substantial role on the audit \131\ only if
the other auditor is registered with the PCAOB.\132\ The provision is
intended to promote compliance with Rule 2100 and thereby enhance audit
quality, and it does not change the rule or the related definition of
``play a substantial role'' in Rule 1001(p)(ii). Several commenters
supported the provision, and the Board adopted it as proposed.
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\131\ See PCAOB Rule 1001(p)(ii).
\132\ For audits in which the lead auditor divides
responsibility for the audit with the referred-to auditor see AS
1206.06c in this document. See also discussion below.
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With regard to registration requirements more broadly, one
commenter suggested--as an alternative to requirements concerning
independence and ethics, and concerning knowledge, skill, and ability--
that the Board require all audit firms ``engaged in a public entit[y]
assurance engagement'' to be registered with the PCAOB. In the
commenter's view, this approach would provide a ``basis for consistent
application [of PCAOB standards] for firms registered with the PCAOB.''
The Board is not taking the commenter's suggestion because simply
requiring firms to register (beyond the current registration
requirements) would not address the need for change identified in this
rulemaking. The shortcoming of this approach is demonstrated by the
inspection deficiencies and enforcement cases described above, which
involve conduct by registered firms during audits involving other
auditors.
Knowledge, Skill, and Ability of and Communications With Other Auditors
See Paragraphs .06H and .16 of AS 2101
Knowledge, Skill, and Ability of Other Auditors
See Paragraphs .06Ha-b and .16 of AS 2101
The amendments require that, with respect to each other auditor,
the lead auditor obtain an understanding of the knowledge, skill, and
ability of the other auditor's engagement team members who assist the
lead auditor with planning or supervision, including their: experience
in the industry in which the company operates; knowledge of the
relevant financial reporting framework, PCAOB standards and rules, and
SEC rules and regulations; and experience in applying the standards,
rules, and regulations. The amendments also require the lead auditor to
obtain a written affirmation from the other auditor that its engagement
team members possess the knowledge, skill, and ability to perform their
assigned tasks.\133\
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\133\ The written affirmation required by AS 2101.06Hb regarding
the other auditor's engagement team members does not need to
identify each member of the engagement team.
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PCAOB standards have long recognized the importance of technical
training and proficiency of the personnel performing the audit.\134\
These matters are particularly important for senior engagement
personnel because of their role in planning the audit, supervising the
work of other engagement team members, and making important
professional judgments.
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\134\ See, e.g., AS 1010, Training and Proficiency of the
Independent Auditor, and paragraphs .11-.12 of QC 20, System of
Quality Control for a CPA Firm's Accounting and Auditing Practice.
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Under existing PCAOB standards, in situations where the lead
auditor supervises an other auditor under AS 1201, the knowledge,
skill, and ability of engagement team members with significant
engagement responsibilities should be commensurate with the assessed
risks of material misstatement.\135\ In situations where the lead
auditor uses the other auditor's work and report under AS 1205, the
lead auditor \136\ is required under existing standards to make
inquiries concerning the professional reputation of the other
auditor.\137\
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\135\ See AS 2301.05a.
\136\ ``Principal auditor'' is the term used in rescinded AS
1205.
\137\ See AS 1205.10.
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[[Page 39699]]
The amendments build on and strengthen the existing provisions.
Compliance with these amendments is not limited to preliminary
engagement activities and should be reevaluated with changes in
circumstances. The amendments seek to apply a balanced and practical
approach by focusing the lead auditor's attention primarily on the
knowledge, skill, and ability of the more senior engagement team
members of the other auditor.
Obtaining an understanding of the knowledge, skill, and ability of
the other auditor's supervisory personnel is important for determining
the extent of the lead auditor's supervision of the other auditor's
work. As a practical matter, the knowledge, skill, and ability of the
supervisory personnel include their experience in the company's
industry and jurisdiction,\138\ and knowledge of the relevant financial
reporting framework, PCAOB standards and rules, and SEC rules and
regulations. Lack of appropriate knowledge, skill, and ability by the
other auditor's supervisory personnel can have an adverse effect on the
overall quality of the audit.
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\138\ As discussed below, AS 2101.16 states that the auditor
should determine whether specialized skill or knowledge is needed to
perform appropriate risk assessments, plan or perform audit
procedures, or evaluate audit results, and the amendments specify
that such specialized skill or knowledge may include ``relevant
knowledge of foreign jurisdictions.''
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Several commenters supported the proposed requirements, including
the requirement to obtain a written affirmation from the other auditor
that its engagement team members possess the knowledge, skill, and
ability to perform their assigned tasks. One commenter asked the Board
to consider providing that the lead auditor's procedures for obtaining
an understanding of the knowledge, skill, and ability of the other
auditor be scalable based on the considerations regarding sufficiency
of participation in AS 2101.06A. The Board noted that the requirements
in AS 2101.06A serve a different purpose: to increase the likelihood
that the firm issuing the auditor's report meaningfully participates in
the audit. The requirements regarding the knowledge, skill, and ability
are designed to focus the lead auditor and other auditors on assigning
qualified personnel at all levels of the audit engagement.
Another commenter suggested inserting a note after paragraph .06H
that indicates the lead auditor's own experience working with the other
auditor is relevant to the lead auditor's understanding of the other
auditor's knowledge, skill, and ability. The Board agrees with the
commenter that the lead auditor's own experience with the other auditor
may be a source of information about the other auditor's knowledge,
skill, and ability. However, the amendments are designed to be
principles-based to accommodate a variety of scenarios in practice,
whereby differing types of information about other auditors can be
available to the lead auditor. Therefore, beyond requiring the written
affirmation described above, the amendments do not prescribe a
particular set of procedures or sources of information for obtaining an
understanding of the other auditor's knowledge, skill, and ability. The
amendments allow the lead auditor to determine the nature and extent of
its procedures in this area. After considering the comments, the Board
adopted the requirements as proposed.
The amendments also add an explanatory phrase, ``including relevant
knowledge of foreign jurisdictions,'' to AS 2101.16's existing
requirement that the auditor should determine whether specialized skill
or knowledge is needed to perform appropriate risk assessments, plan or
perform audit procedures, or evaluate audit results.\139\ Identifying
whether there is a need for specialized skill or knowledge is logically
a prerequisite to evaluating whether someone has that skill or
knowledge. For example, a lead auditor in its home jurisdiction may not
have a sufficient understanding of the business practices or legal
requirements of a foreign jurisdiction to be able to execute the audit
effectively. In these cases, the lead auditor may want to consider
whether to engage an other auditor (e.g., from that jurisdiction) with
relevant knowledge of the foreign jurisdiction to appropriately assess
risk, plan or perform audit procedures, or evaluate audit results.
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\139\ See amended paragraph .16 of AS 2101, which provides that
``[t]he auditor should determine whether specialized skill or
knowledge, including relevant knowledge of foreign jurisdictions, is
needed to perform appropriate risk assessments, plan or perform
audit procedures, or evaluate audit results.''
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One commenter on the 2021 SRC stated that, if added focus on
knowledge of foreign jurisdictions is needed, additional clarity should
be provided as to when this knowledge is needed and how it should be
obtained. Another commenter stated that consideration of relevant
knowledge of foreign jurisdictions may be applicable only in certain
circumstances but acknowledged the possible need for specialized
knowledge of foreign jurisdictions because of the other auditor's
knowledge of the regulatory environment.
Similar to AS 2101.06Ha-b, the amendment in AS 2101.16 allows the
auditor to determine the nature and extent of its procedures when
determining whether specialized skill or knowledge is needed on the
audit. After considering the comments, the Board adopted the amendment
as proposed.
Communication With Other Auditors
See Paragraph .06Hc of AS 2101
The amendments to AS 2101 require the lead auditor to determine, in
connection with using the other auditor's work, that it is able to
communicate with the other auditor and gain access to the other
auditor's audit documentation. The requirement is intended to help the
lead auditor in identifying and addressing any communication or access
issues early in the audit. For example, the lead auditor would consider
whether it can have meaningful two-way communication with the other
auditor \140\ and whether it needs to address any language differences.
In another example, the lead auditor would consider whether it can
access the other auditor's documentation remotely.
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\140\ See, e.g., AS 2110.49-.53 (describing discussions among
key engagement team members regarding risks of material
misstatement).
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The amendment also is based on the existing provisions of PCAOB
standards that require the lead auditor to have access to the other
auditor's documentation and obtain, review, and retain certain portions
of it. As with the existing requirements, the amendments allow the lead
auditor flexibility in determining the means of access (e.g., remotely
or on-site).\141\
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\141\ See, e.g., rescinded AS 1205.12. See also AS 1215.18-.19.
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If the lead auditor cannot obtain sufficient appropriate audit
evidence because of restrictions on communicating with the other
auditor or accessing its documentation, a limitation on the scope of
the audit may exist. Under PCAOB standards, these circumstances may
require the lead auditor to qualify the audit opinion or disclaim an
opinion.\142\
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\142\ See AS 2810.35. See also paragraphs .05-.17 of AS 3105,
Departures from Unqualified Opinions and Other Reporting
Circumstances, which contains requirements regarding audit scope
limitations.
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Those who commented on the proposed requirement in the 2016
Proposal and 2017 SRC viewed it as a clear requirement. Some commenters
asked for examples of acceptable modes of communication between the
lead auditor and the other auditor, and
[[Page 39700]]
inquired whether email communication would be acceptable. The Board
notes that the form of communication between auditors (e.g., oral or
written) depends on the circumstances of the audit and professional
requirements (e.g., PCAOB standards require that certain communications
between the lead auditor and other auditor be in writing \143\).
Although PCAOB standards do not prescribe a particular type of written
communication (e.g., print or electronic), they require that audit
documentation, in whatever form, contain sufficient information to
enable an experienced auditor, having no previous connection with the
engagement, to understand the nature, timing, extent, and results of
the procedures performed, evidence obtained, and conclusions
reached.\144\ In addition, the other auditor's audit documentation must
be accessible by the lead auditor.\145\ Further, audit documentation
should demonstrate that the engagement complied with the standards of
the PCAOB.\146\
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\143\ See, e.g., AS 1215.19.
\144\ See AS 1215.06a.
\145\ See AS 1215.18, as amended.
\146\ See AS 1215.05a.
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Consistent with the above discussion, the Board adopted the
amendment as proposed.
Determining Locations or Business Units at Which Audit Procedures
Should Be Performed
See Paragraph .14 of AS 2101
Other auditors are often involved in audits of companies with
operations in multiple locations or business units (``multi-location
engagements''). In these circumstances, existing AS 2101.11-.13 address
the determination of the locations at which audit procedures should be
performed and the nature, timing, and extent of the audit procedures.
Existing AS 2101.14 provides that, in situations in which AS 1205
applies, the auditor should perform the procedures in paragraphs
.11-.13 to determine the locations or business units where audit
procedures should be performed.
In light of the rescission of AS 1205, the Board amended AS 2101.14
to specify that, in an audit involving other auditors or referred-to
auditors, the lead auditor should perform the procedures set forth in
AS 2101.11-.13 to determine the locations or business units at which
audit procedures should be performed. The amendment to AS 2101.14,
together with the amended supervisory requirements in AS 1201, is
intended by the Board to require that the lead auditor play the central
role in determining the scope of the audit.
One commenter on the 2021 SRC recommended that the Board remove the
requirements in proposed AS 2101.14 with regard to referred-to auditors
because these requirements are not consistent with the principles
underlying dividing responsibility (i.e., the approach would diminish
the line between assuming and dividing responsibility). The Board noted
that the amendment to this paragraph is consistent with the relevant
requirements in existing AS 2101.14 applicable to audits that involve
divided responsibility. For audits involving referred-to auditors, new
AS 1206 describes interactions, including communication of the lead
auditor's plan to divide responsibility, and other measures to assure
the coordination of activities between the lead auditor and the
referred-to auditor when dividing responsibility.\147\
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\147\ See discussion below.
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After considering the comments, the Board adopted the amendment as
proposed.
Supervising Other Auditors
Overview of the Supervisory Approach
The Board's amendments are intended to improve the quality of
audits that involve other auditors for whose work the lead auditor
assumes responsibility by requiring, among other things, that the lead
auditor supervise the other auditors under AS 1201, as amended.
Currently, the risk-based supervision approach described in AS 1201
does not apply to situations in which the lead auditor uses the work
and reports of other auditors under AS 1205. AS 1205, which the Board
rescinded, requires the lead auditor \148\ to perform certain
procedures, when using the work and reports of other auditors, that are
more limited in scope than those required by the supervision standard,
AS 1201. The amendments are designed to improve the lead auditor's
oversight of other auditors by applying AS 1201 to all audits involving
other auditors for whose work the lead auditor assumes
responsibility.\149\ The amendments also supplement the general
supervisory requirements in AS 1201.05 by providing direction for
applying these requirements in an audit involving other auditors.\150\
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\148\ ``Principal auditor'' is the term used in AS 1205.
\149\ For situations in which the lead auditor divides
responsibility for the audit with another accounting firm, see AS
1206. For certain audits involving investments accounted for under
the equity method of accounting whose financial statements are
audited by other auditors, see proposed rule text for changes to
Appendix B of AS 1105.
\150\ See AS 1201.07-.15.
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AS 1201 currently sets forth the general framework for supervision
of engagement team members, including the nature and extent of
supervisory activities. The standard allows the engagement partner to
seek assistance in fulfilling his or her supervisory responsibilities
from appropriate engagement team members, which includes team members
from other firms involved in the audit.\151\ While AS 1201 describes
supervisory activities, it does not, however, describe supervisory
procedures or assign them to a particular member, or members, of the
engagement team. Further, the standard does not differentiate between
the supervisory responsibilities of engagement team members at the lead
auditor and at the other auditor.
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\151\ See AS 1201.04.
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Under PCAOB standards, the audit firm that issues the audit report
is responsible for making sure that sufficient appropriate audit
evidence has been obtained, and appropriately evaluated, to support the
opinion in the audit report.\152\ Because of the lead auditor's central
role in the audit, the amendments the Board adopted require that
certain supervisory procedures be performed by the lead auditor. These
procedures are designed to improve the effectiveness of the lead
auditor's supervision of the work of other auditors.
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\152\ See AS 2810 regarding evaluating the sufficiency and
appropriateness of audit evidence.
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The amendments also are designed to be scalable by applying the
existing principles in AS 1201, which are already familiar to auditors.
When designing and performing supervisory activities the lead auditor
determines the extent of supervision of the other auditors' work in
accordance with paragraph .06 of AS 1201, which describes the factors
to take into account when determining the extent of supervision
necessary.\153\ For example, the extent of the lead auditor's
supervision of the other auditors' work depends on, among other things,
the risks of material misstatement to the company's financial
statements and the knowledge, skill, and ability of the other
auditors.\154\
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\153\ See AS 1201.07.
\154\ See AS 1201.06.
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The lead auditor may determine that the necessary extent of
supervision of the other auditor's work under AS 1201 entails
performing supervisory procedures beyond those specified in
[[Page 39701]]
the amendments. For procedures not assigned to the lead auditor under
the amendments, the lead auditor may seek assistance from qualified
engagement team members (including those at the other auditor) in
supervising the work.\155\ The approach to supervising other auditors
under the amendments is consistent with, and takes into account, recent
developments at some accounting firms that have been observed through
the Board's oversight activities.\156\
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\155\ See AS 1201.04.
\156\ See further discussion above.
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Many commenters on the 2021 SRC noted that communications between
the lead auditor and other auditors are iterative throughout the audit.
In addition, some commenters stated that it was not clear to them
whether under the amendments in the 2021 SRC other auditors can provide
input to the lead auditor on certain issues.
The Board agrees with commenters that effective supervision by the
lead auditor typically necessitates two-way communication with the
other auditor. Similar to the amendments proposed in the 2021 SRC, the
final amendments are designed to foster effective interaction by
requiring the lead auditor to, as necessary, hold discussions with and
obtain information from the other auditors to facilitate the
performance of the supervisory procedures.\157\
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\157\ See, e.g., note to AS 1201.08 and AS 1201.10 (requiring
the lead auditor to discuss with the other auditor any changes to
its planned audit procedures), both of which were originally
introduced in the 2016 Proposal. In addition, the amendments include
a reference to paragraphs .49-.53 of AS 2110, Identifying and
Assessing Risks of Material Misstatement (in a footnote to AS
1201.08) to remind the lead auditor of certain other required
interactions with the other auditor. See discussion below.
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The amendments to AS 1201 do not include the statement contained in
rescinded AS 1205.03 that ``the other auditor remains responsible for
the performance of his own work and for his own report.'' Nevertheless,
the Board believes that supervision by the lead auditor does not
relieve other auditors of their responsibilities, which include
applying due professional care and complying with PCAOB standards. To
reinforce this principle, the amendments add a statement to AS 1015,
that other auditors are responsible for performing their work with due
professional care.\158\ This statement reminds other auditors of their
responsibility to perform work in compliance with PCAOB rules and
standards.\159\ Commenters were supportive of this added statement,
noting that it was clear and appropriate. That responsibility is
further emphasized by (i) an amendment requiring an affirmation from
the other auditor about its compliance with the lead auditor's
instructions \160\ and (ii) an amendment regarding audit documentation
requirements.\161\ The overall responsibility for the audit under the
amendments remains, however, with the lead auditor, as is the case
under the existing standards.\162\
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\158\ See note to AS 1015.01 (``For audits that involve other
auditors, the other auditors are responsible for performing their
work with due professional care.'').
\159\ This amendment would not, of course, establish the sole
responsibilities of other auditors. Like all auditors that
participate in an audit performed under PCAOB standards, other
auditors must comply with all applicable PCAOB standards. See, e.g.,
PCAOB Rule 3100, Compliance with Auditing and Related Professional
Practice Standards.
\160\ See AS 1201.11, which is discussed below.
\161\ See AS 1215.18, which is discussed below.
\162\ To emphasize this point, the amendments add a footnote to
AS 1015.01, referring to AS 2101 and AS 1201, which set forth the
lead auditor's responsibilities for planning and supervising the
other auditor's work.
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Supervisory Procedures To Be Performed by the Lead Auditor
Under the amendments to AS 1201, the engagement partner remains
responsible for the engagement and its performance. Accordingly, the
engagement partner is responsible for proper supervision of the work of
engagement team members, including the work of engagement team members
outside the engagement partner's firm. In fulfilling his or her
supervisory responsibilities, the engagement partner may seek
assistance from appropriate engagement team members, including
engagement team members outside the engagement partner's firm.
Engagement team members who assist the engagement partner with
supervision should exercise their supervisory responsibilities in
accordance with AS 1201.
With respect to the lead auditor's supervisory procedures in the
amendments, other engagement team members who both: (1) are partners,
principals, shareholders, or employees of the registered public
accounting firm issuing the auditor's report (or individuals who work
under that firm's direction and control and function as the firm's
employees); and (2) assist the engagement partner in fulfilling his or
her planning or supervisory responsibilities on the audit pursuant to
planning and supervision, are eligible to perform such procedures. In
addition, in multi-tiered audits, the lead auditor may seek assistance
from a first other auditor in performing the supervisory procedures in
the amendments.\163\
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\163\ See AS 1201.14.
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To provide more specific direction for supervising the other
auditors' work, the amendments to AS 1201 establish requirements for
the lead auditor in the following areas:
<bullet> Informing other auditors of their responsibilities;
<bullet> Obtaining and reviewing a description of the audit
procedures to be performed by other auditors;
<bullet> Obtaining and reviewing a written affirmation that other
auditors performed their work in accordance with the lead auditor's
instructions;
<bullet> Directing other auditors to provide specific documentation
regarding their work; and
<bullet> Determining whether other auditors have performed the work
assigned to them, and whether additional evidence should be obtained.
As noted in AS 1201.07, these requirements supplement the
requirements in AS 1201.05. The requirements imposed by the amendments
are described in new paragraphs AS 1201.08-.13 and discussed in more
detail below.\164\
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\164\ The amendments also specify certain supervisory
responsibilities in multi-tiered audits, as discussed below.
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Informing Other Auditors of Their Responsibilities
See Paragraph .08 of AS 1201
AS 1201 currently requires that engagement team members be informed
of their responsibilities, including the objectives and the nature,
timing, and extent of the procedures to be performed, and other
relevant matters.\165\ For audits performed in accordance with AS 1205,
the standard does not include a specific requirement for the lead
auditor to inform other auditors of their responsibilities.\166\
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\165\ See AS 1201.05a.
\166\ According to AS 1205.12, the lead auditor (or ``principal
auditor'' in its terminology) should consider, among other things,
reviewing the audit programs of the other auditor and issuing
instructions to the other auditor as to the scope of audit work.
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To promote effective supervision of other auditors' work by the
lead auditor, the amendments to AS 1201 specifically require the lead
auditor to inform other auditors in writing of the following matters:
<bullet> The scope of work to be performed by the other auditor
(e.g., location or business unit \167\ and the general type of
[[Page 39702]]
work to be performed, which could range from a few specified audit
procedures to a standalone audit); and
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\167\ As discussed above, in multi-location engagements that
involve other auditors, the lead auditor is required to determine
locations or business units at which audit procedures should be
performed.
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<bullet> With respect to the work requested to be performed: the
identified risks of material misstatement,\168\ tolerable
misstatement,\169\ and the amount (if determined) below which
misstatements are clearly trivial and do not need to be
accumulated.\170\
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\168\ See AS 2110.49-.53 (referenced in a footnote to AS
1201.08), which requires key engagement team members (including
those in differing locations) to hold discussions regarding risks of
material misstatement due to error or fraud, which inform the
identification and assessment of risks. The Board has adopted an
additional reference reminding auditors of the requirements in AS
2110.59 regarding the auditor's responsibility to identify and
assess the risks of material misstatement at the (consolidated)
financial statement level and the assertion level.
\169\ See AS 2105.08-.10 (referenced in a footnote to AS
1201.08), which describe determining the amount or amounts of
tolerable misstatement, including for the individual locations or
business units, where applicable. As noted above, it is common for
audits using other auditors to take place in different locations,
including different countries.
\170\ See AS 2810.10-.11 (referenced in a footnote to AS
1201.08), which require auditors to accumulate misstatements
identified during the audit, other than those that are clearly
trivial, and provide that auditors may designate an amount below
which misstatements are trivial and do not need to be accumulated.
The requirement in the amendments indicates that the lead auditor
makes the determination of the clearly trivial threshold under AS
2810, if such a threshold is determined.
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Some commenters on the 2016 Proposal and the 2017 SRC interpreted
the proposed amendments as requiring the lead auditor to communicate to
other auditors all the risks of material misstatement for the location
or business unit, or even all identified risks of material misstatement
to the consolidated financial statements. Some of those commenters
(some of whom also commented on the 2021 SRC) recommended that the lead
auditor be required to communicate only the significant risks or only
risks that are relevant to the other auditors' work. Some commenters
agreed that the communication by the lead auditor to the other auditor
about the scope of work, identified risks of material misstatement, and
the amount (if determined) below which misstatements are clearly
trivial and do not need to be accumulated, should be in writing.
In the 2021 SRC, the Board agreed with commenters who stated that
the lead auditor should communicate to other auditors those risks to
the consolidated financial statements that are relevant to the other
auditors' work. The Board therefore included in AS 1201.08b in the 2021
SRC the qualifying phrases ``[w]ith respect to the work requested to be
performed'' and ``to the consolidated financial statements that are
associated with the location or business unit.'' \171\ These phrases
remain in the final amendments. The amendments do not limit the lead
auditor's communication to significant risks (as some commenters
suggested) because doing so could lead to inadequate testing of
significant accounts and disclosures where a reasonable possibility of
material misstatement to the financial statements exists.
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\171\ To align with similar language in AS 2101.11, the
amendments have been revised from the 2021 SRC in AS 1201.08b(1) to
change ``the identified risks ... that are applicable to the
location or business unit'' to ``associated with the location or
business unit.''
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Some commenters on the proposing releases also questioned whether
the lead auditor is always best suited to assess risks of material
misstatement at locations or business units audited by other auditors.
Further, a couple of commenters to the 2021 SRC recommended that the
amendments not require the lead auditor to communicate identified risks
of material misstatements that are applicable to the location or
business unit. Instead, the commenters recommended a requirement that
focuses the lead auditor on communicating identified risks to the
consolidated financial statements and matters that would assist the
other auditor in developing a more granular view of risks specific to
the location or business unit.
Although requiring the lead auditor to communicate to the other
auditor the relevant risks of material misstatement to the company's
financial statements is consistent with the lead auditor's
responsibilities under PCAOB standards, existing PCAOB standards also
recognize that additional risks of material misstatement to the
company's financial statements may be identified by other auditors, who
could be more familiar than the lead auditor with a particular location
or business unit where such risks may originate.\172\
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\172\ See AS 2110.49-53.
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The Board agrees with commenters that input from other auditors may
be necessary in identifying and assessing risks of material
misstatement to the company's financial statements and developing an
audit response. The amendments are designed to foster effective two-way
communication by requiring the lead auditor to, as necessary, hold
discussions with and obtain information from other auditors to
facilitate the performance of the supervisory procedures.\173\ Notably,
all key engagement team members, including those at the other auditor
firms, are already required under existing standards to discuss the
susceptibility of the company's financial statements to material
misstatement due to error or fraud, as part of performing the risk
assessment procedures.\174\ A reminder about these requirements is
included in a footnote to AS 1201.08.\175\
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\173\ A note to AS 1201.08 provides that the lead auditor
should, as necessary, hold discussions with and obtain information
from the other auditor to facilitate the performance of procedures
described in paragraph .08.
\174\ See AS 2110.49-.53.
\175\ See footnote 15 to AS 1201.08, citing AS 2110.49-.53,
which require key engagement team members (including those in
differing locations) to hold discussions regarding risks of material
misstatement due to error or fraud, which inform the identification
and assessment of risks.
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The Board also agrees with commenters that under the existing
requirements the lead auditor identifies and assesses the risk of
material misstatement at the level of the company's (consolidated)
financial statements. An additional reference was added to the
amendments reminding lead auditors of the existing requirements of AS
2110.59 to identify and assess the risks of material misstatement at
the financial statement level and assertion level.\176\
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\176\ See footnote 15 to AS 1201.08.
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Obtaining and Reviewing a Written Description of the Audit Procedures
To Be Performed by the Other Auditors
See Paragraphs .09 and .10 of AS 1201
Existing PCAOB standards require that the auditor develop and
document an audit plan that includes a description of, among other
things, the planned nature, timing, and extent of the risk assessment
procedures, tests of controls, and substantive procedures.\177\ In
addition, pursuant to AS 1201, the auditor is required to inform
engagement team members of their responsibilities, including the
nature, timing, and extent of procedures they are to perform.\178\ In
situations governed by AS 1205, the lead auditor is required to
consider reviewing the audit programs of the other auditor.\179\
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\177\ See AS 2101.10.
\178\ See AS 1201.05a(2).
\179\ See rescinded AS 1205.12.
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Similar to the proposed amendments in the 2021 SRC, the final
amendments to AS 1201 require the lead auditor to obtain and review the
other auditor's written description of audit procedures to be
performed,\180\ determine whether any changes to the other auditor's
planned audit procedures are necessary, and if so, discuss the changes
with, and communicate them in writing to, the
[[Page 39703]]
other auditor.\181\ Under these amendments, the lead auditor is
required to inform the other auditor of the level of detail needed in
the other auditor's written description of audit procedures to be
performed, based on the necessary extent of the lead auditor's
supervision.
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\180\ See AS 1201.09.
\181\ See AS 1201.10.
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The amendments are intended to promote proper supervision of the
other auditor's work by the lead auditor and proper coordination of
work performed by the lead and other auditor. Importantly, the
amendments are designed to accommodate different scenarios encountered
in practice. For example, the other auditor who is more familiar than
the lead auditor with a location or business unit may be better
positioned to design detailed audit procedures for that part of the
audit (which procedures would then be subject to the lead auditor's
review and approval). Conversely, an other auditor who lacks experience
in addressing certain risks may not be best suited to plan the work or
to design detailed audit procedures in that area. The amendments
provide that as the necessary extent of supervision increases, the lead
auditor, rather than the other auditor, may need to determine the
nature, timing, and extent of procedures to be performed by the other
auditor.\182\
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\182\ See note to AS 1201.09.
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Many commenters on the 2021 SRC recommended that these requirements
for the lead auditor be more principles-based to better accommodate an
iterative process of communication between the lead auditor and other
auditors, and the use of communication technology. For example, some
commenters indicated that planned audit procedures and related changes
could be communicated through video conferencing and screen sharing
instead of in writing. These commenters encouraged the Board to revise
AS 1201.09 and .10 to make them more principles-based and to reflect
the recent technological innovations in communication. A couple of
commenters went further and recommended removing from the amendments
the requirement to ``obtain'' the information. A couple of other
commenters either recommended that the Board allow the lead auditor to
apply judgment in determining what changes should be communicated in
writing to the other auditor based on the lead auditor's extent of
supervision of the other auditor, or stated that the requirement could
cause an other auditor that is not a member of the lead auditor's
network to be concerned about the confidentiality of its audit
methodology.
In its oversight activities, the PCAOB has seen challenges in the
coordination and communication between lead auditors and other
auditors, particularly in coordinating their responsibilities for the
planning and performance of audit procedures. Requiring that certain
communications be in writing facilitates the supervision of the
engagement by reducing the risk of miscommunication and lack of clarity
about responsibilities.
The terms ``obtain'' and ``in writing'' do not mandate that auditor
working papers be paper-based.\183\ The Board believes that
technological advances in communication including those discussed by
commenters could improve the effectiveness and efficiency of the lead
auditor's supervision of other auditors, and the Board noted that the
amendments would not hamper the implementation of novel means of
communication, including documentation and review.
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\183\ See AS 1215.04 (audit documentation may be in the form of
paper, electronic files, or other media).
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For example, a lead auditor could meet with other auditors through
video conferencing and could view and discuss documents that are shared
by video screen. The lead auditor could also obtain documents by (i)
receiving them via electronic mail or by downloading them via an
electronic portal and could store them electronically or (ii) accessing
the other auditor's electronic working papers remotely. In any case,
audit documentation supporting the lead auditor's conclusions will need
to contain a record that the lead auditor fulfilled its
responsibilities under PCAOB standards, including reviewing the
relevant documents and meeting the requirements of other provisions and
of other standards regarding matters such as determinations related to
other auditors' work \184\ and audit documentation.\185\
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\184\ See, e.g., AS 1201.13 (requiring the lead auditor to make
certain determinations based on a review of the documentation
provided by the other auditor, discussions with the other auditor,
and other information obtained by the lead auditor).
\185\ See, e.g., AS 1215.06 and AS 1215.18 as amended.
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As with paper-based documentation of the work of other auditors,
the necessary level of detail of the other auditors' electronic
documentation that is required to be requested, obtained, and reviewed
by the lead auditor and the lead auditor's communication to the other
auditors under the amendments will depend on the necessary extent of
supervision of the other auditors' work by the lead auditor.
Separately, requiring the lead auditor to obtain a written
description of audit procedures to be performed from the other auditor
and communicate changes in writing to the other auditor not only allows
the Board to fulfill its mandates of inspecting and potentially
investigating the lead auditor's oversight of the other auditor's work
but it is also important for an audit firm's audit quality reviews such
as engagement quality reviews and internal inspections. For the reasons
discussed above, the Board adopted these requirements as proposed.
Obtaining and Reviewing the Other Auditor's Written Affirmation
Regarding Work Performed
See Paragraph .11 of AS 1201
As was proposed in the 2021 SRC, under the amendments the lead
auditor is required to obtain and review a written affirmation as to
whether the other auditor performed work in accordance with the
instructions provided, as described in paragraphs AS 1201.08-.10,
including the other auditor's use of applicable PCAOB standards in
performing that work. If the other auditor has not performed the work
in accordance with the instructions provided, the lead auditor is
required to obtain and review a description of the nature of, and
explanation of the reasons for, the instances where the work was not
performed in accordance with the instructions, including (if
applicable) a description of the alternative work pe
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