Notice2024-12691
Public Company Accounting Oversight Board; Notice of Filing of Proposed Rules on General Responsibilities of the Auditor in Conducting an Audit and Amendments to PCAOB Standards
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Published
June 11, 2024
Issuing agencies
Securities and Exchange Commission
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<title>Federal Register, Volume 89 Issue 113 (Tuesday, June 11, 2024)</title>
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[Federal Register Volume 89, Number 113 (Tuesday, June 11, 2024)]
[Notices]
[Pages 49730-49767]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-12691]
[[Page 49729]]
Vol. 89
Tuesday,
No. 113
June 11, 2024
Part IV
Securities and Exchange Commission
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Public Company Accounting Oversight Board; Notice of Filing of Proposed
Rules on General Responsibilities of the Auditor in Conducting an Audit
and Amendments to PCAOB Standards; Notice
Federal Register / Vol. 89 , No. 113 / Tuesday, June 11, 2024 /
Notices
[[Page 49730]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100276; File No. PCAOB-2024-01]
Public Company Accounting Oversight Board; Notice of Filing of
Proposed Rules on General Responsibilities of the Auditor in Conducting
an Audit and Amendments to PCAOB Standards
June 5, 2024
Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002
(``Sarbanes-Oxley,'' or the ``Act''), notice is hereby given that on
May 24, 2024, 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 May 13, 2024, the Board adopted General Responsibilities of the
Auditor in Conducting an Audit and Amendments to PCAOB Standards
(``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-049-responsibilities-auditor-conducting-audit">https://pcaobus.org/about/rules-rulemaking/rulemaking-dockets/docket-049-responsibilities-auditor-conducting-audit</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
(a) Purpose
The Board adopted a new auditing standard, AS 1000, General
Responsibilities of the Auditor in Conducting an Audit (``new
standard,'' ``final standard,'' or ``AS 1000''). The new standard
replaces a group of standards originally developed by the American
Institute of Certified Public Accountants (``AICPA'') and adopted on an
interim basis by the PCAOB in 2003. That group of standards established
the general principles and responsibilities of the auditor when
conducting an audit (``foundational standards''). The general
principles and responsibilities addressed by the foundational standards
include reasonable assurance, due professional care, professional
skepticism, independence, competence, and professional judgment. These
principles and related responsibilities provide a foundation for the
proper performance of the audit.
Through this standard-setting project, the Board has reaffirmed the
general principles and responsibilities of the auditor so that the
foundation underlying the standards continues to be sound and
appropriate for performing high-quality audits. These principles and
responsibilities, enhanced and consolidated into a single auditing
standard, together with related amendments, will modernize the auditing
standards to better address fundamental aspects of the audit and
provide auditors with better direction to protect investors and further
the public interest in the preparation of informative, accurate, and
independent auditor's reports.
AS 1000 will replace four standards that set forth the general
principles and responsibilities of the auditor: AS 1001,
Responsibilities and Functions of the Independent Auditor; AS 1005,
Independence; AS 1010, Training and Proficiency of the Independent
Auditor; and AS 1015, Due Professional Care in the Performance of Work.
AS 1000 combines and updates the general principles and
responsibilities of these standards to reflect developments in the
auditing environment.
The Board also amended certain other standards that address
responsibilities fundamental to the conduct of an audit. These
amendments clarify the engagement partner's responsibility to exercise
due professional care related to supervision and review of the audit,
accelerate the documentation completion date by reducing the maximum
period for the auditor to assemble a complete and final set of audit
documentation from 45 days to 14 days, and clarify the auditor's
responsibility to evaluate whether the financial statements are
``presented fairly.'' Finally, the Board adopted additional amendments
to conform to these changes.
After carefully considering the comments the Board received, the
Board adopted the amendments substantially as proposed, with revisions
that reflect the input of commenters.
Since the PCAOB's adoption of the foundational standards in 2003,
the auditing environment has evolved, including:
<bullet> Changes to auditing requirements through Board-issued
standards;
<bullet> New or revised independence requirements issued by the
Board; and
<bullet> Advancements in technology that are increasing the
availability of electronic audit tools and use of audit software.
The new standard and related amendments the Board adopted will
modernize PCAOB standards to:
<bullet> Reflect changes in the auditing environment;
<bullet> Eliminate outdated and inconsistent language; and
<bullet> Achieve consistency with Board-issued standards.
AS 1000 and the related amendments modernize, clarify, and
streamline the general principles and responsibilities of the auditor
and provide a more logical presentation, which should enhance the
useability of the standards by making them easier to read, understand,
and apply.
The Board clarified the auditor's responsibility to evaluate
whether the financial statements are ``presented fairly.'' The Board
also clarified the engagement partner's due professional care
responsibilities by adding specificity to certain audit performance
principles set out in the standards. Finally, the accelerated
documentation completion date reflects changes in the auditing
environment, including advancements in technology that have enabled
auditors to assemble a complete and final set of audit documentation in
less time than in a paper-based environment. The new documentation
completion date reduces the window of opportunity for improper
alteration of audit documentation and also enables the Board to
potentially begin the inspection process sooner after completion of an
audit, which the Board believes can enhance the Board's efforts to
improve audit quality and promote investor protection, ultimately
enhancing investor confidence.
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The new standard and related amendments will apply to all audits
conducted under PCAOB standards.
See Exhibit 3 for additional discussion of the purpose of this
project.
(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 the 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 initially released the proposed rules for public comment
in PCAOB Release No. 2023-001 (Mar. 28, 2023). The Board received 28
written comment letters that were specifically submitted in response to
its initial proposed rules in PCAOB Release No. 2023-001. In addition,
the Board received six comment letters relating to its consideration of
proposed amendments on quality control, which were released for public
comment on November 19, 2022, and that are relevant to the definition
of ``applicable professional and legal requirements'' in these proposed
rules. See Exhibits 2(a)(B) and 2(a)(C). The Board has carefully
considered all comments received. The Board's response to the comments
it received, and the changes made to the rules in response to the
comments received are discussed below.
Background
In April 2003, the Board adopted, on an interim basis, the
generally accepted auditing standards of the AICPA's Auditing Standards
Board (``interim standards'') and the related auditing interpretations
as they existed then.\1\ At that time, the Board stated that it would
determine whether the interim standards ``should become permanent
standards of the Board, should be repealed, or should be modified.''
\2\ Since then, the Board has adopted a number of new auditing
standards that supersede or amend portions of the interim standards and
related auditing interpretations.\3\ However, certain remaining interim
standards, including those that address the general principles and
responsibilities of the auditor, have continued to be in effect
substantially in the form adopted.
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\1\ See Establishment of Interim Professional Auditing
Standards, PCAOB Rel. No. 2003-006 (Apr. 18, 2003). The auditing
interpretations were the publications entitled ``Auditing
Interpretations'' issued by the AICPA Auditing Standards Board, as
they existed and were effective as of April 2003.
\2\ See PCAOB Rel. No. 2003-006.
\3\ See, e.g., AS 1201, Supervision of the Audit Engagement; AS
1215, Audit Documentation; AS 2101, Audit Planning; AS 2810,
Evaluating Audit Results, and AS 3101, The Auditor's Report on an
Audit of Financial Statements When the Auditor Expresses an
Unqualified Opinion.
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Since the adoption of the interim standards, the auditing
environment has evolved in many ways, including (i) changes to auditing
requirements through Board-issued standards; (ii) new or revised
independence requirements issued by the Board; \4\ and (iii)
advancements in technology that are increasing the availability of
electronic audit tools and the use of audit software. While these
developments have generally been reflected through amendments to some
interim standards and related interpretations in connection with the
Board's standard-setting initiatives, the 2022-2026 Strategic Plan
reinforced the Board's intent ``to modernize and streamline [the
Board's] existing standards and to issue new standards where necessary
to meet today's needs'' as part of the PCAOB's investor protection
mission.\5\
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\4\ See generally Section 3 of PCAOB rules, Auditing and Related
Professional Practice Standards, Part 5, Ethics and Independence.
\5\ See PCAOB, Strategic Plan 2022-2026, at 10, available at
<a href="https://assets.pcaobus.org/pcaob-dev/docs/default-source/about/administration/documents/strategic_plans/strategic-plan-2022-2026.pdf?sfvrsn=b2ec4b6a_4/">https://assets.pcaobus.org/pcaob-dev/docs/default-source/about/administration/documents/strategic_plans/strategic-plan-2022-2026.pdf?sfvrsn=b2ec4b6a_4/</a>.
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In connection with these initiatives,\6\ the Board analyzed the
interim foundational standards that address the general principles and
responsibilities of the auditor in conducting an audit. These
foundational standards are:
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\6\ See PCAOB's interim standards project, available at <a href="https://pcaobus.org/oversight/standards/standard-setting-research-projects/interim-standards">https://pcaobus.org/oversight/standards/standard-setting-research-projects/interim-standards</a>.
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<bullet> AS 1001, Responsibilities and Functions of the Independent
Auditor;
<bullet> AS 1005, Independence;
<bullet> AS 1010, Training and Proficiency of the Independent
Auditor; and
<bullet> AS 1015, Due Professional Care in the Performance of
Work.\7\
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\7\ When adopted by the Board in 2003, this group of interim
standards was designated as AU sec. 110, AU sec. 220, AU sec. 210,
and AU sec. 230. In 2015, the PCAOB reorganized its auditing
standards using a topical structure and a single, integrated number
system, and these interim standards were designated as AS 1001, AS
1005, AS 1010, and AS 1015, respectively. See Reorganization of
PCAOB Auditing Standards and Related Amendments to PCAOB Standards
and Rules, PCAOB Rel. No. 2015-002 (Mar. 31, 2015). The
reorganization did not impose additional requirements on auditors or
change substantively the requirements of PCAOB standards.
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The general principles and responsibilities addressed by the
foundational standards include reasonable assurance, due professional
care, professional skepticism, independence, competence, and
professional judgment. Through this rulemaking, the Board is
reaffirming and modernizing the general principles and responsibilities
of the auditor to ensure that the foundation continues to be sound and
appropriate for performing high-quality audits.
Rulemaking History
In March 2023, the Board proposed a new, single standard to replace
the foundational standards that address the general principles and
responsibilities of the auditor in conducting an audit (``proposed
standard'').\8\ The proposal also included key amendments to other
PCAOB standards that address matters that are fundamental to the
conduct of an audit. These proposed amendments clarified the engagement
partner's responsibility to exercise due professional care related to
supervision and review of the audit, accelerated the documentation
completion date by reducing the maximum period for the auditor to
assemble a complete and final set of audit documentation from 45 days
to 14 days, and clarified the auditor's responsibility to evaluate
whether the financial statements are ``presented fairly.''
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\8\ Proposed Auditing Standard--General Responsibilities of the
Auditor in Conducting an Audit and Proposed Amendments to PCAOB
Standards, PCAOB Rel. No. 2023-001 (Mar. 28, 2023) (``proposal'' or
``proposing release'').
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The Board received 28 comment letters on the proposal.\9\
Commenters included investor-related groups, firms, firm-related
groups, academics, and others. The Board considered all comments in
developing the final standard and amendments, and specific comments are
discussed in the analysis that follows.
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\9\ The comment letters received on the proposal are available
in the docket for this rulemaking on the PCAOB's website (<a href="https://pcaobus.org/about/rules-rulemaking/rulemaking-dockets/docket-049-responsibilities-auditor-conducting-audit/comment-letters">https://pcaobus.org/about/rules-rulemaking/rulemaking-dockets/docket-049-responsibilities-auditor-conducting-audit/comment-letters</a>).
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Overview of Existing Requirements
This section discusses key provisions of the existing standards.
Key provisions of AS 1001, Responsibilities and Functions of the
Independent Auditor, include:
<bullet> The objective of an audit of financial statements is to
express an opinion on the fairness of the financial statements in
presenting, in all material respects, the financial position, results
of operations, and cash flows in accordance with generally accepted
accounting principles (``GAAP''). The
[[Page 49732]]
auditor also disclaims an opinion if circumstances require. (AS
1001.01)
<bullet> The responsibilities of the auditor and management are
that (i) the auditor plans and performs the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether caused by error or fraud; and (ii) management is
responsible for the financial statements, including adopting accounting
policies and establishing and maintaining internal control to initiate,
record, process, and report transactions (as well as events and
conditions) consistent with management's assertions in the financial
statements. (AS 1001.02-.03)
<bullet> The auditor is to possess professional qualifications and
exercise professional judgment in determining which auditing procedures
are necessary in the circumstances to gain a reasonable basis for the
opinion. (AS 1001.04-.05)
<bullet> The auditor should be aware of and consider auditing
interpretations applicable to the audit and, if the guidance in the
interpretations is not followed, be prepared to explain how the auditor
complied with the provisions of the auditing standard addressed by the
guidance. (AS 1001.11)
Key provisions of AS 1005, Independence, require that the auditor:
<bullet> Maintain independence in mental attitude and be
intellectually honest, impartial, and without bias with respect to the
client (i.e., be independent in fact). (AS 1005.01-.03)
<bullet> Be free from any obligation to or interest in the client,
its management, or its owners, so that the general public maintains
confidence in the independence of auditors. (AS 1005.03)
<bullet> Not only be independent in fact, but also avoid situations
that may lead outsiders to doubt the auditor's independence. (AS
1005.03)
Key provisions of AS 1010, Training and Proficiency of the
Independent Auditor, require that:
<bullet> The audit be performed by persons having adequate
technical training, proficiency, and experience as an auditor. (AS
1010.01-.02)
<bullet> The training of the auditor be adequate to meet the
requirements of the profession, be adequate in technical scope, and
include general education. (AS 1010.01-.03)
<bullet> New audit professionals obtain professional experience
through proper supervision and review of their work by those who are
more experienced, with the nature and extent of supervision reflecting
variances in practice. (AS 1010.03)
<bullet> The engagement partner exercise seasoned judgment in the
varying degrees of supervision and review of work performed and
judgments exercised by subordinates, and subordinates meet the
responsibilities of their work. (AS 1010.03)
<bullet> The auditor continue professional training to become aware
of developments in business and the profession, and study, understand,
and apply new pronouncements on accounting and auditing. (AS 1010.04)
Key provisions of AS 1015, Due Professional Care in the Performance
of Work, require that:
<bullet> The auditor exercise due professional care in the planning
and performance of the audit and the preparation of the report,
including observance of the auditing standards by professionals within
the auditor's organization. (AS 1015.01-.02)
<bullet> The auditor possess ``the degree of skill commonly
possessed'' by other auditors and exercise it with ``reasonable care
and diligence'' (i.e., due professional care) in the planning and
performance of the audit and the preparation of the report. (AS 1015.01
and .05)
<bullet> The engagement team be assigned to tasks and be supervised
commensurate with their level of knowledge, skill, and ability so that
they can evaluate the audit evidence they are examining. (AS 1015.06)
<bullet> The engagement partner know, at a minimum, the relevant
professional accounting and auditing standards, be knowledgeable of the
audit client, and be responsible for the assignment of tasks to, and
supervision of, the members of the engagement team. (AS 1015.06)
<bullet> The auditor exercise professional skepticism throughout
the audit, with a questioning mind and a critical assessment of audit
evidence, to diligently gather and objectively evaluate audit evidence,
and consider the competency and sufficiency of the evidence, and not be
satisfied with less than persuasive evidence because of a belief that
management is honest. (AS 1015.07-.09)
<bullet> The auditor obtain reasonable assurance about whether the
financial statements are free of material misstatement, whether caused
by error or fraud, or whether any material weaknesses exist as of the
date of management's assessment. Reasonable assurance is ``a high level
of assurance'' but is not absolute assurance because of the nature of
audit evidence and the characteristics of fraud. (AS 1015.10)
Key provisions of other standards relevant to this rulemaking
include:
<bullet> AS 1201.04-.05 and AS 2101.03, which describe the
engagement partner's responsibilities for supervision and review of
audit documentation.
<bullet> AS 1215.06, which requires the auditor to document
procedures performed, evidence obtained, and conclusions reached with
respect to relevant financial statement assertions.
<bullet> AS 1215.15, which requires the auditor to complete the
necessary auditing procedures and assemble for retention a complete and
final set of audit documentation within 45 days after the report
release date.
<bullet> AS 2810.30, which requires the auditor to evaluate whether
the financial statements are presented fairly, in all material
respects, in conformity with the applicable financial reporting
framework.
<bullet> AS 2815, The Meaning of ``Present Fairly in Conformity
with Generally Accepted Accounting Principles,'' which explains the
meaning of ``present fairly'' as used in the phrase ``present fairly .
. . in conformity with generally accepted accounting principles,'' and
the basis for the auditor's opinion on whether the financial statements
present fairly an entity's financial position, results of operations,
and cash flows in conformity with generally accepted accounting
principles.
Reasons To Improve Auditing Standards
The new standard and related amendments are intended to modernize,
clarify, and streamline the general principles and responsibilities of
the auditor described in the foundational standards. The Board
identified several areas discussed below that the Board believes will
enhance the useability of the requirements by making them easier to
read, understand, and apply.
1. Alignment With Board-Issued Standards and Rules
Since the adoption of the foundational standards, the Board has
issued a number of new auditing standards and amendments. Certain of
these standards address other principles and responsibilities that are
fundamental to the conduct of an audit, including the engagement
partner's supervisory and review responsibilities and general
requirements for audit documentation. Expressly incorporating these
specific principles and responsibilities for conducting an audit in the
new standard and related amendments should provide the auditor with
more complete direction on matters that are central to the auditor's
work.
Certain descriptions of requirements in the foundational standards
do not align with the language used in Board-issued standards. For
example, some
[[Page 49733]]
provisions in the foundational standards refer to GAAP; \10\ however,
in recognition of the SEC's acceptance of filings that include
financial statements prepared under accounting frameworks other than
U.S. GAAP, such as International Financial Reporting Standards
(``IFRS''), Board-issued standards are written as framework neutral and
refer instead to the applicable financial reporting framework.\11\ As
another example, in describing professional skepticism, AS 1015 refers
to the competency and sufficiency of the audit evidence rather than
using terminology consistent with the Board-issued AS 1105, Audit
Evidence, which refers to audit evidence as sufficient and appropriate.
The Board believes that aligning the descriptions of the general
principles and responsibilities in the new standard with language used
in Board-issued standards will minimize potential confusion.
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\10\ See, e.g., AS 1001.01 and .03.
\11\ See paragraph .01, footnote 1 of AS 2410, Related Parties
(``The auditor should look to the requirements of the U.S.
Securities and Exchange Commission for the company under audit with
respect to the accounting principles applicable to that company . .
.''); Auditing Standard No. 18--Related Parties Amendments to
Certain PCAOB Auditing Standards Regarding Significant Unusual
Transactions and Other Amendments to PCAOB Auditing Standards, PCAOB
Rel. No. 2014-002 (June 10, 2014), at A4-6 (describing the approach
of AS 2410.01, footnote 1 as ``framework neutral'').
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The foundational standards were originally written for audits of
financial statements, but certain general principles and
responsibilities described in the standards (e.g., reasonable
assurance, due professional care, and professional skepticism) apply
equally to audits of internal control over financial reporting
(``ICFR''). None of the foundational standards mention audits of ICFR
or refer to AS 2201, An Audit of Internal Control Over Financial
Reporting That Is Integrated with An Audit of Financial Statements.
While AS 2201 refers to the foundational standards for the requirements
related to technical training and proficiency as an auditor,
independence, and the exercise of due professional care, including
professional skepticism,\12\ the Board believes it is important to
clarify in the new standard that the general principles and
responsibilities apply to an audit of ICFR as well as an audit of
financial statements.
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\12\ See AS 2201.04.
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The application of the general principles and responsibilities
should be improved by conforming the presentation of the related
requirements to the structure used in Board-issued standards. This
includes specifying an introduction and objectives to the new standard.
In addition, the responsibilities from the foundational standards
should be clarified by expressing the related requirements using terms
described in PCAOB Rule 3101, Certain Terms Used in Auditing and
Related Professional Practice Standards (e.g., using ``must'' and
``should'' to describe the degree of responsibility that the standards
impose on auditors). Much of the explanatory material from the
foundational standards that continues to be relevant has been relocated
to the discussion in this release, which should facilitate the
auditor's navigation of the relevant requirements and align with the
approach taken in Board-issued standards.
2. New or Revised Independence Requirements Issued by the PCAOB and the
SEC9
Since the adoption of AS 1005 in 2003, the PCAOB has issued
independence rules that have imposed certain incremental independence
requirements on firms, relative to the SEC rules \13\ (e.g., provisions
related to tax services for persons in financial reporting oversight
roles at issuer audit clients).\14\ These incremental independence
requirements are not expressly addressed in AS 1005, but nevertheless
the auditor is required to comply with them. Further, while AS 1005
includes a general reference to the SEC's requirements for auditor
independence, there is no reference to the specific requirements. The
Board believes it is helpful to refer explicitly in the new standard to
the requirements that govern auditor independence, including
independence requirements set out by the federal securities laws and
related rules, which include an overarching provision for the auditor
to maintain independence from its client in fact and in appearance.\15\
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\13\ See generally PCAOB rules under Section 3. Auditing and
Related Professional Practice Standards, Part 5--Ethics and
Independence.
\14\ See PCAOB Rule 3523, Tax Services for Persons in Financial
Reporting Oversight Roles.
\15\ See Section 10A(g) of the Securities Exchange Act of 1934
(``the Exchange Act''), 15 U.S.C. 78j-1(g);, 17 CFR 210.2-01
(Regulation S-X Rule 2-01).
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3. Advancements in Technology Increasing the Availability of Electronic
Audit Tools and Use of Audit Software
Since the foundational standards were adopted by the PCAOB,
advancements in technology have increased the availability of
electronic audit tools and use of audit software. Auditors have largely
moved away from a paper-based approach to audit documentation in favor
of using software that houses electronic workpapers and audit programs.
Use of electronic workpapers facilitates more efficient performance and
review of audit procedures and enables auditors to assemble a complete
and final set of audit documentation in less time than in a paper-based
environment.
Auditors are also expanding their use of and reliance on electronic
audit tools. For example, some firms have made significant investments
in internally developed tools for use in the audit. In addition, some
``off-the-shelf'' applications such as data analysis software have
become available to auditors. These advancements have changed the way
that many auditors perform and document their audit procedures and
retain related audit documentation. Accordingly, the new standard and
amendments reflect an accelerated documentation completion date and
related documentation requirements.
4. Outdated and Inconsistent Language
The foundational standards include outdated and inconsistent
language that is not relevant to audits conducted under the standards
of the PCAOB. For example, paragraph .03 of AS 1001 provides that the
auditor may draft the financial statements in whole or in part based on
information from management during performance of the audit. This
provision is outdated and should not be included in PCAOB auditing
standards because an auditor drafting the financial statements would
violate the applicable independence rules.\16\ Eliminating outdated
language used in the foundational standards should remove
inconsistencies between PCAOB auditing standards and the relevant rules
of the PCAOB and the SEC. Similarly, in describing the objective of the
audit, paragraph .01 of AS 1001 refers to financial position, results
of operations, and cash flows. This language could be unnecessarily
limiting because the objective of the audit does not change based on
the subject matter of the audit (e.g., whether it is an audit of ICFR
or the financial statements). The new standard excludes references that
are outdated or inconsistent, which the Board believes improves the
application of the requirements and provides clearer direction to
auditors in executing their responsibilities.
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\16\ See 17 CFR 210.2-01(c)(4)(i) (Regulation S-X Rule 2-
01(c)(4)(i)).
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[[Page 49734]]
5. Activities of Other Standard Setters
Since the Board's adoption of the foundational standards, both the
International Auditing and Assurance Standards Board (``IAASB'') and
the Auditing Standards Board (``ASB'') of the AICPA have updated their
analogous standards:
<bullet> IAASB Standard--International Standard on Auditing 200,
Overall Objectives of the Independent Auditor and the Conduct of an
Audit in Accordance with International Standards on Auditing (``ISA
200'') (effective 2009); and
<bullet> ASB Standard--AU-C Section 200, Overall Objectives of the
Independent Auditor and the Conduct of an Audit in Accordance With
Generally Accepted Auditing Standards (``AU-C 200'') (effective 2012).
These revisions were part of clarity projects that were designed to
make the standards easier to read, understand, and apply.\17\ These
standards were updated to align the terminology used throughout the
standards for consistency and to enhance and update explanatory
materials.
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\17\ Descriptions of the clarity projects of the IAASB and ASB
are available, respectively, at <a href="https://www.iaasb.org/projects/clarity-iaasb-standards">https://www.iaasb.org/projects/clarity-iaasb-standards</a> and <a href="https://us.aicpa.org/interestareas/frc/auditattest/improvingclarityasbstandards">https://us.aicpa.org/interestareas/frc/auditattest/improvingclarityasbstandards</a>.
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6. Comments on Reasons for Standard Setting and Proposed Approach
The proposal sought comment on the appropriateness of the general
principles and responsibilities of the auditor and the approach to
reorganize and consolidate those responsibilities. Commenters who
responded generally agreed that the general principles and
responsibilities (i.e., reasonable assurance, due professional care,
professional skepticism, independence, competence, and professional
judgment) described in the proposal are appropriate. One commenter
suggested that the Board address the relevance and reliability of audit
evidence and information in conjunction with the requirements in AS
1105, as part of the general principles and responsibilities. Some
commenters addressed the reorganization and consolidation of the four
existing foundational standards into one new standard and generally
supported the proposed approach.
Commenters were generally supportive of the Board's efforts to
modernize and streamline the general principles and responsibilities of
the auditor. Several commenters, for example, agreed that the proposed
standard would provide a more logical presentation, which would enhance
the useability of the standards by making them easier to read,
understand, and apply. Some commenters, including investor-related
groups, also expressed support for the proposal's focus on investor
protection.
Two commenters suggested consideration of analogous standards of
the IAASB and the ASB. One commenter stated that PCAOB auditing
standards should not diverge from AICPA auditing standards, to the
extent appropriate. Another commenter recommended that the Board
consider similar standards of the IAASB and the ASB and assess whether
their approach could result in higher quality audits.
The proposal also sought comment on the appropriateness of the
general principles and responsibilities of the auditor in light of the
availability of electronic audit tools and the use of audit software by
both larger and smaller firms. Most commenters did not address this
question. One commenter agreed that the proposed general principles and
responsibilities of the auditor are appropriate and clear because they
are necessary to the audit regardless of electronic tools and audit
software. Another commenter recommended considering future
possibilities and uses of machine learning and artificial intelligence
(``AI'') technologies, which in the views of the commenter ``are
progressing rapidly.''
The final standard retains the general principles and
responsibilities of the auditor described in the proposal, subject to
revisions described below. The final standard also retains the overall
approach of consolidating the foundational standards and the general
principles and responsibilities of the auditor under one standard. The
Board did not add specific requirements for evaluating the relevance
and reliability of audit evidence, as suggested by one commenter,
because AS 1105 provides the necessary framework for this evaluation.
The final standard includes general requirements for conducting an
audit, and obtaining sufficient appropriate audit evidence is part of
those general requirements.
In addition, in the final standard the Board did not add provisions
specific to the current and future use of emerging technologies. Due to
the ever-evolving nature of technology, specifying requirements for
certain types of technology based on how those tools are used today
could quickly make the standard become outdated. Further, the general
principles and responsibilities addressed in the standard apply to all
audits, irrespective of the technology that may be used in performing
audit procedures. The Board continues to address emerging technologies
(e.g., machine learning and AI) as part of the staff's ongoing Data and
Technology research project.\18\ Research from this project may give
rise to individual standard-setting projects and may also inform the
scope or nature of other projects that are included on the Board's
standard-setting agenda.
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\18\ See the PCAOB's agenda related to standard setting,
research, and rulemaking projects, available at <a href="https://pcaobus.org/oversight/standards/standard-setting-research-projects">https://pcaobus.org/oversight/standards/standard-setting-research-projects</a>.
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With respect to comments on analogous standards issued by other
standard setters, the Board believes that AS 1000 is based on general
principles and responsibilities of the auditor, similar to the bases of
analogous IAASB and AICPA standards. The Board carefully considered the
approaches of other standard setters when developing the proposal, and
the new standard and amendments being adopted reflect the approach that
the Board believes best protects investors and furthers the public
interest. As a result, certain differences exist between the Board's
new standard and those of other standard setters, including a number of
provisions that the Board believes are appropriate and consistent with
the Board's statutory mandate to protect the interests of investors and
further the public interest.
Discussion of Final Rules
A. Overview of Final Rules
The Board replaced AS 1001, AS 1005, AS 1010, and AS 1015 with one
standard, AS 1000, that describes the general principles and
responsibilities of an auditor \19\ in conducting an audit in
accordance with the standards of the PCAOB. Briefly, the new standard:
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\19\ The term ``auditor'' includes both a public accounting firm
registered with the PCAOB and associated persons thereof, as defined
in PCAOB Rule 1001, Definitions of Terms Employed in Rules. For
example, engagement quality reviewers (``EQRs''), by virtue of their
status as associated persons, are within the term ``auditor'' in AS
1000. See also paragraph .03 of AS 1220, Engagement Quality Review.
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<bullet> Includes introductory language that reaffirms the
auditor's fundamental obligation to protect investors through the
preparation and issuance of informative, accurate, and independent
auditor's reports;
<bullet> Includes objectives for the auditor to conduct and
communicate the results of both an audit of a company's financial
statements and an audit of a company's ICFR and satisfy and fulfill
other general principles and responsibilities described in this
standard;
[[Page 49735]]
<bullet> Retains and clarifies the general principles and
responsibilities that are important for an audit, including reasonable
assurance, due professional care, professional skepticism, and
professional judgment;
<bullet> Aligns the engagement partner's supervisory
responsibilities under AS 1201 with due professional care;
<bullet> Retains the requirement for the auditor to be independent
but expresses the obligation more directly by referring to the PCAOB's
independence criteria in its rules and standards, and the independence
criteria set out in the rules and regulations of the SEC;
<bullet> Describes the auditor's obligations to (i) comply with
ethics requirements, (ii) obtain and maintain competence, and (iii)
prepare audit documentation;
<bullet> Expresses the auditor's responsibilities by using the
terms set forth in PCAOB Rule 3101 (e.g., must and should) that
describe the degree of responsibility that PCAOB standards impose on
auditors; and
<bullet> Removes language that is outdated, inconsistent, and not
relevant to audits conducted under the standards of the PCAOB.
As previously noted, the Board amended other PCAOB auditing
standards that address responsibilities fundamental to the conduct of
an audit to:
<bullet> Clarify the engagement partner's existing responsibilities
for supervision and review in AS 1201, AS 1215, and AS 2101 to provide
more specificity about the engagement partner's responsibility to
exercise due professional care related to supervisory and review
activities required to be performed under existing auditor
requirements;
<bullet> Clarify the requirements for audit documentation in AS
1215 to identify who performed the work, who reviewed the work, and the
date of such review;
<bullet> Accelerate the period in AS 1215 to assemble a complete
and final set of audit documentation for retention from 45 days to 14
days; and
<bullet> Update and incorporate the underlying requirements of AS
2815 into AS 2810, and rescind AS 2815, while preserving the meaning of
``present fairly'' and streamlining the requirements to provide a more
logical presentation.
In a separate release, the Board is also adopting a new quality
control standard, QC 1000, A Firm's System of Quality Control, and a
new ethics standard, EI 1000, Integrity and Objectivity, together with
other amendments to PCAOB standards, rules, and forms.\20\ This release
includes references to QC 1000 and EI 1000, where appropriate.
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\20\ See A Firm's System of Quality Control and Other Amendments
to PCAOB Standard, Rules, and Forms, PCAOB Rel. No. 2024-005 (May
13, 2024).
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B. AS 1000
1. Introduction
See Paragraphs .01 Through .02 of the New Standard.
The first paragraph of the proposed standard, under the heading
``Introduction,'' described the fundamental obligation of auditors to
protect investors through the preparation and issuance of informative,
accurate, and independent auditor's reports. It noted that an audit
primarily benefits investors who rely on the audit to provide objective
and independent opinions on whether the company's financial statements
are presented fairly and, if applicable, on the effectiveness of the
company's ICFR. The proposed paragraph further provided that a properly
conducted audit and related auditor's report enhance the confidence of
investors and other market participants in the company's financial
statements and, if applicable, ICFR. The existing foundational
standards do not include an introduction and do not describe the
auditor's fundamental responsibility to protect investors.
Investor-related groups strongly supported the proposed standard's
emphasis on the auditor's obligation to protect investors. These
commenters suggested some clarification in the language describing the
auditor's obligation for, and role in, protecting investors, as
described in the Supreme Court opinion in United States v. Arthur Young
& Co.\21\ Some pointed to, for example, language stating that the
auditor ``assumes a public responsibility transcending any employment
relationship with the client'' and that the auditor ``owes ultimate
allegiance to the corporation's creditors and stockholders, as well as
the investing public.'' \22\ One of these commenters stated that
without additional clarification, the phrase ``fundamental obligation''
is a vague concept and open to interpretation. Two commenters
recommended including in AS 1000 a footnote from the proposal that
cites the Arthur Young opinion.
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\21\ United States v. Arthur Young & Co., 465 U.S. 805, 817-18
(1984).
\22\ Id. at 817 (emphasis in original).
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Two commenters, including an investor-related group, recommended
that the standard's reference to investors be broadened to include
shareholders, debtholders, and other financial statement users who rely
on a company's financial statements, consistent with the usage by
Financial Accounting Standards Board (``FASB'') and the Supreme Court
in the Arthur Young opinion. One of these commenters recommended
including a definition of ``financial statement users'' in the final
standard. Another recommended adding a footnote to the first sentence
of paragraph .01 defining and describing the meaning of ``investors.''
A number of other commenters, primarily firms, expressed concerns
that the introduction language describing the auditor's role was
unclear and could be misleading. For example, several commenters noted
that the description of the auditor's role in protecting investors
could be viewed as creating a new legal obligation owed to investors.
In the view of one commenter, the proposed language implied that
investor protection is the sole responsibility of the auditor and could
give investors false confidence that they can solely rely on an
auditor's report as investment advice, when in fact there are many
other factors investors should consider. Another commenter asserted
that the proposed language could create a misimpression that auditors
are permitted and expected to deviate from auditing standards when they
believe such a departure would be warranted to further investors'
interests. These commenters suggested that the Board clarify the
introduction language in the final standard. Some commenters provided
alternative language for the Board's consideration. For example, two
commenters suggested replacing the phrase ``properly conducted'' in the
last sentence of paragraph .01 with ``conducted in accordance with the
standards of the PCAOB'' to align with language used in the auditor's
report. One commenter suggested deleting paragraph .01 entirely.
After considering the comments received, the Board retained the
proposed approach to the introduction section, while making certain
revisions in light of the comments received.
The Board revised the first sentence of the introduction to state
that the auditor has a fundamental obligation to protect investors
through the preparation and issuance of informative, accurate, and
independent auditor's reports. The Board also removed a redundant
statement from proposed paragraph .01 (``and that obligation governs
the auditor's work under the standards of the PCAOB''). This statement
is unnecessary because paragraph .02 already clarifies that AS 1000
describes the general principles and
[[Page 49736]]
responsibilities of the auditor in properly conducting an audit in
accordance with the standards of the PCAOB. This includes the
fundamental obligation to protect investors as described in paragraph
.01.
The fundamental obligation to protect investors is interwoven in
the general principles and responsibilities that guide auditors
throughout their work. Under current law, the auditor plays a critical
role in the financial reporting process. By issuing opinions concerning
whether financial statements are presented fairly, in all material
respects, in conformity with the applicable financial reporting
framework, auditors serve a special ``public watchdog'' function under
the existing federal securities laws, requiring ``complete fidelity to
the public trust.'' \23\ As ``gatekeepers,'' auditors have a public
responsibility to serve the public interest.\24\ Investors rely on
auditors to promote companies' adherence to federal securities law
mandates and companies' disclosure of accurate and reliable financial
information.\25\ ``Investor confidence is bolstered by the knowledge
that public financial statements have been subjected to the rigors of
independent and objective investigation and analysis'' by an
auditor.\26\ This enhanced confidence of investors and other financial
statement users in the company's financial statements and ICFR also
plays an integral role in maintaining the public trust in the capital
markets. The introduction in the final standard underscores the
auditor's obligation under the Board's auditing standards and other
applicable laws and regulations.
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\23\ Arthur Young, 465 U.S. at 817-18.
\24\ In the Matter of KPMG Peat Marwick LLP, SEC Rel. No. 34-
43862, at 14 & n.54 (Jan. 19, 2001); see John C. Coffee Jr.,
Gatekeepers: The Professions and Corporate Governance 2-3 (2006)
(describing ``gatekeepers'' as ``repeat players who provide
certification or verification services to investors, vouching for
someone else who has a greater incentive than they to deceive'').
\25\ In the Matter of the Application of SW Hatfield, C.P.A.,
SEC Rel. No. 34-69930, at 33 (July 3, 2013) (reviewing PCAOB
disciplinary action).
\26\ McCurdy v. SEC, 396 F.3d 1258, 1261 (D.C. Cir. 2005); see
Arthur Young, 465 U.S. at 819 n.15.
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The Board emphasized--in response to commenters who expressed
concern that the introductory language, and specifically its use of the
term ``obligation,'' could be interpreted to establish a new legal
duty--that the introductory language does not alter any existing
regulatory or legal requirements or obligations between auditors and
investors. It does not establish a novel duty or new form of legal
obligation. Rather, it reaffirms the auditor's obligation under the
existing legal framework and the important role of the auditing
profession in the capital markets.\27\
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\27\ See Section 101(c)(6) of Sarbanes-Oxley (authorizing PCAOB
to enforce compliance with the ``Act, the rules of the Board,
professional standards, and the securities laws relating to the
preparation and issuance of audit reports and the obligations and
liabilities of accountants with respect thereto, by registered
public accounting firms and associated persons thereof . . ..'')
(emphasis added).
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Paragraph .01 of the final standard has also been revised, as
suggested by some commenters, to state that the auditor's
responsibility \28\ transcends the auditor's relationship with
management and the audit committee of the company under audit,
providing the foundation for an objective and independent audit. This
statement expresses a longstanding principle of public accounting.\29\
Paragraph .01 also states that a properly conducted audit and the
related auditor's report enhance the confidence of investors and other
financial statement users in the company's financial statements and, if
applicable, ICFR. The Board retained the phrase ``properly conducted
audit'' to align with the description in paragraph .02. The Board
removed the sentence that states that ``An audit primarily benefits
investors, who rely on the audit to provide an objective and
independent opinion on whether the company's financial statements are
presented fairly and, if applicable, on the effectiveness of the
company's internal control over financial reporting'' because it is
redundant and unnecessary in the context of the surrounding statements.
The Board does not believe that the language in paragraph .01 suggests
that auditors may deviate from PCAOB auditing standards to protect
investors. In fact, the language clearly establishes the fundamental
duty of auditors to prepare and issue their reports in accordance with
PCAOB standards. Similarly, the Board does not interpret the language
of paragraph .01 as suggesting that investors should view auditor's
reports as the sole source of investment advice. Collectively, these
provisions emphasize that auditors play a critical role in ensuring the
accuracy and transparency of a company's financial information, and
that this role helps investors make well-informed decisions and
supports trust in a company's financial statements.
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\28\ The terms ``obligation'' and ``responsibility'' are used
synonymously in this standard.
\29\ See Arthur Young, 465 U.S. at 817-818 (``By certifying the
public reports that collectively depict a corporation's financial
status, the independent auditor assumes a public responsibility
transcending any employment relationship with the client. The
independent public accountant performing this special function owes
ultimate allegiance to the corporation's creditors and stockholders,
as well as to the investing public.'') (emphasis in original); AICPA
Professional Standards, Vol. 2, Code of Professional Conduct, ET
Section 53, Article II--The Public Interest (2002) (``.01 A
distinguishing mark of a profession is acceptance of its
responsibility to the public. The accounting profession's public
consists of clients, credit grantors, governments, employers,
investors, the business and financial community, and others who rely
on the objectivity and integrity of certified public accountants to
maintain the orderly functioning of commerce.'').
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Finally, a new footnote to paragraph .01 clarifies that references
to ``investors and other financial statement users'' in AS 1000
encompass a broad spectrum of stakeholders. This group includes not
only a company's existing and potential shareholders, but also
bondholders, lenders, other creditors, and others who use the company's
financial statements.\30\
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\30\ See FASB, Statement of Financial Accounting Concepts No. 8,
Conceptual Framework for Financial Reporting, Chapter 1, The
Objective of General Purpose Financial Reporting (Dec. 2021) (``The
objective of general purpose financial reporting is to provide
financial information about the reporting entity that is useful to
existing and potential investors, lenders, and other creditors in
making decisions about providing resources to the entity'').
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In addition to the revisions to paragraph .01, the Board relocated
certain content, discussed in more detail below, from proposed
paragraph .15 into a new note to paragraph .01. The note reminds
auditors that their obligation to protect investors provides important
context to the auditor's work when applying the requirements of AS 1000
and other PCAOB standards and rules (e.g., when conducting interim
reviews in accordance with AS 4105, Reviews of Interim Financial
Information, or when conducting audits of ICFR in accordance with AS
2201).
Paragraph .02 summarizes the scope and content of AS 1000. The
Board did not receive comment on this paragraph and adopted it as
proposed.
2. Objectives of the Auditor
See Paragraph .03 of the New Standard
The proposed standard set forth three objectives of the auditor (a)
in an audit of financial statements, to obtain reasonable assurance
about whether the financial statements are free of material
misstatement, whether due to error or fraud, and to issue an auditor's
report that expresses an opinion about whether the financial
statements, taken as a whole, are presented fairly, in all material
respects, in conformity with the applicable financial reporting
framework; (b) in an audit of internal control over financial
reporting, to obtain reasonable assurance about whether material
weaknesses exist as of
[[Page 49737]]
the date specified in management's assessment, and to issue an
auditor's report that expresses an opinion on the effectiveness of the
company's internal control over financial reporting; and (c) to
communicate externally, as required by applicable professional and
legal requirements. Other than AS 1001,\31\ the existing foundational
standards do not include an objective.
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\31\ See AS 1001.01.
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The proposal defined the term ``applicable professional and legal
requirements'' by referring to the term's definition in proposed QC
1000.\32\ That proposed definition included (i) professional standards,
as defined in PCAOB Rule 1001(p)(vi); (ii) rules of the PCAOB that are
not professional standards; and (iii) to the extent related to the
obligations and responsibilities of accountants or auditors or to the
conduct of engagements, rules of the SEC, other provisions of U.S.
federal securities law, and other applicable statutory, regulatory, and
other legal requirements.
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\32\ See A Firm's System of Quality Control and Other Proposed
Amendments to PCAOB Standards, Rules, and Forms, PCAOB Rel. No.
2022-006 (Nov. 18, 2022).
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Several commenters expressly supported the proposed objectives of
the auditor. Some commenters suggested ways to further clarify these
objectives. For example, one commenter suggested that the objectives be
reframed as objectives of the ``audit'' rather than of the ``auditor.''
Another commenter suggested moving the requirements on the
determination of critical audit matters (``CAMs'') from AS 3101.11, to
the objectives of the auditor in AS 1000 in order to highlight the
importance of CAMs. One commenter recommended that the objective
related to the audit of ICFR refer to the relevant criteria used (e.g.,
criteria issued by the Committee of Sponsoring Organizations of the
Treadway Commission) and clarify that it is integrated with the audit
of financial statements.
With respect to the communication objective, one commenter stated
that the proposed objective should also refer to communications with
the company. Another commenter stated that the term ``applicable legal
and professional requirements'' is overly broad and may inadvertently
scope in legal requirements outside of public accountancy laws. An
additional commenter suggested that AS 1000 refer instead to ``PCAOB
rules and standards.''
The Board adopted the objectives in the final standard
substantially as proposed, with the modifications discussed below.
The purpose of the objectives is to provide additional context for
understanding the requirements in the standard. Therefore, the Board
added the objective to ``satisfy and fulfill the other general
principles and responsibilities described in this standard.'' This
provides more explicit linkage to the general principles and
responsibilities set forth in the final standard.
The objectives refer, as proposed, to the ``objectives of the
auditor.'' Because the standard addresses the general principles and
responsibilities of the auditor in conducting an audit, the Board
believes that the objectives should be directed at the ``auditor''
rather than the audit as a whole.
The determination of CAMs is an important part of the auditor's
reporting responsibilities and is encompassed under the applicable
professional and legal requirements. The auditor's responsibilities for
determining and communicating CAMs are described in AS 3101 and align
with the stated objectives of that standard.\33\ Rather than repeating
these requirements, the Board instead added a note to paragraph .17 of
the final standard that refers to the potential inclusion of CAMs in
the auditor's report.
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\33\ See AS 3101.04 and .11-.17.
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The suggested references to the relevant criteria used in the audit
of ICFR are not suitable for the objective section of AS 1000 and are
already covered in other PCAOB standards. The specific requirements
relevant to performing an audit of ICFR are addressed in AS 2201, which
provides the appropriate context for the framework to be used by the
auditor when conducting an ICFR audit and integrating the audit of ICFR
with an audit of financial statements.
As was proposed, the final standard includes an objective to
communicate externally in accordance with applicable legal and
professional requirements. The auditor has a responsibility to make
certain communications (e.g., communications about audit results to the
audit committee under AS 1301, Communications with Audit Committees),
in addition to reporting externally on the results of the audit. The
reference to these requirements in the objective is not intended to
limit or preclude appropriate communications with company personnel.
For example, PCAOB auditing standards require the auditor to conduct
various inquiries of management and other company personnel (e.g., AS
2110, Identifying and Assessing Risks of Material Misstatement, and AS
2201), which is part of complying with applicable professional and
legal requirements.
For ease of reference, the final standard includes the definition
of the term ``applicable professional and legal requirements'' as:
<bullet> Professional standards, as defined in PCAOB Rule
1001(p)(vi);
<bullet> Rules of the PCAOB that are not professional standards;
and
<bullet> To the extent related to the obligations and
responsibilities of accountants or auditors in the conduct of
engagements or in relation to the quality control system, rules of the
SEC, other provisions of U.S. federal securities law, ethics laws and
regulations, and other applicable statutory, regulatory, and other
legal requirements.
This definition is intended to capture all professional and legal
requirements specifically related to engagements under PCAOB standards
of issuers and SEC-registered broker-dealers, including relevant
accounting, auditing, and attestation standards, PCAOB rules, SEC rules
and regulations, other provisions of federal securities law, other
relevant laws and regulations (e.g., state law and rules governing
accountants), applicable ethics law and rules, and other legal
requirements related to the obligations and responsibilities of
accountants or auditors in the conduct of the firm's engagements or in
relation to the quality control system.\34\ It does not encompass
requirements that apply to businesses generally, such as tax laws,
safety regulations, and employment law.
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\34\ The requirements related to compliance with applicable
professional and legal requirements are meant to make clear that, in
engagements subject to PCAOB auditing standards, all applicable
professional and legal requirements must be followed. The
requirement does not suggest that application of ``other applicable
statutory, regulatory, and other legal requirements'' could
supersede rules of the SEC, other provisions of U.S. federal
securities law, rules of the PCAOB that are not professional
standards, or PCAOB professional standards. On the contrary,
requirements relating to ``applicable professional and legal
requirements'' are meant to highlight the importance of adhering to
other requirements when those requirements do not conflict with or
abridge requirements of federal securities laws, PCAOB rules, or
PCAOB standards.
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This definition reflects revisions made in response to comments
received on proposed QC 1000.\35\ The definition
[[Page 49738]]
was expanded to explicitly mention ethics laws and regulations.\36\ It
was also refined to make clear that it encompasses statutory,
regulatory, and other legal requirements beyond professional standards
and other PCAOB rules ``[t]o the extent related to the obligations and
responsibilities of accountants or auditors in the conduct of
engagements or in relation to the quality control system.'' This change
is designed to limit the breadth of the definition to the relevant
circumstances. The phrase ``quality control policies and procedures,''
used in PCAOB Rule 1001(p)(vi), is drawn from Section 110(5) of
Sarbanes-Oxley, and therefore no amendment to the PCAOB rule was
necessary.
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\35\ Two commenters supported the definition as proposed. One
commenter recommended including the profession's ethical standards
explicitly. Two commenters stated the phrase ``other applicable
statutory, regulatory, and other legal requirements'' could be read
broadly and extend beyond regulations that directly bear on the
conduct of audit engagements. Another commenter suggested amending
the definition of ``professional standards'' in PCAOB Rule
1001(p)(vi) to refer to ``quality control standards'' rather than
``quality control policy and procedures.''
\36\ These include those arising under state law or the law of
other jurisdictions (e.g., obligations regarding client
confidentiality).
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3. Professional Qualifications of the Auditor
i. Independence
See Paragraphs .04 Through .05 of the New Standard
The Board proposed to carry forward the existing requirement in AS
1005 for the auditor to be independent, and to align the language that
describes auditor independence obligations with language used in PCAOB
Rule 3520, Auditor Independence, and SEC Rule 2-01.\37\ Specifically,
the Board proposed to require the auditor to be independent of its
audit client both in fact and in appearance throughout the audit and
professional engagement period.\38\ The proposed standard also
clarified that the auditor is not independent with respect to an audit
client if the auditor is not, or a reasonable investor with knowledge
of all relevant facts and circumstances would conclude that the auditor
is not, capable of exercising objective and impartial judgment on all
matters encompassed within the engagement. This clarification aligned
the standard with language used in SEC Rule 2-01(b) \39\ to explain
further the meaning of being independent both in fact and in
appearance. In addition, the Board proposed to require the auditor to
satisfy the independence criteria set out in the rules and standards of
the PCAOB, and satisfy all other independence criteria applicable to
the engagement, including the independence criteria set out in the
rules and regulations of the SEC under the federal securities laws.
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\37\ 17 CFR 210.2-01 (Regulation S-X Rule 2-01).
\38\ See PCAOB Rule 3501, Definitions of Terms Employed in
Section 3, Part 5 of the Rules, for the definition of the term
``audit and professional engagement period.''
\39\ Under the general standard in SEC Rule 2-01(b), the SEC
``will not recognize an accountant as independent, with respect to
an audit client, if the accountant is not, or a reasonable investor
with knowledge of all relevant facts and circumstances would
conclude that the accountant is not, capable of exercising objective
and impartial judgment on all issues encompassed within the
accountant's engagement.''
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Several commenters expressed support for including in AS 1000 the
existing requirements from AS 1005 and stating more directly the
auditor's obligation to comply with the independence requirements of
the PCAOB and SEC. Two commenters, including an investor-related group,
suggested that the Board replace references to ``audit client'' with
``company under audit.'' One commenter asserted that using ``client''
does not recognize that the auditor's public responsibility transcends
the employment relationship with the client. Another commenter asserted
that the use of ``client'' mischaracterizes the relationship between
auditor and the company or its management, and places the auditor in a
``subservient'' position. In addition, one commenter suggested adding
to the final standard additional language from SEC Rule 2-01(b) to
indicate that the PCAOB and SEC will consider ``all relevant facts and
circumstances'' in determining independence. That commenter also
suggested limiting the use of the term ``independent'' in the title of
the auditor's report to only those auditors that have complied with the
SEC and PCAOB rules.
After considering the comments received, the Board adopted the
requirements related to independence substantially as proposed with
some modifications. The Board agrees with the commenters' observation
that language used in the Board's standards can help emphasize that
audits are performed primarily for the benefit of investors, not
management of the company. Accordingly, the Board replaced references
to ``audit client'' with ``company under audit'' and added a footnote
to clarify that the phrase ``company under audit'' has the same meaning
as ``audit client'' as defined by PCAOB Rule 3501(a)(iv).
The Board did not add to the final standard additional language
from SEC Rule 2-01(b) stating that the PCAOB and SEC will consider
``all relevant facts and circumstances'' in determining independence.
The Board's standards do not address the SEC's processes, and need not
repeat in this standard that relevant matters are considered in PCAOB
independence determinations.\40\ The Board also did not add limitations
on the use of the term ``independent'' in the title of the auditor's
report. AS 3101 contains requirements regarding the content of the
auditor's report, including the title ``Report of Independent
Registered Public Accounting Firm.'' AS 3101 also requires that the
auditor's report include a statement that the auditor is required to be
independent with respect to the company in accordance with U.S. federal
securities laws and the applicable rules and regulations of the SEC and
PCAOB. Imposing any limitations on the use of the term ``independent''
in the title, as suggested by a commenter, is outside of the scope of
this standard.
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\40\ See Note to paragraph (b) of PCAOB Rule 3525, Audit
Committee Pre-approval of Non-audit Services Related to Internal
Control Over Financial Reporting (``Independence requirements
provide that an auditor is not independent of his or her audit
client if the auditor is not, or a reasonable investor with
knowledge of all relevant facts and circumstances would conclude
that the auditor is not, capable of exercising objective and
impartial judgment on all issues encompassed within the accountant's
engagement.'') (emphasis added).
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ii. Ethics
See Paragraph .06 of the New Standard
The Board proposed to require the auditor to comply with applicable
ethics requirements, including the rules and standards of the PCAOB.
Under the proposed standard, ethics requirements included the rules in
Section 3, Part 5 of PCAOB rules and proposed EI 1000, Integrity and
Objectivity, of the QC proposal. The existing foundational standards do
not reference the auditor's responsibility to comply with ethics
requirements.
A few commenters suggested revisions to the proposed requirement.
Two commenters, including an investor-related group, stated that the
proposed requirement is weak because it focused on merely complying
with rules and standards of the Board. The investor-related group also
suggested adding language that discusses subordination of judgment to
others, specifically those outside the audit firm (e.g., external
specialists). The other commenter recommended requiring that firms
create and maintain codes of ethics embracing the principles of
proposed EI 1000 and upholding the integrity of capital markets and
auditors' fundamental obligations to investors. An additional commenter
suggested addressing in the standard broader ethical principles, such
as integrity and objectivity, in addition to compliance with rules and
standards.
After considering the comments received, the Board retained the
requirement to comply with ethics
[[Page 49739]]
requirements substantially as proposed, with the modifications
discussed below. The Board added the word ``ethics'' before ``rules and
standards of the PCAOB'' to provide a clearer indication of the rules
and standards referenced. Under the final standard, applicable ethics
requirements are not limited to the ethics rules and standards of the
PCAOB but also include state law and the laws of other jurisdictions
that may establish additional ethics provisions with which the auditor
is required to comply (e.g., obligations regarding conflicts of
interest).
The Board agrees with the underlying point of the comment that
auditors should not subordinate their judgment to individuals outside
the audit firm (e.g., external specialists) and believe that the new
standard will achieve the desired objective of the comment. A
subordination or relinquishment of professional judgment would be
inconsistent with the requirements of AS 1000.09-.10 related to due
professional care, which are discussed below. In addition, EI 1000
addresses the broader ethical principles of integrity and objectivity.
Specifically, the overarching requirements in EI 1000 include (i)
maintaining integrity, which includes being honest and candid, not
knowingly or recklessly misrepresenting facts, and not subordinating
judgment; and (ii) maintaining objectivity, which includes being
impartial, intellectually honest, and free of conflicts of interest.
The intent of the requirement to comply with ethics in AS 1000 is to
remind auditors of their responsibilities described in EI 1000 and
Section 3, Part 5 of PCAOB rules. Therefore, additional discussion of
broader ethical principles and responsibilities is appropriately
addressed in EI 1000 and need not be duplicated in AS 1000. The Board
expanded the reference to EI 1000 in footnote 6 of paragraph .06 of AS
1000 to clarify that EI 1000 specifically requires auditors to maintain
integrity and objectivity. Further clarification on matters related to
subordination of professional judgment is unnecessary in this release.
Lastly, the Board considered comments related to firms' adoption of an
ethics code as part of the adoption of EI 1000.
iii. Competence
See Paragraphs .07 and .08 of the New Standard
a. Description of Competence
The Board proposed to require that the audit be performed by an
auditor who has competence to conduct an audit in accordance with
applicable professional and legal requirements. Competence, as
described in the proposed standard, consists of having the knowledge,
skill, and ability that enable an auditor to perform the assigned
activities in accordance with applicable professional and legal
requirements and the firm's policies and procedures. In the proposing
release, the Board explained that the auditor's knowledge and skill
relate to adequate technical training and proficiency as an auditor,
and the auditor's ability relates to the capabilities to perform, and
in the case of supervisory staff, to review assigned tasks. The
proposed standard also provided that, in determining the appropriate
level of competence, the measure is qualitative rather than
quantitative because quantitative measurement may not accurately
reflect the experience gained over time. A note to the proposed
requirement stated that competence includes knowledge and expertise in
accounting and auditing standards and in SEC rules and regulations
relevant to the company being audited and to the related industry or
industries in which it operates. The proposed requirement was
consistent with the auditor's existing responsibilities under AS 1010
for maintaining ``adequate technical training and proficiency'' but
used updated terminology.
Several commenters sought greater clarity in the proposed
requirement, stating that it did not account for the collective
competence of the engagement team or that it might imply that all
individual members of an engagement team are expected to have the same
level of competence. These commenters generally suggested (i) revising
the requirement to apply to, for example, ``the engagement team,
including specialists'' or ``auditors, collectively'' instead of ``an
auditor'' and (ii) clarifying that necessary competence is commensurate
with the assigned tasks of the individual auditor. One commenter
suggested (i) defining the individuals intended to be covered by the
requirement, including subject matter experts and EQRs; (ii) explaining
that the competence of individuals varies based on a variety of
factors; and (iii) including quantitative factors in the measure of
competence. Another commenter noted that the proposed requirement could
be interpreted to limit the ability to assign challenging work to
junior staff because they may lack significant experience.
Some commenters, mostly firms and professional organizations, also
expressed concern with the description of competence in the note to the
proposed requirement--which referred to having ``expertise'' in SEC
rules and regulations and the relevant industry of the company being
audited--and asked for additional clarification. These commenters
asserted that the term ``expertise'' may impose a higher standard of
competence than intended and could imply that the expected level of
knowledge is that of a person qualified to engage in the practice of
another profession or occupation (e.g., the legal profession). One of
these commenters also expressed concern with the implication that a
partner without relevant expertise in the industry in which the issuer
operates may not be competent to perform an audit of the issuer, even
with the assistance of other firm or engagement team members with
relevant industry expertise. Several commenters recommended deleting
the reference to ``expertise'' or using alternative language such as
``proficiency'' or ``sufficient knowledge.''
After considering the comments received, the Board adopted the
requirement related to competence substantially as proposed, with the
modifications discussed below.
First, consistent with the Board's description in the proposal, the
Board continues to believe the level of competence needed to conduct
the audit is driven by the activities assigned to the individual
auditors performing those activities. As the assigned activities in an
audit vary from individual to individual, so does the required level of
competence to complete those activities in accordance with applicable
professional and legal requirements and the firm's policies and
procedures. For example, a first-year auditor is not expected to have
the same level of competence as a more experienced auditor because the
tasks assigned to the seasoned auditor generally require experience
gained over time. Further, PCAOB standards and rules use the term
``auditor'' to mean both a firm registered with the PCAOB and its
associated persons.\41\ Therefore, the Board believes that defining the
individuals covered by the requirement or revising terminology to
``auditors'' or ``engagement team,'' as suggested by some commenters,
is not necessary. The requirements regarding the appropriate assignment
of responsibilities to engagement team members and proper supervision
are addressed in other PCAOB standards.\42\
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\41\ See PCAOB Rule 1001(a)(xii).
\42\ See, e.g., paragraph .05 of AS 2301, The Auditor's
Responses to the Risks of Material Misstatement, and AS 1201.05.
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Second, the Board agrees that quantitative measures are not wholly
[[Page 49740]]
irrelevant when measuring competence. Quantitative measures alone may
not accurately reflect the nature of experience gained over time and
therefore competence should not be measured exclusively on a
quantitative basis.\43\ In consideration of comments, the final
requirement clarifies that competence is measured both qualitatively
and quantitatively.
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\43\ The description of competence is consistent with the
description in QC 1000.
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Third, the intent of the proposed requirement's note (providing
that competence ``includes knowledge and expertise'' in certain areas)
was to provide additional direction to auditors on the meaning of
competence in the context of the company being audited. The Board did
not intend to impose a higher standard of competence beyond having the
knowledge, skill, and ability to enable the auditor to perform the
assigned activities in accordance with applicable professional and
legal requirements. The Board therefore changed ``expertise'' to
``proficiency'' in the final requirement in response to comments.
Nevertheless, the Board continues to believe that understanding the
company's business and being proficient in the rules and regulations
relevant to the company under audit and its related industry is an
important part of competence. For example, an engagement partner with
significant experience mostly in auditing manufacturing companies may
not necessarily have the appropriate level of competence to oversee,
and have primary responsibility for, an audit of a financial
institution.
b. Developing and Maintaining Competence
The Board also proposed to require that the auditor develop and
maintain competence through an appropriate combination of academic
education; professional experience in accounting and auditing with
proper supervision; and training, including accounting, auditing,
independence, ethics, and other relevant continuing professional
education. Existing AS 1010 includes a similar requirement.
Investor-related groups advocated for the inclusion of investor-
related training that focuses on investors as the primary beneficiaries
of the audit and being responsive to investors' needs. These commenters
also emphasized the importance of including the auditor's understanding
of the business and industry related to the company under audit as part
of developing competence. One investor-related group suggested specific
training on materiality.
The Board retained the requirement to develop and maintain
competence as proposed. The Board agrees with investor-related groups'
views on the importance of protecting investors when conducting an
audit. In that regard, paragraph .01 of the final standard and the
Board's related discussion provide the context of investor protection
that is relevant to the auditor's compliance with the requirements for
developing and maintaining competence. Further, in considering
commenters' suggestion about investor-focused training, the Board
believes that the implementation of the final standard will necessarily
involve training auditors on the application of the relevant
requirements, including conducting an audit with investor protection in
mind.
The note to paragraph .07 of the final standard reinforces the need
for auditors to have knowledge and proficiency in the requirements
relevant to the company being audited and the related industry.
Further, the auditor's responsibilities for understanding the company's
business and consideration of materiality in planning and performing an
audit are specifically addressed in other PCAOB auditing standards,\44\
and the Board expects that these responsibilities would already be
included in training on auditing standards.
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\44\ See AS 2110 and AS 2105, Consideration of Materiality in
Planning and Performing an Audit.
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4. Due Professional Care, Including Professional Skepticism
i. Due Professional Care
See Paragraphs .09 Through .10 of the New Standard
The Board proposed to require the auditor to exercise due
professional care in all matters related to the audit. The proposed
standard stated that due professional care (i) concerns what the
auditor does and how well the auditor does it, and (ii) means acting
with reasonable care and diligence, exercising professional skepticism,
acting with integrity, and complying with applicable professional and
legal requirements. The proposed requirement was based on the existing
requirement in AS 1015 to exercise due professional care.
The proposing release explained that exercising due professional
care ``in all matters related to the audit'' would encompass all
aspects of planning and performing an audit, including client
acceptance and continuance procedures, and would extend to periods
after the issuance of the auditor's report, such as completion of audit
documentation,\45\ reporting on Form AP, Auditor Reporting of Certain
Audit Participants,\46\ and procedures performed in connection with
filings under the federal securities statutes.\47\ The Board also
proposed to retain language from existing standards related to an
auditor's use of the work of other auditors, which emphasized that
other auditors are responsible for performing their work with due
professional care.\48\
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\45\ See AS 1215.15 (as proposed to be amended).
\46\ See PCAOB Rule 3211, Auditor Reporting of Certain Audit
Participants.
\47\ See AS 4101, Responsibilities Regarding Filings Under
Federal Securities Statutes, which describes the auditor's
responsibilities when the auditor's report is included in filings
under federal securities statutes.
\48\ See Planning and Supervision of Audits Involving Other
Auditors and Dividing Responsibility for the Audit with Another
Accounting Firm, PCAOB Rel. No. 2022-002 (June 21, 2022) (amendments
approved by the SEC in Rel. No. 34-95488 (Aug. 12, 2022)), which
amended AS 1015 to add this provision.
---------------------------------------------------------------------------
Some commenters acknowledged that due professional care is an
important principle that should be retained in the final standard.
Several commenters expressed support for requiring auditors to exercise
due professional care ``in all matters related to the audit.''
Some commenters, primarily some firms, advocated for retaining
certain contextual language from AS 1015.03-.04, including, for
example, the description of due professional care in the 1932 legal
treatise, Cooley on Torts.\49\ These commenters expressed concern that
without such language there may be a lack of transparency, or confusion
among investors and other stakeholders, about the limitations of due
professional care.
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\49\ The treatise states, among other things, that ``no man,
whether skilled or unskilled, undertakes that the task he assumes
shall be performed successfully, and without fault or error; he
undertakes for good faith and integrity, but not for infallibility,
and he is liable to his employer for negligence, bad faith, or
dishonesty, but not for losses consequent upon pure errors of
judgment.''
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After considering comments, the Board adopted the requirement to
exercise due professional care as proposed. The Board continues to
believe that the description of due professional care in the final
standard is consistent with the description in AS 1015.03 (and the
reference in the current standard to the legal treatise, Cooley on
Torts), which uses the terms ``reasonable care and diligence'' and
``good faith and integrity but not infallibility'' to describe due
care. As discussed in the proposal, the Board retained explicit
reference to ``reasonable care and diligence,'' which the Board
believes is well understood. The Board also believes that ``good faith
[[Page 49741]]
and integrity'' means acting with ``integrity.'' The Board's use of the
term ``integrity'' aligns with its meaning established in EI 1000,
which the Board adopted in connection with the Quality Control
rulemaking. EI 1000 codifies the concepts of integrity and objectivity,
emphasizing that integrity includes being honest and candid, not
knowingly or recklessly misrepresenting facts, and not subordinating
judgment.\50\ The Board believes that the terms used to describe due
professional care are clear and should not cause confusion, as
suggested by some commenters, because the Board did not change the
meaning of due professional care.
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\50\ See also PCAOB Rel. No. 2024-005.
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The proposed standard specified that, for engagement partners, due
professional care also includes (i) appropriately assigning
responsibilities to, and supervising, engagement team members; (ii)
determining that the audit is properly planned and performed to obtain
reasonable assurance; (iii) evaluating that significant findings or
issues are appropriately addressed; (iv) determining that significant
judgments and conclusions on which the auditor's report is based are
appropriate and supported by sufficient appropriate audit evidence; and
(v) determining that required communications under applicable
professional and legal requirements have been made.
The proposed clarifications of the engagement partner's
responsibilities leveraged existing requirements for planning and
performing an audit and for completing the corresponding audit
documentation. For example, AS 1215 describes matters that are
considered to be significant findings or issues in an audit and
requires the auditor to document the significant findings or issues,
including the actions taken to address them.\51\ As part of the
engagement partner's supervisory responsibilities under AS 1201, the
proposal stated that the engagement partner would need to evaluate (in
a timely manner) the significant findings and issues identified by the
engagement team to ensure appropriate action was taken.\52\
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\51\ See AS 1215.12.
\52\ See AS 1201.05.
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Similarly, the proposal stated that significant judgments made by
the engagement team, which AS 1220 specifically requires the EQR to
review, also warrant the engagement partner's review. Because the
engagement partner has primary responsibility for the engagement, they
have primary responsibility for the significant judgments made during
the engagement, notwithstanding any involvement in or responsibility
for those judgments by firm personnel outside of the engagement team,
such as members of the firm's national office. Accordingly, the
``significant judgments made by the engagement team'' include all of
the significant judgments made during the engagement.\53\ The proposed
standard aligned the engagement partner's supervisory and review
activities with existing auditor responsibilities.
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\53\ See Auditing Standard No.7--Engagement Quality Review and
Conforming Amendment to the Board's Interim Quality Controls
Standards, PCAOB Rel. No. 2009-004 (July 28, 2009), at 4 n.7.
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A few commenters addressed the proposed requirement regarding the
engagement partner's responsibilities for exercising due professional
care. One commenter recommended separating the partner's
responsibilities from the broader requirement to exercise due
professional care. Another commenter expressed concern that, as
presented, the responsibilities of the engagement partner could be
viewed as a substitute for the broader responsibilities applicable to
all auditors. This commenter suggested emphasizing in the final
standard that for engagement partners, the responsibilities are in
addition to those required for all auditors.
Several commenters also suggested clarifications to the proposed
requirements. For example, one commenter suggested that the
requirements be extended to team members performing supervisory
activities. Another commenter pointed to potential inconsistencies with
requirements of AS 1201 and AS 2101, noting that AS 1201 does not
explicitly require the partner to assign activities to team members
that adequately match their levels of competence and allows the partner
to seek assistance from appropriate engagement team members in
fulfilling responsibilities. One commenter recommended adding a
footnote to AS 1220 to the discussion of significant judgments and
conclusions.
In response to commenters, the Board relocated the proposed
engagement partner's responsibility for due professional care into a
separate paragraph in the final standard, with certain clarifications.
Specifically, the Board agrees with commenters' views that the
engagement partner is not required to directly assign responsibilities
to all engagement team members (e.g., audit staff at other accounting
firms involved in the audit). Nevertheless, consistent with AS 1015.06,
the engagement partner is responsible for the appropriate assignment of
tasks to, and supervision of, engagement team members. As such, the
final standard states that the engagement partner's responsibility for
due professional care includes ``being responsible for the appropriate
assignment of responsibilities to, and supervision of, engagement team
members.'' This formulation acknowledges that in certain audit
engagements, such as large, multi-tiered audits, the engagement partner
may not be directly assigning work to engagement team members. Instead,
other engagement team members performing supervisory activities may
assist the engagement partner and inform engagement team members of
their responsibilities.\54\
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\54\ See AS 1201.05.
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The Board believes that relocating the engagement partner's
responsibility for due professional care into a separate paragraph
helps draw a distinction between the responsibilities applicable to all
auditors and those that are incremental for engagement partners. To
clarify this further, the Board added ``also'' to the requirement in
paragraph .10 to indicate that the engagement partner responsibilities
for due professional care are in addition to those applicable to all
auditors. The Board did not expand the applicability of the engagement
partner responsibilities described in AS 1000 to other members of the
engagement team performing supervisory activities because, as discussed
above, the intent of this requirement is to focus the engagement
partner on exercising due professional care as the person with the
primary responsibility for the engagement and its performance. As
suggested by one commenter, the Board added a footnote to the final
standard referencing AS 1220 for the discussion of significant
judgments and conclusions. The Board adopted the remaining provisions
of the requirement as proposed.
ii. Description of Professional Skepticism
See Paragraph .11 of the New Standard
The proposed standard stated that exercising due professional care
includes exercising professional skepticism in conducting an audit, and
described professional skepticism as an attitude that includes a
questioning mind and a critical assessment of information related to
the audit. This requirement is based on the existing auditor
responsibility to exercise professional skepticism in AS 1015. The
Board emphasized in the proposal that
[[Page 49742]]
application of professional skepticism extends beyond the information
used as audit evidence, which is described in AS 1105.02 as the
information ``that is used by the auditor in arriving at conclusions on
which the auditor's opinion is based.'' For example, by exercising
professional skepticism in the preparation of Form AP, the auditor may
become aware of inconsistencies in total audit hours reported by
another accounting firm participating in the audit based on the level
of work assigned to that accounting firm and take corrective action.
An investor-related group supported the proposed description of
professional skepticism to include a critical assessment of information
related to the audit. In contrast, a number of other commenters, mostly
firms, expressed concern about the proposed change in the description
of professional skepticism from a critical assessment of ``audit
evidence'' to ``information related to the audit,'' stating that this
language is overly broad and its meaning unclear. Some of these
commenters noted that, unlike with audit evidence, there is no
established framework for auditors to assess information related to the
audit and it is unclear what such an assessment would entail. Many of
these commenters advocated for retaining the extant description of
professional skepticism in AS 1015.07, which includes ``a critical
assessment of audit evidence.''
Some commenters offered additional explanation or suggestions, for
example:
<bullet> One commenter indicated they were unable to identify
information, other than Form AP data, that would be considered
``information related to the audit'' that is not already part of
``audit evidence.'' This commenter and another recommended specifically
incorporating Form AP data into the requirement.
<bullet> One commenter indicated the proposed language could risk
including information related to the audit that was never presented to
the auditor. This commenter suggested retaining reference to ``audit
evidence'' and including a reference to information obtained to comply
with rules of the Board.
<bullet> Another commenter recommended retaining the reference to
``audit evidence'' because this concept is supplemented by the
requirements in proposed paragraph .11 and by the overarching
responsibility to exercise due professional care in relation to all
matters related to the audit (including the preparation of Form AP).
Several commenters offered other views related to the description
of professional skepticism. For example, one commenter stated that the
difference between ``critical assessment of information related to the
audit'' and ``objective evaluation of evidence obtained in an audit''
in proposed paragraph .11 is unclear. This commenter suggested
combining proposed paragraphs .10 and .11 or providing further
guidance, including guidance that is aligned with other standard
setters. Another commenter questioned the assumption in the proposed
standard that all auditors can exercise professional skepticism
consistently for the duration of the audit, pointing to a lack of
research.
After consideration of comments, the Board revised the description
of professional skepticism. The final standard describes professional
skepticism as ``an attitude that includes a questioning mind and a
critical assessment of audit evidence and other information that is
obtained to comply with PCAOB standards and rules.'' While the Board
agrees with commenters that information related to the audit that is
obtained by the auditor is generally audit evidence, the Board
continues to believe that the exercise of professional skepticism in an
audit extends beyond the evaluation of the sufficiency and
appropriateness of audit evidence. Professional skepticism is an
attitude held by the auditor throughout the audit process. For example,
AS 2401, Consideration of Fraud in a Financial Statement Audit,
provides that professional skepticism requires an ongoing questioning
of whether the information and evidence obtained suggests that a
material misstatement due to fraud has occurred.\55\ The revised
description in AS 1000 retains the extant reference to ``critical
assessment of audit evidence'' but also, as suggested by one commenter,
refers to information obtained by the auditor to comply with PCAOB
standards and rules, such as information to complete Form AP. The Board
believes that the revised description will provide auditors with a
clear framework for exercising professional skepticism and aligns with
the auditor's obligation to exercise due professional care, which
applies to all matters related to the audit.
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\55\ See AS 2401.13.
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As suggested by one commenter, the final standard also combines in
paragraph .11 the description of professional skepticism (proposed
paragraph .10) with the description of what exercising professional
skepticism entails (proposed paragraph .11) discussed below. The Board
believes this unified paragraph will provide better context for the
application of professional skepticism.
iii. Exercise of Professional Skepticism
See Paragraph .11 of the New Standard
The proposed standard described several factors involved in the
exercise of professional skepticism, which were largely consistent with
extant requirements. Under the proposed standard, the auditor's
exercise of professional skepticism included:
<bullet> Objective evaluation of evidence obtained in an audit
(including information that supports and corroborates management's
assertions regarding the financial statements or internal control over
financial reporting and information that contradicts such assertions),
and consideration of the sufficiency and appropriateness (i.e.,
relevance and reliability) of that evidence;
<bullet> Remaining alert to conditions that may indicate possible
misstatement due to error or fraud;
<bullet> Not relying on evidence that is less than persuasive;
<bullet> Not assuming that management is honest or dishonest; and
<bullet> Consideration of potential bias on the part of management
and the auditor.
Some commenters provided views on specific aspects of the factors
involved in the auditor's exercise of professional skepticism. The
comments and related responses are discussed in more detail below.
Objectively evaluating evidence. One commenter suggested requiring
the auditor to search for contradictory evidence. Another commenter
stated that the proposed description did not sufficiently address
professional skepticism in obtaining audit evidence and instead focused
only on evaluating the evidence. One commenter stated that the proposed
description was unclear and suggested using more direct language,
including requiring the auditor to be more neutral in the assessment
(e.g., evaluating evidence that both supports assertions and evidence
that does not).
The intent of paragraph .11a of AS 1000 is not to alter the
responsibilities for obtaining and evaluating evidence addressed in AS
1105, but to remind auditors of their responsibility to exercise
professional skepticism in connection with both obtaining and
evaluating audit evidence. As discussed in the proposal, sufficient
appropriate audit evidence is necessary to support the auditor's
opinion. While primarily obtained from audit procedures performed
during the audit, audit evidence may also include information
[[Page 49743]]
obtained from other sources such as previous audits, and client
acceptance or continuance procedures. The exercise of professional
skepticism is particularly important in obtaining and evaluating audit
evidence when responding to assessed risks of material misstatement,
including fraud risks.
Audit evidence consists of both information that supports and
corroborates management's assertions and information that contradicts
such assertions.\56\ The auditor's appropriate application of
professional skepticism includes critically assessing this information
and should result in procedures that are focused on obtaining evidence
that is more relevant and reliable,\57\ such as evidence obtained
directly by the auditor and evidence obtained from independent,
knowledgeable sources. Further, if audit evidence obtained from one
source is inconsistent with audit evidence obtained from another, the
auditor is required to perform the audit procedures necessary to
resolve the matter and should determine the effect, if any, on other
aspects of the audit.\58\
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\56\ See AS 1105.02. A new footnote has been added to AS
1000.11a, referring to AS 1105 for the discussion of management's
assertions regarding the financial statements and internal control
over financial reporting, and the proposed phrase ``regarding the
financial statements or internal control over financial reporting''
has been deleted from paragraph .11a.
\57\ See AS 1105.07-.08.
\58\ See AS 1105.29.
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Professional skepticism is important in all aspects of the audit,
particularly in those areas of the audit that involve significant
management judgments or transactions outside the normal course of
business. It is ultimately the responsibility of each individual
auditor to appropriately apply professional skepticism throughout the
audit, including when (i) identifying and assessing risks of material
misstatement, (ii) performing tests of controls and substantive
procedures, and (iii) evaluating audit results. For example, a lack of
professional skepticism in the risk assessment process could result in
an auditor not identifying or assessing risks appropriately, which
could impact the effectiveness of the audit.
Remaining alert to conditions that may indicate possible
misstatement due to fraud. The Board did not receive significant
comments in this area. As part of exercising professional skepticism,
the auditor remains alert to conditions that may indicate possible
misstatement due to error or fraud. This includes, for example, being
alert to information that calls into question the reliability of
documents and responses to inquiries the auditor plans to use as audit
evidence. Such information could identify conditions that may indicate
possible fraud or error in the financial statements. As discussed
above, AS 2401 provides further requirements regarding potential fraud
risk factors.
Not relying on evidence that is less than persuasive. One commenter
stated that the proposed phrase ``not rely'' appears to be more
restrictive than the existing phrase ``not be satisfied with'' in AS
1015.09 because the proposed phrase would preclude the auditor from
placing any reliance on anything less than completely persuasive
evidence, even in combination with other persuasive evidence.
The proposed phrase ``not rely'' was intended to convey that,
consistent with AS 1015.09, exercising professional skepticism involves
seeking evidence that is more persuasive rather than settling on
evidence that may be less so. AS 1000 is not intended to address the
sufficiency and appropriateness of evidence. To avoid confusion, the
final standard retains the existing terminology from AS 1015 as ``not
being satisfied with evidence that is less than persuasive.'' The
requirements for obtaining audit evidence, including evaluating its
relevance and reliability, are discussed in AS 1105, which provides
that the quantity of audit evidence needed is affected by both the risk
of material misstatement and the quality of the evidence obtained
(i.e., its relevance and reliability). To supplement evidence that is
less relevant or obtained from a less reliable source, an auditor would
need to gather additional evidence. The appropriate application of
professional skepticism focuses the auditor on seeking the best
evidence reasonably obtainable.
Not assuming that management is honest or dishonest. An investor-
related group referenced certain views expressed in the 2000 report by
the Public Oversight Board's Panel on Audit Effectiveness.\59\ That
report recommended that auditing standards require forensic-type
fieldwork in which auditors would ``modify the otherwise neutral
concept of professional skepticism and presume the possibility of
dishonesty at various levels of management, including collusion,
override of internal control and falsification of documents.'' \60\ The
Board believes that establishing a presumption of management's
dishonesty would have broader implications beyond the exercise of
professional skepticism under this standard.
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\59\ See Public Oversight Board, The Panel on Audit
Effectiveness Report and Recommendations (Aug. 31, 2000).
\60\ Id. at 88-89.
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Consideration of potential bias on the part of management and the
auditor. Several commenters expressed concern that the obligations
related to consideration of the auditor's own bias were unclear or
could be viewed as a requirement to seek contradictory evidence. Some
of these commenters noted that consideration of auditor bias is
inherent in the requirements for evaluating audit evidence under AS
1105 and suggested deleting the reference to ``and the auditor'' from
proposed paragraph .11e. One commenter suggested aligning this concept
with the approach used by the AICPA in their revised audit evidence
standard. Two commenters also questioned the nature and extent of
documentation necessary to demonstrate consideration of auditor bias.
One investor-related group advocated for requiring the auditor to
affirmatively consider the risk of bias, particularly confirmation
bias, arising out of the financial relationship between management and
the auditor.
The Board continues to believe that it is important to include
reference to auditor bias in connection with exercising professional
skepticism because certain conditions inherent in the audit environment
create incentives and pressures that could impede the appropriate
application of professional skepticism and allow unconscious bias to
influence decisions. Examples of these incentives and pressures include
avoiding significant conflicts with management, providing an
unqualified audit opinion prior to the company's filing deadline,
achieving high client satisfaction ratings, keeping audit costs low, or
cross-selling other services.
As discussed in the proposal, it is important for the auditor, as
part of exercising professional skepticism, to consider the impact of
management bias and the auditor's own bias that could affect the
auditor's judgments. For example, the tendency to seek confirming
information can lead the auditor to seek audit evidence that is only
consistent with management's explanations, or to favor conclusions that
are consistent with the auditor's initial beliefs or conclusions
reached in prior year audits. In exercising professional skepticism,
the auditor could mitigate such potential bias by being aware of
``confirmation bias,'' considering alternatives provided by others, and
being aware of contradictory
[[Page 49744]]
information.\61\ Auditors and management may also have biases related
to electronic information (e.g., a belief that electronic information
is either always reliable or inherently prone to error). For example, a
tendency to favor output generated from automated systems, even when
contradictory information raises questions as to whether such output is
reliable, illustrates a form of bias. Exercising professional
skepticism, including critically assessing information related to the
audit, helps the auditor address the effects of potential bias on
professional judgment and decision-making. It is important to clarify,
however, that the consideration of potential bias discussed above does
not change the auditor's responsibilities for evaluating contradictory
evidence, as suggested by some commenters.
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\61\ For a discussion of confirmation bias, see, e.g., Raymond
S. Nickerson, Confirmation Bias: A Ubiquitous Phenomenon in Many
Guises, 2 Review of General Psychology 175 (1998).
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Finally, the Board did not add new documentation requirements for
demonstrating the auditor's exercise of professional skepticism beyond
those addressed in AS 1215. Auditors can demonstrate that their work
encompassed the exercise of professional skepticism by documenting the
procedures performed and conclusions reached in accordance with AS
1215.
After consideration of the comments, the Board adopted the
provisions for exercising professional skepticism substantially as
proposed, with the modifications discussed above.
5. Professional Judgment
See Paragraph .12 of the New Standard
Auditors exercise professional judgment throughout the audit, and
existing standards refer to the use of professional judgment, but do
not describe in detail what professional judgment means. The proposed
standard provided that the auditor must exercise professional judgment
and included a description of professional judgment. As discussed in
the proposing release, auditors exercise professional judgment
throughout the audit. For example, the auditor exercises professional
judgment in:
<bullet> Determining the areas to be tested and the nature, timing,
and extent of the tests to be performed;
<bullet> Interpreting the results of audit testing and evaluating
audit evidence;
<bullet> Evaluating the reasonableness of accounting estimates in
significant accounts and disclosures, based on information that could
reasonably be expected to be available through the date of the
auditor's report; \62\
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\62\ See AS 2501, Auditing Accounting Estimates, Including Fair
Value Measurements, which discusses the auditor's responsibility to
obtain sufficient appropriate evidence to determine whether
accounting estimates in significant accounts and disclosures are
properly accounted for and disclosed in the financial statements.
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<bullet> Determining if there are any CAMs in the audit of the
financial statements; \63\ and
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\63\ See AS 3101 for requirements regarding CAMs.
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<bullet> Determining the nature and extent of documentation to
comply with documentation requirements.\64\
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\64\ See AS 1215 for documentation requirements.
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As proposed, professional judgment involved applying relevant
training, knowledge, and experience to make informed decisions and
reach well-reasoned conclusions about the courses of action that are
appropriate in the circumstances such that the audit is planned and
performed, and the report or reports are issued, in accordance with
applicable professional and legal requirements.
Several commenters, primarily firms, expressed concern that the
proposed description of professional judgment could be interpreted as
imposing a new strict liability requirement. These commenters suggested
removing the phrase ``such that the audit is planned and performed, and
the report or reports are issued, in accordance with applicable
professional and legal requirements'' in the description, noting that a
deficiency in an auditor's compliance with applicable professional and
legal requirements should not, by default, indicate a failure to
exercise appropriate professional judgment. In the view of these
commenters, this implication would be contrary to the established
interpretation of an auditor's responsibilities, which recognizes that
reasonable observers may disagree regarding whether applicable
standards were complied with while agreeing that the matter in question
was within the purview of the auditors' professional judgment and could
result in hindsight challenges of auditors' judgments.
One commenter recommended that the description of professional
judgment refer to ``sound'' judgment, consistent with the description
used by the International Ethics Standards Board for Accountants
(``IESBA'').\65\ Another commenter asked for clarification of the
concept of ``well-reasoned conclusions,'' noting potential differences
with the definition of professional judgment established by other
standard setters. Two commenters advocated for the establishment of a
judgment framework by the Board. One commenter stated that they heard
auditors express the need for more clarity about the degree of
documentation necessary to demonstrate their reasoned judgment. Another
commenter suggested adding the concept of materiality to the
description of an auditor's exercise of judgment, based on the
description of judgment in AS 2815.04 with regard to the auditor's
opinion on financial statements.
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\65\ See IESBA, Handbook of the International Code of Ethics for
Professional Accountants (2023), Subsection 113--Professional
Competence and Due Care, at 113.1 A1 (``Serving clients and
employing organizations with professional competence requires the
exercise of sound judgment in applying professional knowledge and
skill when undertaking professional activities.'').
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The proposed phrase ``such that the audit is planned and performed,
and the report or reports are issued, in accordance with applicable
professional and legal requirements'' was meant to provide context to
the application of professional judgment and was not intended to
introduce a strict liability requirement. After considering the
comments received, the Board removed this phrase in the final
description of professional judgment. The Board continues to believe
that it is important to clarify that the use of professional judgment
does not allow for an arbitrary exercise of discretion. While
conclusions could vary, auditors are required to apply relevant
training, knowledge, and experience to make informed decisions and
reach well-reasoned conclusions about the courses of action that are
appropriate in the circumstances. Therefore, the Board added a note to
paragraph .12 to clarify that professional judgment is applied in the
context of conducting an audit with due professional care in accordance
with applicable professional and legal requirements. The Board believes
that this note properly frames the exercise of professional judgment
without implying that a deficiency in an auditor's compliance with
applicable professional and legal requirements would by default also
indicate a failure to exercise appropriate professional judgment.
The Board did not change the description of professional judgment
to include ``sound judgment'' as the Board believes that term is
redundant with the phrase ``well-reasoned.'' The phrase ``well-
reasoned,'' used in the context of an auditor exercising professional
judgment and reaching conclusions, is clear because it refers to
judgment made and conclusions reached that are based on logical
thinking and an analysis of relevant information.
As discussed earlier, the auditor is required to exercise due
professional care in all matters related to the audit. The concept of
the auditor's exercise of
[[Page 49745]]
professional judgment is rooted in conducting the audit with due
professional care. Therefore, the Board retained the phrase ``well-
reasoned'' as proposed. Regarding the degree of documentation related
to professional judgment, the auditor is expected to comply with
documentation requirements of AS 1215, which includes requirements for
considering the nature and extent of documentation needed.
The Board believes that creating a ``framework'' for how auditors
should exercise their professional judgment, as suggested by some
commenters, would be beyond the scope of this project. The Board
further believes it is better for auditors to adhere to overarching
principles and standards that mandate the exercise of professional
judgment in connection with conducting an audit with due professional
care. This approach acknowledges the multifaceted nature of audits and
allows auditors to exercise their professional judgment in the unique
circumstances of each audit engagement.
6. Conducting an Audit
i. Auditor and Management Responsibilities
See Paragraph .13 of the New Standard
The Board proposed to require the auditor to plan and perform the
audit to obtain sufficient appropriate audit evidence to (a) obtain
reasonable assurance about whether: (1) in an audit of financial
statements, the financial statements are free of material misstatement,
whether due to error or fraud, or (2) in an audit of ICFR, material
weaknesses exist as of the date specified in management's assessment;
and (b) provide the auditor with a reasonable basis for forming an
opinion. This requirement was retained from AS 1001 and AS 1015 but
expanded to cover an audit of ICFR. The Board also proposed to include
a note to the requirement that clarified the distinction between the
responsibilities of the auditor and those of management, and to expand
those responsibilities to include an audit of ICFR. Specifically, the
note stated that in an audit of financial statements, the financial
statements are management's responsibility and the auditor's
responsibility is to express an opinion on the financial statements. In
an audit of ICFR, management is responsible for maintaining effective
ICFR and for assessing the effectiveness of ICFR, and the auditor's
responsibility is to express an opinion on the effectiveness of the
company's ICFR.
Several commenters discussed the importance of clearly
distinguishing the responsibilities of the auditor from those of
management and suggested retaining the corresponding language from AS
1001.02-.03. For example, one commenter observed that some investors
may mistakenly believe that the auditor drafts the financial
statements. In the view of this commenter, stating that management is
``responsible'' for the financial statements may be interpreted as a
legal responsibility and does not explicitly convey that management
prepares the financial statements.
The Board retained the requirement substantially as proposed. In
response to commenters, the Board updated the language in the note to
clarify that the financial statements, ``including their preparation,''
are the responsibility of management and that management is responsible
for ``establishing and maintaining'' effective ICFR.
ii. Reasonable Assurance
See Paragraph.14 of the New Standard
The Board proposed to retain the concept of reasonable assurance
from AS 1015. Specifically, the proposed standard stated that
reasonable assurance is a high level of assurance and is obtained by
reducing audit risk to an appropriately low level through the
application of due professional care, including in obtaining sufficient
appropriate audit evidence.\66\ The auditor is able to obtain
reasonable, but not absolute, assurance that (1) misstatements are
detected that, individually or in combination, would result in material
misstatement of the financial statements; and (2) in an audit of ICFR,
material weaknesses are detected.
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\66\ See paragraph .03 of AS 1101, Audit Risk.
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Commenters generally supported retaining the concept of reasonable
assurance but provided views on its proposed description. A number of
commenters, primarily firms, recommended that the Board retain certain
statements from AS 1015.10-.13 (or similar language) that describe the
limitations of an audit. These statements include:
<bullet> Absolute assurance is not attainable because of the nature
of audit evidence and the characteristics of fraud. Therefore, an audit
conducted in accordance with the standards of the PCAOB may not detect
a material weakness in internal control over financial reporting or a
material misstatement to the financial statements.\67\
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\67\ See AS 1015.10.
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<bullet> Even with good faith and integrity, mistakes and errors in
judgment can be made . . . . . [I]n the great majority of cases, the
auditor has to rely on evidence that is persuasive rather than
convincing.\68\
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\68\ See AS 1015.11.
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<bullet> Because of the characteristics of fraud, a properly
planned and performed audit may not detect a material misstatement.\69\
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\69\ See AS 1015.12.
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<bullet> [T]he auditor is not an insurer and his or her report does
not constitute a guarantee. Therefore, the subsequent discovery that
either a material misstatement, whether from error or fraud, exists in
the financial statements or a material weakness in internal control
over financial reporting exists does not, in and of itself, evidence
(a) failure to obtain reasonable assurance, (b) inadequate planning,
performance, or judgment, (c) the absence of due professional care, or
(d) a failure to comply with the standards of the PCAOB.\70\
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\70\ See AS 1015.13.
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A few of these commenters also pointed to the characterization of
reasonable assurance in the standards of other standard setters (e.g.,
ISA 200).\71\ These commenters generally expressed concern that without
such language, the proposal would reduce transparency and contribute to
the expectation gap among investors and other stakeholders regarding
the nature of reasonable assurance (as compared to absolute assurance).
For example, one commenter stated that the elimination of the existing
clarifying language could also result in ambiguity as to whether a new
level of assurance would be expected, beyond reasonable assurance but
less than absolute assurance.
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\71\ Paragraph 13(m) of ISA 200 defines reasonable assurance as
``in the context of an audit of financial statements, a high, but
not absolute, level of assurance.'' Paragraph 5 of ISA 200 further
describes that reasonable assurance ``is obtained when the auditor
has obtained sufficient appropriate audit evidence to reduce audit
risk (that is, the risk that the auditor expresses an inappropriate
opinion when the financial statements are materially misstated) to
an acceptably low level. However, reasonable assurance is not an
absolute level of assurance, because there are inherent limitations
of an audit which result in most of the audit evidence on which the
auditor draws conclusions and bases the auditor's opinion being
persuasive rather than conclusive.''
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Some commenters offered other clarifications. For example, two
commenters suggested retaining certain language from AS 1001.02, which
states that the auditor has no responsibility to plan and perform the
audit to obtain reasonable assurance that misstatements, whether caused
by errors
[[Page 49746]]
or fraud, that are not material to the financial statements are
detected. One of these commenters also acknowledged that identifying
limitations on the auditor's responsibilities should not be the main
focus of the standard. One commenter recommended that the final
standard include guidance on determining whether audit risk is reduced
to an appropriately low level, including a requirement to consider
changes in technology, the nature and quality of an issuer's financial
reporting system, relevant academic and other research, and any other
factor that can reduce the risk of material misstatements or fraud.
As discussed further below, the Board retained the description of
reasonable assurance as proposed with some modifications. The concept
of ``reasonable assurance'' is not new. Reasonable assurance refers to
the auditor's degree of satisfaction that the evidence obtained during
the audit supports the assertions of the financial statements. It is a
high level of assurance and is obtained by reducing audit risk to an
appropriately low level (i.e., the risk that the auditor expresses an
inappropriate audit opinion when the financial statements are
materially misstated or in an audit of ICFR, when a material weakness
exists) through applying due professional care, including obtaining
sufficient appropriate audit evidence.\72\ AS 1101 discusses audit risk
and the relationships among the various components of audit risk in an
audit of financial statements. The Board retained a reference to AS
1101 in the final standard and added the description of the term
``audit risk.'' The Board believes that additional guidance on
consideration of audit risk, as suggested by one commenter, is outside
the scope of this standard. If additional guidance is necessary
regarding the auditor's assessment of and response to the risks of
material misstatement in an audit, it would be provided in connection
with the Board's risk assessment standards.\73\
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\72\ See AS 1101.03-.04.
\73\ See, e.g., AS 1101, AS 2101, AS 2105, AS 2110, and AS 2301.
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The Board did not change the meaning of reasonable assurance or the
requirement to obtain reasonable assurance. In consideration of
comments received, the Board emphasized in the final requirement that
reasonable assurance is not absolute assurance. As observed by some
commenters, absolute assurance is not attainable because of the nature
of audit evidence (e.g., selective testing involving professional
judgments \74\ regarding the nature, timing, and extent of procedures
to be performed; and inherent uncertainty of accounting estimates), and
the characteristics of fraud (e.g., falsified company documentation).
In many cases, the auditor has to rely on evidence that is persuasive
rather than convincing. Because the Board did not change the meaning of
reasonable assurance, the Board believes that further explanation of
the difference between reasonable assurance and absolute assurance is
not needed in the final standard.
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\74\ The discussion above describes requirements for exercising
professional judgment.
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The Board did not retain additional descriptions of the inherent
limitations of an audit from AS 1015.10-.13. The Board believes that
these matters are part of the differences between reasonable and
absolute assurance discussed above or addressed elsewhere in PCAOB
standards. Although a properly planned and performed audit may not
detect a material misstatement because of the characteristics of fraud,
that does not diminish the auditor's responsibility to plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or
fraud.
iii. Compliance With Applicable Professional and Legal Requirements
See Paragraph .15 of the New Standard
The Board proposed to require that the auditor comply with
applicable professional and legal requirements in conducting the audit.
As discussed above, the term ``applicable professional and legal
requirements'' was proposed to have the same meaning as defined in
proposed QC 1000. Under existing provisions, auditors are required to
comply with PCAOB standards and rules. The proposed requirement
emphasized that the overall objective of the auditor is achieved by
complying with more than just the standards of the PCAOB. This includes
compliance with requirements of Section 10A of the Exchange Act related
to illegal acts, related party transactions, and an evaluation of
whether there is substantial doubt about the ability of the company to
continue as a going concern.\75\ The proposed requirement also stated
that, in fulfilling these requirements, the auditor should keep in mind
its role in protecting investors.
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\75\ 15 U.S.C. 78j-1.
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One commenter on this proposed paragraph stated that the term
``applicable professional and legal requirements'' appears to exceed
the Board's authority, citing Sections 104 and 105 of Sarbanes-Oxley
and urged that the Board replace it with ``PCAOB rules and standards.''
Two other commenters noted that applicable professional and legal
requirements could be read broadly as a wide range of laws and
regulations that do not directly bear on the conduct of audit
engagements. Another commenter recommended adding clarifying language
in the release to state that although the auditor is expected to comply
with applicable legal requirements, the auditor is not expected to have
the expertise of a lawyer or to express opinions on matters of law.
The Board disagrees with the commenter's assertions regarding the
Board's authority, which extends beyond PCAOB rules and standards. For
example, Section 105(c)(4) of Sarbanes-Oxley empowers the Board to
sanction a registered firm and its associated persons for violations
not only of PCAOB rules and standards but also violations of ``the
provisions of the securities laws relating to the preparation and
issuance of audit reports and the obligations and liabilities of
accountants with respect thereto, including the rules of the Commission
issued under [the] Act[.]''
As discussed above, the final standard includes a definition of the
term ``applicable professional and legal requirements'' rather than a
reference to the definition in QC 1000. The definition that was
proposed in the QC 1000 project has been modified in response to
comments received in that rulemaking, to explicitly mention ethics laws
and regulations. The definition was also refined to limit the breadth
of the term, by clarifying that it encompasses statutory, regulatory,
and other legal requirements beyond professional standards and other
PCAOB rules ``[t]o the extent related to the obligations and
responsibilities of accountants or auditors in the conduct of
engagements or in relation to the quality control system.'' The Board
believes that further changes to this term in the final standard are
not necessary.
As discussed above, the Board changed ``expertise'' to
``proficiency'' in the final description of competence in response to
comments. While the Board does not expect auditors to have the
expertise of a lawyer, the Board believes that understanding the
company's business and being proficient in the rules and regulations
relevant to the company under audit and the related industry is
important.
[[Page 49747]]
Some commenters also stated that the requirement for auditors to
``keep in mind their role in protecting investors'' when fulfilling the
requirement to comply with applicable professional and legal
requirements was unclear, including how to apply such a requirement. As
discussed above, investor-related groups suggested including the
language from the Arthur Young opinion to describe the auditor's
responsibility. Other commenters suggested that the proposed reference
to the auditor's role in protecting investors be deleted from the final
requirement or reframed. One commenter pointed to research noting that
encouraging auditors to adopt an investor perspective when making
judgments may be detrimental to audit quality.\76\
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\76\ This commenter cited two research papers: (i) Altiero,
Kang, and Peecher (2022) ``show that auditors prompted to take an
investor perspective are less likely to assess a misstatement as
material'' and (ii) Dong, Wang, and Chien (2022) ``highlight that
taking an investor perspective can decrease assessed risk of
material misstatement.'' See additional discussion below.
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After considering comments and for the reasons discussed above, the
Board retained the requirement to comply with applicable professional
and legal requirements. The Board removed the reference to ``keep in
mind their role in protecting investors'' from the final standard based
on changes made to paragraph .01 of the final standard. As discussed
earlier, in connection with certain revisions made to the introductory
paragraph of the final standard, the Board added a note to paragraph
.01 to remind auditors that their obligation to protect investors is
important when complying with all requirements of this and other PCAOB
standards and rules.
iv. Relevant Guidance
See Paragraph .15 of the New Standard
The Board also proposed a note to paragraph .15 stating that, as
part of complying with all applicable professional and legal
requirements in conducting the audit, the auditor is required to take
into account relevant guidance applicable to the audit. The proposed
requirement was an extension of the existing requirement in AS 1001.11
that the auditor be aware of and consider auditing interpretations
issued by the AICPA as of 2003, and adopted by the PCAOB and in effect.
Under the proposal, relevant guidance included PCAOB auditing
interpretations, Board-issued guidance, and releases that accompany the
rules and standards of the Board.
Many commenters, mostly firms and firm-related groups, expressed
concern that the proposed note is overly broad and unclear. For
example, some commenters cited a lack of clarity as to (i) the scope of
the Board-issued guidance including whether documents such as concept
releases would be covered; (ii) the timeline in which the requirement
would apply; (iii) the hierarchy of guidance and what types of guidance
would be considered authoritative; and (iv) how to reconcile
potentially conflicting information between proposing and final
releases. These commenters generally suggested either deleting the
note, codifying the relevant guidance to ensure consistent application,
or specifying that relevant guidance includes releases accompanying
``final'' standards. Another commenter also suggested clarifying the
meaning of ``take into account,'' including defining the phrase in
PCAOB Rule 3101.
A few commenters, including an investor-related group, recommended
including relevant guidance within the standard rather than the
accompanying release. Two commenters suggested that the Board consider
restructuring guidance in a manner similar to the application and other
explanatory material, as presented in the AICPA and IAASB standards. An
investor-related group recommended a ``codification'' approach that
would include placing all guidance, interpretations, releases,
amendments, and rules in the same location.
After considering comments received, the Board revised the note as
follows:
<bullet> Replaced the reference to ``relevant guidance'' with
``PCAOB auditing interpretations''; and
<bullet> Replaced a footnote describing the scope of the relevant
guidance with a footnote describing the scope of PCAOB auditing
interpretations.
The note in the final standard provides that, when complying with
PCAOB standards, the auditor is required to also take into account
PCAOB auditing interpretations applicable to the audit. As mentioned
previously, this is an existing requirement that is being carried
forward with modifications. In the final standard, PCAOB auditing
interpretations refer to the PCAOB publications entitled ``Auditing
Interpretations'' as currently in effect.\77\ These interpretations
were originally adopted by the Board in 2003 along with the interim
standards. Since that time, certain of these auditing interpretations
have been and continue to be revised or rescinded in connection with
the other amendments to PCAOB standards. The requirement in the final
standard, as it did previously, relates to the interpretations
currently in effect.
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\77\ PCAOB auditing interpretations do not include independence
interpretations. The requirements to comply with independence
interpretations are covered by PCAOB Rule 3500T, Interim Ethics and
Independence Standards.
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Apart from the PCAOB auditing interpretations referenced in
paragraph .15, the PCAOB also supports the implementation of and
compliance with its standards in many other ways, including providing
guidance in rulemaking releases that accompany standards, amendments,
or rules, or issuing staff guidance.\78\ Although there is no
requirement to follow these guidance documents, the Board continues to
believe that it is important for auditors to pay attention to such
guidance, if relevant, when conducting an audit in accordance with
PCAOB standards because it may help the auditor understand and comply
with complex provisions of those standards or rules. For example, staff
guidance can help auditors better understand how the PCAOB intends to
implement, inspect against, or enforce existing rules and standards.
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\78\ PCAOB staff prepares guidance to assist in the
implementation of PCAOB standards and rules. The typical legend on
such guidance states that the document represents the views of PCAOB
staff and not necessarily those of the Board, and that the document
is not a rule, policy, or statement of the Board. PCAOB staff audit
practice alerts are examples of staff guidance that highlight new,
emerging, or otherwise noteworthy circumstances that may affect how
auditors conduct audits under existing PCAOB standards.
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The phrase ``take into account'' in the rule text is not new. It
has been used previously in PCAOB standards in reference to information
or matters that the auditor should think about or give attention to in
performing an audit procedure or reaching a conclusion.\79\
Accordingly, the results of the auditor's thinking on the relevant
matters should be reflected in the performance and documentation of the
respective audit procedure performed or conclusion reached.
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\79\ See, e.g., AS 3101.12 and AS 2501.
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Lastly, the Board did not consider the ``codification'' approach
because it is out of scope for this project.
v. Audit Documentation
See Paragraph .16 of the New Standard
The Board proposed to require the auditor to prepare audit
documentation in accordance with AS 1215. This requirement was intended
to emphasize the importance of adequate audit documentation to planning
and performing the audit and to the supervision and review of work
performed during the audit. Commenters did not express concerns
[[Page 49748]]
with the documentation requirement, and the Board adopted it as
proposed.
vi. Auditor Communications
See Paragraphs .17 Through .20 of the New Standard
The Board proposed an explicit requirement for the auditor's report
to contain (i) an expression of opinion on the financial statements,
taken as a whole, or an assertion that an opinion cannot be expressed;
and (ii) in an audit of internal control over financial reporting, an
expression of opinion on the effectiveness of the company's internal
control over financial reporting or an assertion that an opinion cannot
be expressed. Under the proposed standard, the auditor would be in a
position to express an unqualified opinion only when the auditor has
performed the audit in accordance with standards of the PCAOB and has
obtained sufficient appropriate audit evidence to conclude that: (i) in
an audit of financial statements, the financial statements, taken as a
whole, are presented fairly, in all material respects, in conformity
with the applicable financial reporting framework; and (ii) in an audit
of internal control over financial reporting, the company maintained,
in all material respects, effective internal control over financial
reporting. The proposal also briefly addressed when circumstances
require an auditor to express a qualified opinion, adverse opinion, or
disclaimer of opinion and referred to AS 3105 and AS 2201 for a
description of those circumstances. The proposed requirements were
retained from AS 1001 with modifications to be consistent with
provisions of AS 3101 and AS 2201.
One investor-related group requested that the required
communications include CAMs, and that paragraph .17a of the proposed
standard be revised to refer to CAMs ``as a `must contain' item in the
auditor's report.'' The commenter was concerned with the low numbers of
CAMs in auditor's reports and that auditors treat the determination of
CAMs as ``nearly a `check the box' exercise.'' Another commenter
suggested edits to proposed paragraphs .17 and .19 to align with
existing requirements (e.g., adding the phrase ``In an audit of
financial statements'' to paragraph .17a and moving the phrase ``the
company's'' within paragraph .19).
The Board adopted paragraphs .17-.19 substantially as proposed with
some modifications. After considering the comments received, the
reference to CAMs in a footnote has been moved to a note to paragraph
.17 to emphasize the importance of CAMs. The Board did not make any
additional changes to address concerns regarding CAMs. The proposal was
not designed to address concerns about the frequency or informative
quality of CAMs. Although the Board understands the importance of the
concern raised by commenters, this is outside the scope of this
project. The Board also revised paragraph .17a and paragraph .19 to
incorporate commenters' suggestions described above. Additionally, the
Board changed the phrase ``modify the report'' to ``depart from an
unqualified opinion'' in paragraph .19 to align with other Board-issued
standards that describe reports that include opinions other than an
unqualified opinion.\80\
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\80\ See, e.g., AS 3105.
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The Board proposed in paragraph .20 to require that the auditor
communicate externally in accordance with applicable professional and
legal requirements. This is an overarching requirement to communicate
externally that is based on existing auditor communication requirements
(e.g., AS 1301). The Board did not receive any comments on this
requirement and are adopting it with slight modification. The Board
changed ``as required by'' to ``in accordance with'' applicable
professional and legal requirements to align with similar phrases used
in other Board-issued standards.
Amendments Related to AS 1000
The amendments the Board adopted are described below.
1. Amendments to AS 2810 and Rescission of AS 2815
The Board proposed to incorporate into AS 2810 the requirements of
AS 2815 regarding the determination of whether the financial statements
are presented fairly in conformity with the applicable financial
reporting framework for a more logical presentation, and to rescind AS
2815. Currently, AS 2810 requires the auditor to evaluate whether the
financial statements are presented fairly, in all material respects, in
conformity with the applicable financial reporting framework, and AS
2815 describes the meaning of this evaluation. The proposed approach
was intended to streamline these requirements into one standard and
eliminate redundant or unnecessary language. A number of commenters
commented on the proposed amendments to AS 2810. After considering the
comments received, the Board adopted amendments to AS 2810 with certain
modifications discussed below.
i. Clarifying the Meaning of ``Present Fairly''
The discussion in the proposing release was designed to clarify the
auditor's existing obligation to evaluate the fairness of the financial
statements in conformity with the applicable financial reporting
framework by stating that ``present fairly,'' under extant PCAOB
standards, is a concept that goes beyond mere technical compliance with
the requirements of the applicable financial reporting framework.
Some commenters, primarily investor-related groups, supported
clarifying the meaning of ``present fairly'' and provided additional
suggestions on amendments to AS 2810. Two investor-related groups
suggested that the Board consider going further and require auditors to
focus on whether the financial statements are a fair presentation of
the company's position rather than narrowly focusing on whether the
company is following U.S. GAAP. One investor-related group suggested
adding the word ``and'' immediately before the phrase ``in conformity''
to make it clear that there is an expectation that the financials are
presented fairly, in all material respects in addition to conforming
with the applicable financial reporting framework. Another group said
that auditors should aid in disclosing and providing transparency
around the sensitivity and accuracy of climate-related estimates and
assumptions.
Other commenters, primarily firms and firm-related groups, viewed
the proposed amendments as an expansion of auditors' existing
responsibilities. Some commenters asserted that the statement in the
proposal that the auditor's judgments concerning the fair presentation
of the financial statements go beyond compliance with the applicable
financial reporting framework may create a conflict between the
auditor's judgment and management's judgment and introduce potential
inconsistency in accounting treatment. Others expressed concern that
under the proposal, auditors would expect the company to override the
requirements of an applicable financial reporting framework if the
financial statements prepared in accordance with the framework did not
fairly present the substance of the company's financial results.
Some commenters suggested retaining language from AS 2815.03 which
states, ``The independent auditor's judgment concerning the `fairness'
of the overall presentation of financial statements should be applied
within the framework of generally accepted accounting
[[Page 49749]]
principles. Without that framework, the auditor would have no uniform
standard for judging the presentation of financial position, results of
operations, and cash flows in financial statements.'' Other commenters
suggested explicitly retaining the concept of professional judgment for
evaluation of fair presentation.
The Board's proposed clarification of ``present fairly'' was not
intended to change the auditor's existing responsibilities for the
evaluation of whether the financial statements are presented fairly in
conformity with the applicable financial reporting framework.
First, the amendments to AS 2810 clarify that ``presents fairly''
involves evaluating whether information in the financial statements is
presented and classified appropriately and in a manner that is not
misleading, and that this evaluation is made within the applicable
financial reporting framework. Contrary to the views of some
commenters, the amendments do not require auditors to expect that the
company override or deviate from the requirements of the applicable
financial reporting framework. Any override or deviation from the
requirements of the applicable financial reporting framework would
normally result in a departure from an unqualified opinion under PCAOB
standards.\81\ Further, the auditor is required to evaluate the risk of
omitted, incomplete, or inaccurate disclosures as part of the auditor's
risk assessment procedures.\82\
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\81\ See AS 3105. In addition, under SEC rules, a company's
``[f]inancial statements filed with the Commission which are not
prepared in accordance with generally accepted accounting principles
will be presumed to be misleading or inaccurate, despite footnote or
other disclosures, unless the Commission has otherwise provided.''
17 CFR 210.4-01(a)(1) (Regulation S-X Rule 4-01(a)(1)). Paragraph
(a) of that rule also provides that ``the information required with
respect to any statement shall be furnished as a minimum requirement
to which shall be added such further material information as is
necessary to make the required statements, in the light of the
circumstances under which they are made, not misleading.''
\82\ See, e.g., AS 2110.67, which requires the auditor, as part
of the auditor's evaluation of fraud risk factors, to include
evaluation of how fraud could be perpetrated or concealed by
presenting incomplete or inaccurate disclosures or omitting
disclosures that are necessary for the financial statements to be
presented fairly in conformity with the applicable financial
reporting framework.
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Second, the amendments acknowledge that applicable financial
reporting frameworks recognize that additional disclosures may be
needed to ensure fair presentation. For example, as noted above, the
SEC requires by rule that a company provide further material
information as necessary to make any required statements, in the light
of the circumstances under which they are made, not misleading.\83\
This obligation is also consistent with the accounting standards issued
by the FASB \84\ and International Accounting Standards Board
(``IASB'').\85\ Thus, when the auditor evaluates whether company
transactions have been recorded and presented in conformity with the
applicable financial reporting framework, the auditor may determine
that additional company disclosures are needed to better reflect the
substance of the transactions. Such evaluation is currently required
under both AS 2810.31 and AS 2815.06, and the requirement is retained
in the amendments to AS 2810.30A and .31.
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\83\ See 17 CFR 210.4-01(a) (Regulation S-X Rule 4-01(a).
\84\ See, e.g., FASB Accounting Standards Codification (``FASB
ASC'') paragraph 105-10-05-1, Generally Accepted Accounting
Principles--Overall--Overview and Background (``Rules and
interpretive releases of the Securities and Exchange Commission
(SEC) under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants.''); FASB ASC paragraph 235-
10-05-3, Presentation--Notes to Financial Statements--Overall--
Overview and Background--Importance of Accounting Policies
Disclosure (``The accounting policies of an entity are the specific
accounting principles and the methods of applying those principles
that are judged by the management of the entity to be the most
appropriate in the circumstances to present fairly financial
position, cash flows, and results of operations in accordance with
generally accepted accounting principles (GAAP) and that,
accordingly, have been adopted for preparing the financial
statements.'').
\85\ See, e.g., IASB International Accounting Standards
(``IAS'') 1, paragraph 15, Presentation of Financial Statements--
Financial Statements--General features--Fair presentation and
compliance with IFRSs (``Financial statements shall present fairly
the financial position, financial performance and cash flows of an
entity. Fair presentation requires the faithful representation of
the effects of transactions, other events and conditions in
accordance with the definitions and recognition criteria for assets,
liabilities, income and expenses set out in the Conceptual Framework
for Financial Reporting (Conceptual Framework). The application of
IFRSs, with additional disclosure when necessary, is presumed to
result in financial statements that achieve a fair presentation.'');
IAS 1, paragraphs 19-24, Presentation of Financial Statements--
Financial Statements--General features--Fair presentation and
compliance with IFRSs (describing financial reporting
responsibilities in the ``extremely rare circumstances in which
management concludes that compliance with a requirement in an IFRS
would be so misleading that it would conflict with the objective of
financial statements set out in the Conceptual Framework''); IAS 8,
paragraph 10, Accounting Policies, Changes in Accounting Estimates
and Errors (``In the absence of an IFRS that specifically applies to
a transaction, other event or condition, management shall use its
judgement in developing and applying an accounting policy that
results in information that is: (a) relevant to the economic
decision-making needs of users; and (b) reliable, in that the
financial statements: (i) represent faithfully the financial
position, financial performance and cash flows of the entity; (ii)
reflect the economic substance of transactions, other events and
conditions, and not merely the legal form; (iii) are neutral, ie
free from bias; (iv) are prudent; and (v) are complete in all
material respects.'').
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In response to commenters, the Board retained, in the first note to
AS 2810.30, the language of AS 2815.03, with some modifications.
Specifically, the Board revised the reference to ``generally accepted
accounting principles'' to ``applicable financial reporting
framework.'' The Board rephrased the sentence to emphasize that the
``applicable financial reporting framework provides the basis for the
auditor's judgment regarding the presentation of financial position,
results of operations, cash flows, and disclosures in financial
statements.'' The Board also agrees with commenters that the auditor's
evaluation of fairness of presentation of the financial statements is
an exercise of professional judgment in the context of an applicable
financial reporting framework. The first note to AS 2810.30 refers to
the auditor's judgment when evaluating the fairness of the overall
presentation of financial statements.
The Board also added a new footnote to paragraph .30A, as discussed
below, referencing SEC Rule 4-01(a) that describes the company's
obligation regarding additional information that may need to be
disclosed in the financial statements so that the financial statements
are not misleading.
ii. References to SEC Rule 12b-20
The proposed amendment to AS 2810.30 included a new footnote 17A
that referred to a company's responsibility pursuant to SEC Rule 12b-20
under the Exchange Act, 17 CFR 240.12b-20 (``SEC Rule 12b-20''). That
rule requires the company to disclose ``such further material
information, if any, as may be necessary to make the required
statements, in the light of the circumstances under which they are made
not misleading.''
Most commenters who addressed the proposed citation to SEC Rule
12b-20 expressed concern with it. While one investor-related group
recommended relocating the proposed footnote to the body of the
amendments due to its significance, other commenters suggested removing
the reference to SEC Rule 12b-20, with some commenters objecting
primarily because the rule pertains to companies' disclosures within or
beyond the financial statements. Some commenters emphasized that
disclosures beyond the financial statements are the responsibility of
companies rather than of auditors. Many expressed concerns that
referring to the rule might be viewed as expanding the auditor's
responsibilities, or would conflict with
[[Page 49750]]
the auditor's responsibilities described in AS 3101.08e.\86\ One of
these commenters suggested citing SEC Rule 4-01(a)(1) instead, because
that rule relates specifically to financial statements, upon which the
auditor expresses an opinion.
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\86\ AS 3101.08e requires that the auditor's report include an
opinion that the financial statements present fairly, in all
material respects, the financial position of the company, results of
operations, and cash flows in conformity with the applicable
financial reporting framework, and that the opinion identify the
applicable financial reporting framework.
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After considering the comments received, the Board deleted proposed
footnote 17A with the reference to SEC Rule 12b-20 from the final
amendment to AS 2810.30 because that rule reflects a company's
responsibilities for information beyond as well as within the financial
statements.\87\ Instead, the Board retained the existing note to that
paragraph requiring that the auditor look to the requirements of the
SEC for the company under audit with respect to the accounting
principles applicable to that company. The requirements of the SEC for
the company under audit are included in SEC Rule 4-01(a), which the
Board referenced in a new footnote to paragraph .30A, to remind
auditors of the company's obligation regarding additional information
that may need to be disclosed in the financial statements so that the
financial statements are not misleading.
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\87\ The auditor's responsibility for other information outside
of the financial statements is specified in AS 2710, Other
Information in Documents Containing Audited Financial Statements.
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iii. Other Clarifications To Proposed AS 2810.30A
The Board proposed a new paragraph AS 2810.30A based on the extant
requirement from AS 2815.04, using language consistent with other PCAOB
standards. Specifically, the Board:
<bullet> Combined the concepts in AS 2815.04a-b regarding
acceptability and appropriateness of accounting principles and
presented them in AS 2810.30Ab;
<bullet> Retained the concepts from AS 2815.04c-d regarding
informativeness of information presented in the financial statements
and presented them as a new AS 2810.30Aa; and
<bullet> Retained the concepts from AS 2815.04e regarding
transactions presented in the financial statements within a range of
acceptable limits as a new AS 2810.30Ac and an amendment to AS 2810.31.
Several commenters expressed concern about not retaining the
reference to the ``within a range of acceptable limits'' from AS 2815
and suggested (i) retaining this phrase in AS 2810.30A or (ii) revising
proposed 2810.30A to include a footnote referencing AS 2110 or a note
describing the relationship between AS 2810.30A and AS 2110 and adding
``in all material respects'' to AS 2810.30Ac. Another commenter
suggested defining ``a reasonable investor'' used in AS 2810.30Aa. One
commenter encouraged the Board to provide guidance on the use of the
term ``informative'' in AS 2810.30A because it could be widely
interpreted and applied in practice.
In addition, several commenters suggested including or clarifying
certain terminology or concepts used in the proposed new paragraph, AS
2810.30A. Suggestions included:
<bullet> Referencing the importance of exercising professional
judgment when evaluating the requirements specified in AS 2810.30A; and
<bullet> Clarifying that (i) ``financial statements'' include all
notes to the statements and all related schedules; \88\ and (ii)
``disclosures'' used in AS 2810.30A means ``accompanying notes,'' not
other information included in management discussion and analysis
(``MD&A'') and other disclosures included in the annual report.
---------------------------------------------------------------------------
\88\ See 17 CFR 210.1-01(b) (Regulation S-X Rule 1-01(b)).
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After considering the comments received, the Board retained
proposed paragraph .30A with modifications discussed below.
The final AS 2810.30A requires an auditor, when evaluating whether
the financial statements (including the accompanying notes) present
fairly the financial position, results of operations, and cash flows,
in all material respects, in conformity with the applicable financial
reporting framework, to evaluate whether:
a. The financial statements are informative of matters that may
affect their use, understanding, and interpretation; and the
information in the financial statements is presented and classified
appropriately and in a manner that is not misleading;
b. The accounting principles selected and applied by the company's
management are appropriate in the circumstances; and
c. Company transactions and relevant events and conditions are
appropriately recognized, measured, and disclosed in the financial
statements.
The Board added ``(including the accompanying notes)'' in AS
2810.30A to clarify that financial statements include the accompanying
notes, to match the description in AS 2810.31 of financial statements
as ``financial statements (including the accompanying notes).'' Because
the Board uses ``disclosures'' as an interchangeable term with
``notes'' or ``accompanying notes'' throughout PCAOB standards, it is
unnecessary to further clarify the terms in AS 2810.30A. The Board also
did not add a reference to professional judgment in AS 2810.30A, but as
discussed above the Board revised the first note to AS 2810.30 to
clarify that the auditor uses professional judgment when evaluating the
fairness of financial statements.
The term ``informative'' is in AS 2815.04c, which refers to AS
2810.31, which in turn provides additional considerations for
evaluation of information disclosed in the financial statements (e.g.,
consideration of the form, arrangement, and the amount of detail
given). To clarify this further, the Board retained in the final
standard language from AS 2815.04c stating that the information in the
financial statements is presented appropriately, in a manner that is
``informative of matters that may affect their use, understanding and
interpretation'' and not misleading. The Board removed the reference to
``reasonable investor'' from AS 2810.30A because it was limiting and
did not consider a broader population of financial statement users
(e.g., creditors). The Board also believes that introducing
``reasonable investor'' in AS 2810.30A may create confusion by implying
that an analysis is needed that is distinct from determining if the
financial statements are presented fairly in conformity with the
applicable financial reporting framework.
Finally, the Board does not believe it is necessary to retain a
reference to ``within a range of acceptable limits'' in AS 2810.30A.
The standard is clear that evaluation of fairness is based on auditor
judgment and that the concept of materiality is inherent in that
judgment, which involves the consideration of qualitative as well as
quantitative factors. The combination of these considerations should be
clear that not every transaction or account is evaluated to arrive at
the conclusion that the company's financial statements, taken as a
whole, are presented fairly, in all material respects.
iv. Other Clarifications to Proposed AS 2810.31
The Board proposed to revise the note to AS 2810.31 by (i) removing
the first sentence that describes the requirements from AS 3105 (i.e.,
inadequate disclosures) and instead adding a reference to AS
3105.24-.27 in paragraph .31, and (ii) adding an extant
[[Page 49751]]
requirement from AS 2815.06 for the auditor to also evaluate whether
the substance of transaction or events differs materially from their
form, but changing it from ``should consider'' to ``should evaluate.''
Several commenters suggested, in addition to retaining the
requirement from AS 2815.06, to also retain a provision from AS 2815.06
that states ``generally accepted accounting principles recognize the
importance of reporting transactions and events in accordance with
their substance.'' Some commenters suggested not changing the ``should
consider'' requirement from extant AS 2815.06 to ``should evaluate''
when evaluating a transaction in substance over form. Additionally,
some commenters recommended removing or relocating the note in AS
2810.31 to proposed AS 2810.30A for better context.
Two investor-related groups suggested providing guidance on AS
2810.31 by adding the existing concept of what the auditors are
required to do (per AS 2815.04c) when the applicable financial
reporting framework does not provide guidance (e.g., financial
statements and accompanying notes do not disclose the necessary
information required), or what considerations should be given by
auditors in evaluating fair presentation of financial statements in
accordance with proposed AS 2810.30.
After considering the comments received, rather than amending the
existing note to AS 2810.31, the Board removed the note in its
entirety. The Board believes that a separate requirement to evaluate
whether the substance of transactions differs from their form is
unnecessary in light of the requirement in new AS 2810.30Aa. As
discussed above, AS 2810.30Aa requires auditors to evaluate ``whether
the financial statements are informative of matters that may affect
their use, understanding, and interpretation;'' and the information in
the financial statements is presented and classified appropriately and
in a manner that is not misleading. This evaluation includes
determining whether additional disclosures are necessary to reflect,
for example, the substance of the company's transactions. The auditor's
evaluation of whether company transactions have been recorded and
presented in conformity with the applicable financial reporting
framework includes the determination of whether additional disclosures
are needed in the financial statements.
The Board also believes that AS 2810.31 and the amendments are
comprehensive and clear, and thus no additional guidance is warranted.
For example, under US GAAP and IFRS, management has a range of
conforming choices in selecting classifications and measurements of
revenue recognition, segment reporting, and fair value measurement. The
auditor is responsible for evaluating whether the disclosures reflect
the choices made by management and are not misleading to investors and
other financial statement users.
2. Amendments Related to Engagement Partner Responsibilities for
Supervision
i. Seeking Assistance From Other Engagement Team Members
AS 1201 and AS 2101 establish the engagement partner's
responsibility for the engagement and its performance, including
planning, supervision, and review. The Board proposed to amend the
existing requirements in AS 1201 and AS 2101 to clarify that even when
the engagement partner seeks assistance from other engagement team
members, the engagement partner retains the primary responsibility for
the engagement and its performance. One commenter strongly supported
these amendments, and the Board adopted them as proposed.
The final notes added to AS 1201 and AS 2101 clarify that while an
engagement partner may seek assistance on specific tasks from other
engagement team members, they continue to retain the primary
responsibility for supervising, reviewing, and ensuring the quality of
the work performed in the audit. In other words, the work of other
engagement team members does not replace or reduce the engagement
partner's responsibility for the engagement and its performance.
ii. Timing of review
The Board also proposed a requirement to clarify that the review
and evaluation by the engagement partner (and as applicable by other
engagement team members performing supervisory activities) of work
performed by engagement team members, as described in AS 1201.05c, must
be completed prior to the report release date. These amendments did not
receive any comment and are being adopted as proposed.
iii. Workpaper Review
The Board proposed to amend AS 1201 to clarify the extent of the
planning, supervisory, review, and documentation activities to be
performed by the engagement partner by aligning those activities with
existing auditor responsibilities under AS 1015 because the Board
believes that the engagement partner's review of audit documentation is
an important part of supervision. These amendments were intended to
reaffirm the engagement partner's supervisory and review
responsibilities in the context of exercising due professional
care.\89\ Specifically, the Board proposed to add a note stating that
notwithstanding assistance from other engagement team members
performing supervisory activities, the engagement partner is required
to review sufficient documentation to determine that (i) the engagement
was performed as planned; (ii) significant judgments were appropriate
and significant findings and issues, along with matters brought to the
engagement partner's attention pursuant to AS 1201.05b, were
appropriately addressed; (iii) the conclusions expressed in the
auditor's report are appropriate and supported by sufficient
appropriate evidence; and (iv) matters requiring communication under
applicable professional and legal requirements are appropriately
identified and communicated. The proposed note also provided that the
engagement partner's review includes review of documentation of
significant findings or issues \90\ and review of documentation that is
also subject to review by the EQR, citing the provisions of AS 1220
that specifically require the EQR to review certain documentation.\91\
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\89\ See AS 1000.10 discussed above.
\90\ See AS 1215.12.
\91\ See AS 1220.09-.10 and .14-.15.
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One commenter stated that the proposed amendments were overly
prescriptive and should allow more flexibility regarding the engagement
partner's review and sign-off. Another commenter recommended clarifying
how due professional care in AS 1201 relates to the engagement
partner's responsibilities in AS 1000. This commenter further
recommended better aligning AS 1201 with proposed AS 1000.09, including
the interplay between Note 2 of AS 1201.05, which has specific
workpaper review requirements by the engagement partner, while AS
1201.04 also allows the engagement partner to seek assistance from
other engagement team members.
After considering the comments received, the Board adopted
amendments to AS 1201 substantially as proposed. The Board believes
that the amendments clarify the engagement partner's existing
obligations for supervision and review. As the engagement team member
with primary responsibility for the engagement, the engagement partner
must review, at minimum, sufficient documentation of
[[Page 49752]]
specific audit areas that are deemed important to support the auditor's
opinion. Without reviewing sufficient documentation in these areas, the
engagement partner would not be able to demonstrate that the engagement
partner has the primary responsibility for the audit.
One commenter asserted that the proposed requirement that the
``engagement partner's review should include review of documentation .
. . subject to review by the engagement quality reviewer'' could be
interpreted to require the engagement partner to review all
documentation reviewed by the EQR, beyond what is required in AS
1220.10 or .15. Another commenter expressed concern about the proposed
note stating that in multi-tiered audits, other audit partners, not
only the engagement partner, should retain the ability to review all
documentation subject to EQR review. This commenter suggested not
linking engagement partner review requirements to documentation subject
to review by EQR.
In response to the commenters, the Board clarified the final
requirement by changing the phrase ``review of documentation subject to
review by the engagement quality reviewer'' to ``review of
documentation required to be reviewed by the engagement quality
reviewer pursuant to the requirements of paragraphs .09-.10 and .14-.15
of AS 1220 . . . .'' This revision further clarifies that the Board
expects the engagement partner to review the documentation that the
engagement quality reviewer is required to review in order to comply
with those provisions of AS 1220, rather than all of the documentation
that the engagement quality reviewer may have actually reviewed. The
Board believes that the documentation of significant judgments made and
conclusions reached by the engagement team that is required to be
reviewed by the EQR provides important information to the engagement
partner. This is true for all engagements, including multi-location and
multi-tiered engagements. The extent of documentation reviewed by the
EQR and, under the final amendment, by the engagement partner, will
depend on the facts and circumstances of the particular engagement.
Further, the requirement for the engagement partner to review
documentation required to be reviewed by the EQR does not preclude
other engagement team members performing supervisory activities to also
review this documentation.
Several commenters further expressed concerns that the proposed
amendments create an incorrect perception that the responsibility for
all phases of the audit resides with the engagement partner only
without any consideration given to the responsibility of the firm or
other engagement team members. One of these commenters further
suggested including a statement that the engagement partner should
tailor the extent of their supervision based on a variety of factors as
described in AS 1201.06. AS 1201.05 specifically addresses the
responsibilities of the engagement partner relating to supervision of
engagement team members, and the Board does not think it is necessary
to change these requirements to address the responsibilities of others.
One commenter stated that the engagement partner's review of
documentation to determine that the engagement was performed as planned
may be construed as expanding the partner review requirements beyond AS
1215.12c because the review of documentation only relates to ``results
of auditing procedures that indicate a need for significant
modification of planned auditing procedures.'' The Board does not
believe that Note 2 of AS 1201.05 expands the engagement partner's
responsibilities. AS 2101.03 states that the engagement partner is
responsible for planning the audit and that the engagement partner
retains primary responsibility for the engagement and its performance.
In addition, the documentation requirements under AS 1215 are not
limited to the significant findings and issues described in AS 1215.12
and there are other documentation requirements outside of documenting
specific matters.
Another commenter further suggested that the Board define
``sufficient documentation'' used in proposed Note 2 of AS 1201.05. The
Board does not believe this is necessary. What is sufficient will
depend on the facts and circumstances of the particular engagement
under review. The amount of documentation that the engagement partner
would review will vary depending on the associated risk involved in the
audit area and the nature of the work performed that the engagement
partner reviews. The Board further clarified this point, by changing
``sufficient documentation to determine'' to ``documentation sufficient
to determine'' in the final amendment. This change is designed to
better connect the concept of sufficiency with the matters that the
engagement partner will determine.
The Board also proposed other amendments to AS 1201 and AS 2101 to
conform to the adoption of AS 1000. These technical and clarifying
amendments included replacing references to titles of existing
standards with the title of the new standard and updating cross-
referenced terminology and paragraph citations. The Board adopted these
other amendments as proposed as no comments were received.
3. Amendments Related to Documentation
The Board proposed several amendments to AS 1215 discussed in more
detail below. Commenters generally supported the proposed amendments to
AS 1215. Some commenters provided specific comments related to (i)
documentation completion date and (ii) specific audit documentation and
timing for documentation review. These are discussed in more detail
below.
i. Documentation Completion Date
Audit documentation is the written record of the basis for the
auditor's conclusions that provides the support for the auditor's
representations, whether those representations are contained in the
auditor's report or otherwise. Audit documentation also facilitates the
planning, performance, and supervision of the engagement, and is the
basis for the review of the quality of the work because it provides the
reviewer with written documentation of the evidence supporting the
auditor's significant conclusions.\92\ Under existing standards, a
complete and final set of audit documentation is required to be
assembled for retention as of a date not more than 45 days after the
report release date, known as the documentation completion date.\93\
The Board proposed to accelerate the documentation completion date by
reducing the maximum period from 45 days to 14 days.
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\92\ See AS 1215.02.
\93\ See AS 1215.15.
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Many commenters who addressed the amendment generally supported it
or agreed that the proposed acceleration of the documentation
completion date would be appropriate or result in increased audit
quality. Two commenters further stated that the shorter period of 14
days would not cause significant changes at most firms.
Several commenters raised concerns over the acceleration of the
documentation completion date. One commenter stated that the
acceleration would likely lead to more audit quality issues due to the
increasingly more complex financial accounting, reporting, and auditing
landscape requiring more
[[Page 49753]]
time as well as the current talent crisis. Another commenter stated
that 14 days is too short to handle any unforeseen consequences (e.g.,
technology interruptions). Another commenter questioned whether
acceleration of documentation will (i) have any meaningful impact on
PCAOB inspection timelines and operating efficiencies and (ii) be
workable for smaller firms, who may not have the technology to
implement this change.
Two commenters, both investor-related groups, recommended further
shortening the documentation completion date to two days because an
earlier PCAOB inspection would benefit investors. These two investor-
related groups and another commenter questioned why 14 days is a more
appropriate timeframe. Focusing on challenges that smaller firms may
face in implementing the acceleration, and the diversity across global
network firms in documentation archive systems, several commenters
recommended a phased implementation approach or extending the
implementation over a longer period (e.g., two-year period).
The proposal also sought comment, in light of the proposed 14-day
documentation completion date, on whether firms would have difficulty,
when filing Form AP within 35 days of the audit report being filed,
complying with AS 1215.16. That paragraph of AS 1215 prohibits the
deletion or discarding of audit documentation after the documentation
completion date but permits the addition of documentation under certain
conditions. Two firms stated that they did not foresee significant
difficulties in complying with AS 1215.16 with additional costs, while
another firm indicated some technological and process challenges. Two
commenters recommended making both due dates (i.e., documentation
completion date and Form AP due date) the same.
After considering the comments received, the Board adopted the
accelerated documentation completion date of 14 days as proposed with
modification to the effective date for certain firms discussed below.
The 14-day timeline strikes a good balance of meeting the objectives of
this amendment (e.g., enhance investor protection by enabling the Board
to begin the inspection process sooner after the completion of an
audit) while still allowing a two-week period (14 calendar days) to
assemble audit documentation for retention (i.e., archive audit
documentation). As echoed by some commenters, the Board believes that
the accelerated documentation period will not require a significant
change for many firms. In the Board's view, the changes to the
archiving period (i.e., 14 days) are necessary to focus auditors on
assembling a complete set of audit documentation that is high-quality
and without documentation errors or omissions in a timely manner. The
Board believes that a delay in assembling the audit documentation
increases the potential for omissions to occur.
Further, shortening the archiving period also reduces the window of
opportunity for improper alteration of audit documentation and
increases the quality of documentation because recalling and describing
audit procedures long after the work was actually performed can be
difficult.
In accordance with AS 1215, the auditor must have completed all
necessary auditing procedures and obtained sufficient evidence to
support the representations in the auditor's report before the report
release date.\94\ The presence of complex financial accounting,
reporting, or auditing matters should not have a bearing on the
archiving period as the effects of such matters on the audit should be
addressed before the report release date (i.e., before the 14 days to
assemble the audit documentation). Under existing AS 1215.16 auditors
are allowed to add documentation after the documentation completion
date, if needed.\95\ While the Board understands that in practice some
firms use a short archiving period, the Board believes that an
archiving period of two days, as suggested by investor-related groups,
may be too short to handle any unforeseen consequences (e.g.,
technology interruptions) and could result in inadvertent non-
compliance.
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\94\ See AS 1215.15 (as amended).
\95\ See AS 1215.16.
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The Board also continues to believe that the accelerated
documentation completion date of 14 days is still appropriate even when
considering the Form AP deadline of 35 days. The Board acknowledged
that in most situations, firms currently have 35 days to file Form
AP,\96\ and a firm must document the computation of total audit hours
and include that computation in the files.\97\ If the actual hours
become available after the documentation completion date but before the
Form AP filing, the auditor is required under provisions of AS 1215 to
add that information to the audit documentation after the documentation
completion date.\98\ The instructions to Form AP also provide that
firms may use a reasonable method to estimate audit hours when actual
hours have not been reported or are otherwise unavailable.\99\
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\96\ Form AP has a filing deadline of 35 days after the date the
auditor's report is first included in a document filed with the SEC,
or 10 days after the auditor's report is first included in a
document filed with the SEC for a registration statement under the
Securities Act of 1933. PCAOB Rule 3211(b).
\97\ See Improving the Transparency of Audits: Rules to Require
Disclosure of Certain Audit Participants on a New PCAOB Form and
Related Amendments to Auditing Standards, PCAOB Rel. No. 2015-008
(Dec. 15, 2015).
\98\ See AS 1215.16.
\99\ See Instructions to Form AP, Part IV--Responsibility for
the Audit is Not Divided.
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The Board acknowledged that certain firms may have less
technologically advanced systems in place and may need more time to
implement new processes to comply with the accelerated documentation
completion date requirement. Therefore, as discussed in more detail
below, the effective dates for this requirement allow a phased-in
approach for smaller firms to comply with the 14-day documentation
completion date. This approach addresses implementation challenges that
some commenters suggested smaller firms may face.
ii. Specific Audit Documentation and Timing of Review
The Board also proposed to emphasize that audit documentation must
clearly demonstrate who performed the work, who reviewed the work, and
the date of such review.\100\ In order for an engagement partner to
conclude that the audit evidence obtained is sufficient and appropriate
to support the opinion expressed in the auditor's report,\101\ the
audit work is required to be reviewed prior to the report release date.
Therefore, the Board also proposed to amend AS 1215.15 to clarify that,
before the report release date, the engagement partner and other
engagement team members performing supervisory activities have
completed their reviews of audit documentation.
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\100\ See AS 1215.06.
\101\ See AS 2810.02.
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One commenter raised a concern that the amendments may result in
lower quality documentation and an increase in late filings, providing
an example of when a significant issue emerged closer to the issuer's
filing deadline, because additional time to complete and review the
relevant documentation would be needed. Another commenter suggested
further clarifying whether the engagement partner and other supervisors
must ensure that all review notes have been sufficiently addressed
prior to the report release date.
The Board adopted the amendments to AS 1215 as proposed. The
[[Page 49754]]
requirement for the engagement partner and other supervisors to review
relevant audit documentation prior to the report release date is a
clarification of existing requirements in AS 1215 and AS 2101. As
discussed earlier, since the auditor's report is dated no earlier than
the date on which the auditor has obtained sufficient appropriate
evidence to support the auditor's opinion,\102\ the auditor must have
completed all necessary auditing procedures, including documentation to
support the work performed that is reviewed by the engagement partner
and other reviewers, on or before the auditor's report date, in all
cases. The engagement partner and other supervisors should refer to
existing requirements in AS 1215.07, in determining the sufficiency of
audit documentation. Several factors to consider include nature of the
audit procedure, risk of material misstatement associated with the
assertion, and extent of judgment required in performing the work and
evaluating the results (i.e., accounting estimates require greater
judgment and commensurately more extensive documentation).\103\
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\102\ See paragraph .01 of AS 3110, Dating of the Independent
Auditor's Report.
\103\ See AS 1215.07.
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Lastly, in relation to proposed amendments in AS 1215.06 and .06A,
one commenter agreed with the addition of paragraph .06A but suggested
removing the phrase of ``who performed the work, the person or persons
who reviewed the work, and the date of such review'' in AS 1215.06
because the same phrase is already included in AS 1215.06Ab. The Board
did not make changes to the final amendments to AS 1215.06 and .06A.
The addition of the phrase in paragraph .06 is an intentional
clarification, rather than duplication, of what the audit documentation
is required to demonstrate. The requirement in paragraph .06, is
different, and relates to the sufficiency of documentation needed to
meet the experienced auditor threshold.
The Board also proposed other amendments to AS 1215 to conform to
AS 1000. These technical and clarifying amendments included replacing
references to titles of existing standards with the title of the new
standard and updating cross-referenced terminology and paragraph
citations. The Board did not receive any comments relating to other
amendments to AS 1215 and adopted those as proposed.
4. Other Amendments
In connection with the adoption of AS 1000, the Board also adopted
other amendments to several PCAOB standards to conform with AS 1000,
amendments to AS 2810, and rescission of AS 2815. These amendments
include superseding the foundational auditing standards.
The other changes adopted include replacing references to titles of
existing standards with the title of the final standard and updating
cross-referenced terminology and paragraph citations.
The proposed amendments that received comments are discussed in
more detail below.
i. Amendments to AS 2710, Other Information in Documents Containing
Audited Financial Statements
AS 2710.05 refers to differences in the auditor's judgment or
opinion. The Board proposed to amend that standard in two ways, by
clarifying that the difference of judgment or opinion is ``between the
auditor and the client,'' and by adding a footnote clarifying the
meaning of ``judgment.'' One commenter suggested replacing ``the
client'' with ``management'' to be consistent with other PCAOB
standards. Although the Board adopted other amendments that refer to
the management and audit committee of the company under audit
[…truncated; see source link]Indexed from Federal Register on June 11, 2024.
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