[Federal Register Volume 87, Number 126 (Friday, July 1, 2022)]
[Notices]
[Pages 39680-39731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-13983]



[[Page 39679]]

Vol. 87

Friday,

No. 126

July 1, 2022

Part III





Securities and Exchange Commission





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Public Company Accounting Oversight Board; Notice of Filing of Proposed 
Rules on Planning and Supervision of Audits Involving Other Auditors 
and Dividing Responsibility for the Audit With Another Accounting Firm; 
Notice

Federal Register / Vol. 87 , No. 126 / Friday, July 1, 2022 / 
Notices

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95159; File No. PCAOB-2022-01]


Public Company Accounting Oversight Board; Notice of Filing of 
Proposed Rules on Planning and Supervision of Audits Involving Other 
Auditors and Dividing Responsibility for the Audit With Another 
Accounting Firm

June 24, 2022.
    Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 
(``Act''), notice is hereby given that on June 24, 2022, the Public 
Company Accounting Oversight Board (the ``Board'' or the ``PCAOB'') 
filed with the Securities and Exchange Commission (the ``Commission'' 
or the ``SEC'') the proposed rules described in items I and II below, 
which items have been prepared by the Board. The Commission is 
publishing this notice to solicit comments on the proposed rules from 
interested persons.

I. Board's Statement of the Terms of Substance of the Proposed Rules

    On June 21, 2022, the Board adopted ``Planning and Supervision of 
Audits Involving Other Auditors and Dividing Responsibility for the 
Audit with Another Accounting Firm'' and related amendments to its 
auditing standards, attestation standards, auditing interpretations, 
rules, and a form (collectively, the ``proposed rules''). The text of 
the proposed rules appears in Exhibit A to the SEC Filing Form 19b-4 
and is available on the Board's website at https://pcaobus.org/about/rules-rulemaking/rulemaking-dockets/docket-042-proposed-amendments-relating-to-the-supervision-of-audits-involving-other-auditors-and-proposed-auditing-standard and at the Commission's Public Reference 
Room.

II. Board's Statement of the Purpose of, and Statutory Basis for, the 
Proposed Rules

    In its filing with the Commission, the Board included statements 
concerning the purpose of, and basis for, the proposed rules and 
discussed any comments it received on the proposed rules. The text of 
these statements may be examined at the places specified in Item IV 
below. The Board has prepared summaries, set forth in sections A, B, 
and C below, of the most significant aspects of such statements. In 
addition, the Board is requesting that the Commission approve the 
proposed rules, pursuant to Section 103(a)(3)(C) of the Act, for 
application to audits of emerging growth companies (``EGCs''), as that 
term is defined in Section 3(a)(80) of the Securities Exchange Act of 
1934 (``Exchange Act''). The Board's request is set forth in section D.

A. Board's Statement of the Purpose of, and Statutory Basis for, the 
Proposed Rules

(1) Purpose
Summary
    The Board has adopted amendments to its auditing standards to 
strengthen requirements for planning and supervising audits involving 
accounting firms and individual accountants (collectively, ``other 
auditors'') outside the accounting firm that issues the auditor's 
report (the ``lead auditor''). In these audits, the lead auditor issues 
the audit report on the company's consolidated financial statements, 
but other auditors often perform important work on the audit. The roles 
of other auditors have increased as companies' global operations have 
grown. In addition, the Board adopted a new auditing standard that will 
apply when the lead auditor divides responsibility for an audit with 
another accounting firm (``referred-to auditor'').
    Working with other auditors and referred-to auditors can differ 
from working with people in the same firm, creating challenges in 
coordination and communication. These challenges can lead to 
misunderstandings about the nature, timing, and extent of their work 
and can reduce audit quality. It is important for investor protection 
that the lead auditor adequately plan and supervise the work of other 
auditors so that the audit is performed in accordance with PCAOB 
standards and provides sufficient appropriate evidence to support the 
lead auditor's opinion in the audit report.
    This rulemaking is intended to increase and improve the lead 
auditor's involvement in and evaluation of the other auditors' work. 
The Board believed that the heightened attention to other auditors' 
work will improve communication among auditors and the lead auditor's 
ability to prevent or detect deficiencies in that work, and thus 
enhance the quality of audits involving other auditors and promote 
investor protection.
    The amendments to the Board's auditing standards are intended to 
improve PCAOB standards principally by (i) applying a risk-based 
supervisory approach to the lead auditor's oversight of other auditors 
and (ii) requiring that the lead auditor perform certain procedures 
when planning and supervising an audit that involves other auditors. 
The amendments have taken into account recent practice developments in 
the lead auditor's oversight of other auditors' work, including the 
greater use of communication technology. In brief, the amendments:
    <bullet> Require that the engagement partner determine whether his 
or her firm's participation in the audit is sufficient for the firm to 
carry out the responsibilities of a lead auditor and report as such. 
The amendments also provide considerations for the engagement partner 
to use in making this determination and require that the audit's 
engagement quality reviewer review the determination.
    <bullet> Require that the lead auditor, when determining the 
engagement's compliance with independence and ethics requirements, 
understand the other auditors' knowledge of those requirements and 
experience in applying them. The amendments also require that the lead 
auditor obtain and review written affirmations regarding the other 
auditors' policies and procedures related to those requirements and 
regarding compliance with the requirements, and a description of 
certain auditor-client relationships related to independence. In 
addition, the amendments require the sharing of information about 
changes in circumstances and the updating of affirmations and 
descriptions in light of those changes.
    <bullet> Require that the lead auditor understand the knowledge, 
skill, and ability of other auditors' engagement team members who 
assist the lead auditor with planning and supervision, and obtain a 
written affirmation from other auditors that their engagement team 
members possess the knowledge, skill, and ability to perform assigned 
tasks.
    <bullet> Require that the lead auditor supervise other auditors 
under the Board's standard on audit supervision and inform other 
auditors about the scope of their work, identified risks of material 
misstatement, and certain other key matters. The amendments also 
require that the lead auditor and other auditors communicate about the 
audit procedures to be performed, and any changes needed to the 
procedures. In addition, the amendments require the lead auditor to 
obtain and review written affirmations from other auditors about their 
performance of work in accordance with the lead auditor's instructions, 
and to direct other auditors to provide certain documentation about 
their work.
    <bullet> Provide that, in multi-tiered audits, a first other 
auditor may assist the lead auditor in performing certain required

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procedures with respect to second other auditors.
    This rulemaking rescinds an interim standard but carries forward 
and strengthens some of its requirements in a new standard that applies 
to those infrequent situations where the lead auditor divides 
responsibility for a portion of the audit with another audit firm and 
therefore does not supervise the work performed by that firm. In these 
situations, the lead auditor refers in the audit report to the work of 
that auditor (i.e., a referred-to auditor). This new standard requires 
that in these situations the lead auditor determine that audit 
procedures were performed regarding the consolidation or combination of 
financial statements of the business units audited by the referred-to 
auditor into the company's financial statements. The standard also 
requires that the lead auditor obtain the referred-to auditor's written 
representation that it is independent and duly licensed to practice, 
and that the lead auditor disclose in the audit report the magnitude of 
the portion of the financial statements and, if applicable, internal 
controls audited by the referred-to auditor.
    The Board has adopted the amendments and new standard after three 
rounds of public comment. Commenters generally expressed support for 
the rulemaking's objective of improving the quality of audits involving 
other auditors and referred-to auditors. They also suggested ways to 
revise or clarify the proposed amendments and standard. The Board took 
into account these comments, as well as observations of the Board and 
its staff through PCAOB oversight activities (including audit 
inspections and enforcement cases).
    The amendments and new standard apply to all audits conducted under 
PCAOB standards. Subject to approval by the Securities and Exchange 
Commission (``SEC'' or ``Commission''), the amendments and new standard 
will take effect for audits for fiscal years ending on or after 
December 15, 2024.
(b) Statutory Basis
    The statutory basis for the proposed rules is Title I of the Act.

B. Board's Statement on Burden on Competition

    Not applicable. The Board's consideration of economic impacts of 
the proposed rules is discussed in section D below.

C. Board's Statement on Comments on the Proposed Rules Received From 
Members, Participants or Others

    The Board released the proposed rule amendment for public comment 
in PCAOB Release No. 2016-002 (Apr. 12, 2016). The Board received 23 
written comment letters on that release. The Board issued a 
supplemental request for public comment in PCAOB Release No. 2017-005 
(Sept. 26, 2017). The Board received 22 written comment letters on that 
release. The Board issued a second supplemental request for public 
comment in PCAOB Release No. 2021-005 (Sept. 28, 2021). The Board 
received 19 written comment letters on that release. The Board has 
carefully considered all comments received. The Board's response to the 
comments it received and the changes made to the proposed rules in 
response to the comments received are discussed below.
Background
    This rulemaking addresses the responsibilities of the lead auditor 
(i.e., the audit firm that issues the auditor's report) in planning and 
supervising an audit that involves the work of other auditors. In 
formulating the approach, the Board sought public comment several 
times. In April 2016, the Board issued a proposal (``2016 Proposal'') 
to amend our auditing standards and issue a new standard, to strengthen 
the requirements for lead auditors in audits that involve other 
auditors and referred-to auditors.\1\ In September 2017, after 
considering public comments on the 2016 Proposal, the Board issued a 
supplemental request for comment (``2017 SRC'') on certain targeted 
revisions to the proposed amendments.\2\ In September 2021, after 
considering the public comments on the prior releases, the Board issued 
a second supplemental request for comment (``2021 SRC'') to seek 
additional public comment on certain revisions to the amendments and 
other matters.\3\
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    \1\ Proposed Amendments Relating to the Supervision of Audits 
Involving Other Auditors and Proposed Auditing Standard--Dividing 
Responsibility for the Audit with Another Accounting Firm, PCAOB 
Release No. 2016-002 (Apr. 12, 2016).
    \2\ Supplemental Request for Comment: Proposed Amendments 
Relating to the Supervision of Audits Involving Other Auditors and 
Proposed Auditing Standard--Dividing Responsibility for the Audit 
with Another Accounting Firm, PCAOB Release No. 2017-005 (Sept. 26, 
2017).
    \3\ Second Supplemental Request for Comment: Proposed Amendments 
Relating to the Supervision of Audits Involving Other Auditors and 
Proposed Auditing Standard--Dividing Responsibility for the Audit 
with Another Accounting Firm, PCAOB Release No. 2021-005 (Sept. 28, 
2021).
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    Commenters on the 2016 Proposal, 2017 SRC, and 2021 SRC 
(collectively, the ``proposing releases'') generally expressed support 
for the rulemaking's objective of improving the quality of audits 
involving other auditors and referred-to auditors. They also suggested 
ways to revise or clarify the proposed amendments and standard. The 
Board considered all of the comments and adopted the amendments and 
standard (collectively ``amendments'' or ``final amendments'') for the 
reasons discussed below.
Rulemaking History
    In the 2016 Proposal, the Board proposed to amend PCAOB auditing 
standards to strengthen existing requirements and impose a more uniform 
approach to the lead auditor's supervision of other auditors.\4\ The 
proposed amendments were intended to increase the lead auditor's 
involvement in, and evaluation of, the work of other auditors, enhance 
the ability of the lead auditor to prevent or detect deficiencies in 
the work of other auditors, and facilitate improvements in the quality 
of the work of other auditors. The proposed amendments also included a 
proposed new standard that would apply when the lead auditor divides 
responsibility for a portion of the audit with another accounting firm 
and refers to the referred-to auditor's report in the lead auditor's 
report. The Board received 23 comment letters on the 2016 Proposal.\5\ 
Commenters generally expressed support for the rulemaking's objective 
of improving the quality of audits involving other auditors and 
referred-to auditors. Some expressed concerns or requested 
clarification about certain proposed requirements.
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    \4\ See 2016 Proposal at Section II.
    \5\ See 2017 SRC at 6-7 (discussing comment letters received on 
the 2016 Proposal).
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    In response to the input from commenters, the Board issued a 
supplemental request for comment on the 2016 Proposal in September 
2017.\6\ The 2017 SRC discussed significant comments received and 
presented revisions to the proposed amendments while leaving the 
overall proposed approach to the supervision of other auditors intact. 
The Board received 22 comment letters on the 2017 SRC.\7\ Commenters 
generally expressed continued support for the project's objectives, and 
a number of commenters also suggested changes to, or requested 
clarification or guidance on, certain proposed requirements.
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    \6\ 2017 SRC.
    \7\ See 2021 SRC at 7 (discussing comment letters received on 
the 2017 SRC).
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    After consideration of the comments on the 2017 SRC and further 
analysis of issues raised by commenters and

[[Page 39682]]

developments in this area, the Board issued a second supplemental 
request for comment in September 2021. The proposed revisions in the 
2021 SRC were designed to adjust certain requirements to better take 
into account the lead auditor's role in the audit, address certain 
scenarios encountered in practice, revise certain proposed definitions 
to reflect recent amendments to the Board's standards, and improve the 
readability of the amended standards. The Board received 19 comment 
letters on the 2021 SRC. Commenters continued to generally express 
support for the project's objectives, and also suggested some changes 
to, or requested clarification or guidance on, certain proposed 
requirements. The Board has considered the comments on the 2021 SRC, as 
well as on the previous proposing releases, in developing the final 
amendments.\8\ The Board has also considered the observations of the 
Board and its staff from PCAOB oversight activities.
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    \8\ The comment letters received on the 2016 Proposal, 2017 SRC, 
and 2021 SRC are available in the docket for this rulemaking on the 
PCAOB's website (https://pcaobus.org/Rulemaking/Pages/Docket042Comments.aspx).
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Overview of Existing Requirements
    This section discusses key provisions of existing PCAOB auditing 
standards that address lead auditor responsibilities involving the work 
of other auditors or referred-to auditors that participate in an audit. 
Depending on the circumstances of an audit involving other auditors, 
one of two standards applies, as described below.
    In 2003, the Board adopted the standard known today as AS 1205, 
Part of the Audit Performed by Other Independent Auditors (at that 
time, AU sec. 543), when it adopted the auditing profession's standards 
then in existence.\9\ AS 1205 imposes requirements on a lead auditor 
(or ``principal auditor,'' in the terminology of AS 1205) that uses the 
work and reports of other independent auditors that have audited the 
financial statements of one or more subsidiaries, divisions, branches, 
components, or investments included in the financial statements audited 
by the lead auditor. These requirements relate to situations in which 
the lead auditor uses the work and reports of other auditors or 
referred-to auditors by (i) assuming responsibility for the other 
auditors' work or (ii) dividing responsibility for the audit with 
referred-to auditors and referring to their work and reports in the 
lead auditor's audit report.\10\ Those ``divided-responsibility'' 
situations, as discussed below, are relatively uncommon.
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    \9\ In 1963, the American Institute of Certified Public 
Accountants (``AICPA'') issued a codification of auditing standards 
that included several paragraphs on using the work of other auditors 
or referred-to auditors. In 1971, the AICPA issued Statement on 
Auditing Procedure No. 45, Using the Work and Reports of Other 
Auditors, and in 1972 it codified the standard in section 543 of the 
Statement on Auditing Standards No. 1 (AU sec. 543). In 2003, the 
PCAOB adopted the auditing profession's standards in existence at 
that time, including AU sec. 543. See Establishment of Interim 
Professional Auditing Standards, PCAOB Release No. 2003-006 (Apr. 
18, 2003). In 2015, the PCAOB reorganized its auditing standards 
using a topical structure and a single, integrated numbering system. 
See Reorganization of PCAOB Auditing Standards and Related 
Amendments to PCAOB Standards and Rules, PCAOB Release No. 2015-002 
(Mar. 31, 2015). As part of that rulemaking, AU sec. 543 was 
reorganized as AS 1205. The reorganization did not impose additional 
requirements on auditors or substantively change the requirements of 
that standard.
    \10\ For example, the lead auditor may divide responsibility for 
a portion of the audit with another firm if it is impracticable for 
the lead auditor to review the other firm's work. See AS 1205.06.
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    In 2010, the Board adopted AS 1201, Supervision of the Audit 
Engagement (at that time, Auditing Standard No. 10), when it adopted 
eight new auditing standards that set forth the auditor's 
responsibilities for assessing and responding to risk in an audit.\11\ 
AS 1201 governs the supervision of the audit engagement, including 
supervising the work of engagement team members outside the engagement 
partner's firm. Under existing PCAOB standards, the lead auditor 
supervises the work of another auditor under AS 1201 in situations not 
covered by AS 1205.\12\
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    \11\ Auditing Standards Related to the Auditor's Assessment of 
and Response to Risk and Related Amendments to PCAOB Standards, 
PCAOB Release No. 2010-004 (Aug. 5, 2010). Among other things, these 
risk assessment standards established risk-based requirements for 
determining the necessary audit work in multi-location audit 
engagements.
    \12\ See second note to AS 1205.01.
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    Figure 1 illustrates an example of a U.S.-based audit that involves 
other accounting firms, and the PCAOB auditing standards that apply to 
the audit. In the example, Accounting Firm 1 is the lead auditor, and 
it involves Accounting Firm 2 by either (A) assuming responsibility for 
the work and reports of Accounting Firm 2 in accordance with AS 1205, 
or (B) supervising the work of Accounting Firm 2 in accordance with AS 
1201. The lead auditor (C) divides responsibility for part of the audit 
with Accounting Firm 3 in accordance with AS 1205 and refers to 
Accounting Firm 3 in the lead auditor's audit report on the 
consolidated financial statements.

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[GRAPHIC] [TIFF OMITTED] TN01JY22.001

    The following discusses AS 1205 and AS 1201 in more detail:
    (A) Using the work and reports of other auditors under AS 1205. If 
an auditor uses, and assumes responsibility for, the work and reports 
of other auditors that audited the financial statements of one or more 
subsidiaries, divisions, branches, components, or investments included 
in the financial statements presented, AS 1205 includes the following 
requirements:\13\
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    \13\ In addition, in situations governed by AS 1205, the lead 
auditor is required by the Board's standard on planning, AS 2101, 
Audit Planning, to perform procedures to determine the locations or 
business units at which audit procedures should be performed. See AS 
2101.11-.13. This also applies to situations in which the auditor 
divides responsibility with another accounting firm. See AS 2101.14.
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    <bullet> When significant parts of the audit are performed by other 
auditors (from the same network of firms as the lead auditor or outside 
the network), the auditor is required to decide whether its own 
participation in the audit is sufficient to enable it to serve as the 
lead auditor (or, in the language of AS 1205, the ``principal 
auditor'') and to report as lead auditor on the company's consolidated 
financial statements.\14\
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    \14\ See AS 1205.02.
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    <bullet> Whether or not the lead auditor decides to make reference 
to the audit of the other auditor, the lead auditor is required to make 
inquiries about the professional reputation and independence of the 
other auditor.\15\ In addition, the lead auditor is required to adopt 
appropriate measures to assure the coordination of its activities with 
those of the other auditor in order to achieve a proper review of the 
matters affecting the consolidating or combining of accounts in the 
financial statements. Those measures may include procedures to 
ascertain through communication with the other auditor:
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    \15\ AS 1205.10.
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    <bullet> That the other auditor is aware that the financial 
statements of the component which it is to audit are to be included in 
the financial statements on which the lead auditor will report, and 
that the other auditor's report will be relied upon (and, where 
applicable, referred to) by the lead auditor;
    <bullet> That the other auditor is familiar with the accounting 
principles generally accepted in the United States and with the 
standards of the PCAOB, and will conduct its audit and issue its report 
in accordance with those standards;
    <bullet> That the other auditor has knowledge of the SEC's 
financial reporting requirements; and
    <bullet> That a review will be made of matters affecting 
elimination of intercompany transactions and accounts and, if 
appropriate, the uniformity of accounting practices among the 
components included in the financial statements.\16\
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    \16\ AS 1205.10.c.
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    <bullet> The lead auditor must obtain, review, and retain certain 
information from the other auditor before issuing the report, including 
an engagement completion document, a list of significant risks, the 
other auditor's responses to those risks, the results of the other 
auditor's related procedures, and significant deficiencies and material

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weaknesses in internal control over financial reporting.\17\
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    \17\ AS 1205.12.
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    <bullet> The lead auditor also should \18\ consider performing one 
or more of the following procedures: visiting the other auditor, 
reviewing the audit programs of the other auditor (and, in some cases, 
issuing instructions to the other auditor), and reviewing additional 
audit documentation of significant findings or issues in the engagement 
completion document.\19\
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    \18\ The word ``should,'' as used in the auditing and related 
professional practice standards, indicates responsibilities that are 
presumptively mandatory. See Paragraph (a)(2) of PCAOB Rule 3101, 
Certain Terms Used in Auditing and Related Professional Practice 
Standards. Rule 3101 also defines other terms, such as ``must'' and 
``may,'' that describe the degree of responsibility that the 
standards impose on auditors.
    \19\ AS 1205.12.
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    (B) Including the other auditors in the engagement team and 
supervising their work under AS 1201. This standard governs the 
auditor's supervision of an audit engagement, including the work of 
other auditors who are members of the same engagement team, wherever 
they are located. AS 1201, as it relates to the supervision of other 
auditors on the engagement team, includes the following requirements:
    <bullet> The engagement partner is responsible for the engagement 
and its performance.\20\ The engagement partner may seek assistance 
from appropriate engagement team members in fulfilling his or her 
responsibilities for the engagement and its performance.\21\ Engagement 
team members can be from the engagement partner's firm or outside the 
firm.
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    \20\ AS 1201.03.
    \21\ AS 1201.04.
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    <bullet> The engagement partner and others who assist the 
engagement partner in supervising the work of other engagement team 
members are required to:
    <bullet> Inform the engagement team members of their 
responsibilities for the work they are to perform, including the 
objective of the procedures they are to perform, the nature, timing, 
and extent of those procedures, and matters that could affect those 
procedures;
    <bullet> Direct the engagement team members to inform the 
engagement partner or supervisors of significant accounting and 
auditing issues arising during the audit; and
    <bullet> Review the work of engagement team members to evaluate 
whether the work was performed and documented, the objectives of the 
procedures were achieved, and the results of the work support the 
conclusions reached.\22\
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    \22\ AS 1201.05.
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    <bullet> The engagement partner and others who assist the 
engagement partner in supervising the audit should determine the extent 
of supervision necessary for engagement team members to perform their 
work as directed and form appropriate conclusions. Under this standard, 
requirements for supervision are risk-based and scalable, and the 
necessary extent of supervision varies depending on, for example, the 
nature of the assigned work, the risks of material misstatement 
associated with that work, and the knowledge, skill, and ability of 
each individual involved.\23\
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    \23\ AS 1201.06.
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    (C) Dividing responsibility for the audit with another accounting 
firm. AS 1205 also governs audits in which the lead auditor divides 
responsibility for the audit with another accounting firm that issues a 
separate auditor's report on the financial statements of one or more 
subsidiaries, divisions, branches, components, or investments included 
in the company's financial statements.\24\ The requirements of AS 1205 
that apply under these circumstances are more limited than the 
requirements that apply to the lead auditor's use of the work and 
reports of other auditors when the lead auditor assumes responsibility 
for the other auditor's work (discussed in item A above).\25\ For 
example, AS 1205 does not require the lead auditor to obtain, review, 
and retain certain information from the accounting firm with which the 
lead auditor divides responsibility for the audit (which is required 
when the lead auditor assumes responsibility for another firm's work 
under AS 1205).\26\ If the lead auditor refers in its report to the 
work of another firm, the lead auditor's report indicates the division 
of responsibility and the magnitude of the portion of the financial 
statements audited by the other firm.\27\
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    \24\ For auditors' reports on non-issuer entities, where the 
principal accountant elects to place reliance on the work of the 
other accountant and makes reference to that effect in the auditor's 
report, SEC rules require that the other accounting firm's report be 
filed with the SEC. See Rule 2-05 of Regulation S-X, 17 CFR 210.2-
05.
    \25\ AS 1205.06-.09.
    \26\ AS 1205.12.
    \27\ AS 1205.07-.09.
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Existing Practice
    This section describes the state of practice--including the 
evolution of audit practices and related inspection findings--that the 
Board and its staff have observed in past years through PCAOB oversight 
activities (including through observations from audit inspections and 
enforcement cases).
Evolution of Auditing Practice at Accounting Firms
    Auditors around the world, even when they perform audit procedures 
that are required to comply with PCAOB standards, may be influenced by 
international and home country auditing standards. With respect to the 
use of other auditors, the standards of the International Auditing and 
Assurance Standards Board (``IAASB'')--specifically, International 
Standard on Auditing (``ISA'') 600 \28\--establishes requirements for 
``group audits.'' \29\ ISA 600 was originally developed in the wake of 
several significant frauds that involved multinational groups of 
companies, audited by multiple accounting firms.\30\ In December 2021, 
the IAASB approved amendments to ISA 600 in a project that was informed 
by, among other things, persistent deficiencies in group audits 
reported by the International Forum of Independent Audit Regulators 
(``IFIAR'').\31\
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    \28\ ISA 600, Special Considerations--Audits of Group Financial 
Statements (Including the Work of Component Auditors) (effective for 
audits of group financial statements for periods beginning on or 
after December 15, 2009); ISA 600 (Revised), Special 
Considerations--Audits of Group Financial Statements (Including the 
Work of Component Auditors) (effective for audits of group financial 
statements for periods beginning on or after December 15, 2023). See 
also AU-C Section 600, Special Considerations--Audits of Group 
Financial Statements (Including the Work of Component Auditors) 
(standard adopted by the AICPA's Auditing Standards Board 
(``ASB'')).
    \29\ Under ISA 600, group audits are audits of ``group financial 
statements'' consisting of at least two ``components.'' Group audits 
generally are performed by a ``group engagement team'' and one or 
more ``component auditors'' and may involve a single firm or 
multiple firms.
    \30\ See, e.g., Koninklijke Ahold N.V. (Royal Ahold), A. Michiel 
Meurs, Cees van der Hoeven, Johannes Gerhardus Andreae, and Ture 
Roland Fahlin, SEC Accounting and Auditing Enforcement Release 
(``AAER'') No. 2124 (Oct. 13, 2004); Lernout & Hauspie Speech 
Products, SEC AAER No. 1729 (Mar. 4, 2003); In re Parmalat 
Finanziara, S.p.A, SEC AAER No. 2065 (July 28, 2004); see also 
Michael J. Jones, ed., Creative Accounting, Fraud and International 
Accounting Scandals (2011) (describing, in Part B, 58 high-profile 
accounting scandals across 12 countries, including the Royal Ahold 
and Parmalat cases).
    \31\ See paragraph 7 of IAASB, Invitation to Comment, Enhancing 
Audit Quality in the Public Interest: A Focus on Professional 
Skepticism, Quality Control and Group Audits (Dec. 2015); see also 
IFIAR, 2017 Survey of Inspection Findings (Mar. 8, 2018), at 10 
(showing group audits among the inspection themes with frequent 
findings in 2014-2017); IAASB, Work Plan for 2015-2016: Enhancing 
Audit Quality and Preparing for the Future (Dec. 2014), at 7 
(``Concern [with ISA 600] has been expressed about: [t]he extent of 
the group auditor's involvement in the work of the component auditor 
. . .; [c]ommunication between the group auditor and the component 
auditor; [a]pplication of the concept of component materiality; 
[i]dentifying a component in complex situations; and [w]ork effort 
of the component auditor.'').

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[[Page 39685]]

    Meanwhile, the PCAOB has observed through its oversight activities 
that, after the PCAOB and IAASB adopted their own standards on risk 
assessment, some audit firms, particularly some of the largest firms 
that work extensively with other auditors, revised their policies, 
procedures, and guidance (``methodologies'') for using other auditors. 
The PCAOB has also observed differences among firms' methodologies, for 
example, in their approaches to determining whether the firm's 
participation in an audit is sufficient for the firm to serve as lead 
auditor.
    The PCAOB has also noted through its oversight activities that some 
audit firms have applied advances in technology to various aspects of 
the audit, including the supervision of engagement team members and 
other communications.\32\ The PCAOB has taken these practice 
developments into account in formulating the amendments.
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    \32\ See PCAOB, Spotlight: Data and Technology Research Project 
Update (May 2020), at 4-5 (noting that some firms have applied 
technology and developed tools to ``improve communications between 
the auditor and the company or among members of the engagement team 
(including other auditors), track information received during the 
audit, automate the documentation of procedures performed, and 
facilitate the efficiency of supervisory review.'').
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Observations From Audit Inspections and Enforcement Cases
    This section discusses observations based on PCAOB audit 
inspections and PCAOB and SEC enforcement cases. PCAOB staff has 
inspected the work of auditors who use other auditors, such as by 
reviewing the scope of work performed by the other auditor, the 
planning and instructions provided to the other auditor, and the degree 
of supervision (including review) of the other auditor. The PCAOB has 
also inspected the work of other auditors, such as by conducting 
inspections abroad and reviewing work performed by non-U.S. auditors at 
the request of a U.S.-based lead auditor. In some cases, PCAOB staff 
inspected the work performed by both the lead auditor and other 
auditors on the same audit. In many cases, but not always, the lead 
auditor was a U.S. firm while the other auditor was located in another 
jurisdiction. In addition, in 2019 the PCAOB established a ``target 
team'' of staff who performed inspection procedures across inspected 
firms. The team focused on U.S.-based multi-location audits and on 
issuer audits at annually inspected firms in which the U.S. firm was 
not the lead auditor.\33\
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    \33\ See PCAOB, Spotlight: Staff Update and Preview of 2019 
Inspection Observations (Oct. 8, 2020).
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Other Auditors
    PCAOB inspections staff has observed significant audit deficiencies 
in the work performed by other auditors, including noncompliance with 
the lead auditor's instructions and failure to communicate significant 
accounting and auditing issues to the lead auditor. Deficiencies have 
also been identified in other auditors' compliance with PCAOB standards 
governing a variety of audit procedures.\34\
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    \34\ See, e.g., 2016 Proposal at 16-17.
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    These failures in audit performance occurred in critical audit 
areas that are frequently selected for inspection, including revenue, 
accounts receivable, internal control over financial reporting, and 
accounting estimates including fair value measurements. For example, in 
several instances, other auditors failed to perform sufficient 
procedures in auditing the revenue of a company's business unit, 
including with respect to evaluating the business unit's revenue 
recognition policy, testing the occurrence of revenue, and testing the 
operating effectiveness of the business unit's controls over revenue. 
In recent years, there have been some indications of decreasing 
inspection-observed deficiencies, as discussed below.
    The Board in its enforcement cases has made similar findings about 
failures in audit performance. In one case, the Board found that an 
other auditor failed to perform audit procedures and to exercise 
supervisory responsibilities in accordance with PCAOB standards.\35\ In 
another case, an other auditor failed to exercise due professional care 
and failed to obtain sufficient audit evidence for the audit work on 
accounts receivable.\36\ In a more recent case, other auditors failed 
to exercise due professional care, respond adequately to a known 
significant risk, and obtain sufficient appropriate audit evidence, and 
they misrepresented their work in communications with the lead 
auditor.\37\
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    \35\ See In the Matter of Akiyo Yoshida, CPA, PCAOB Release No. 
105-2014-024 (Dec. 17, 2014). Unless otherwise indicated, the 
enforcement cases discussed in this section were settled 
proceedings.
    \36\ See In the Matter of Wander Rodrigues Teles, PCAOB Release 
No. 105-2017-007 (Mar. 20, 2017).
    \37\ See In the Matter of Ricardo Agust[iacute]n Garc[iacute]a 
Chagoy[aacute]n, Jos[eacute] Ignacio Valle Aparicio, and 
Rub[eacute]n Eduardo Guerrero Cervera, PCAOB Release No. 105-2018-
021 (Oct. 30, 2018).
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Lead Auditor
    Over the years, there have been numerous observations from 
inspections and from enforcement cases where the lead auditor failed, 
under existing PCAOB standards, to appropriately determine the 
sufficiency of its participation in an audit to warrant serving as lead 
auditor. These failures occurred at large and small firms, domestic and 
international. Among the most egregious findings, lead auditors failed 
to perform an audit or participated very little in the audit, and 
instead issued an audit report on the basis of procedures performed by 
other auditors.\38\ In these audits, the auditor failed to 
appropriately determine that it could serve as the lead auditor when 
all or a substantial portion of the financial statements were audited 
by another auditor. In two SEC enforcement cases, one firm failed to 
perform any analysis,\39\ and another firm failed to perform an 
adequate analysis,\40\ under AS 1205 regarding the sufficiency of its 
participation to serve as lead auditor.
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    \38\ For findings in PCAOB enforcement cases, see, for example, 
In the Matter of Michael T. Studer, CPA, P.C. and Michael T. Studer, 
CPA, PCAOB Release No. 105-2012-007 (Sept. 7, 2012), and In the 
Matter of Bentleys Brisbane Partnership and Robert John Forbes, CA, 
PCAOB Release No. 105-2011-007 (Dec. 20, 2011). Some of the 
standards violated in the enforcement cases cited in this release 
were predecessor standards to current PCAOB standards. The 
descriptions of inspection findings in this release are based on 
certain accounting firm inspection reports (portions of which are 
available on the PCAOB's website) and on the PCAOB's experience with 
inspecting firms.
    \39\ See BDO Canada LLP (f/k/a BDO Dunwoody LLP), SEC AAER No. 
3926 (Mar. 13, 2018).
    \40\ See KPMG Inc., SEC AAER No. 3927 (Mar. 13, 2018).
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    There also have been findings in which the lead auditor failed to 
assess, or adequately assess, the qualifications of other auditors' 
personnel who participated in the audit. For example, PCAOB oversight 
activities have revealed situations in which the other auditors' 
personnel lacked the necessary industry experience or knowledge of 
PCAOB standards and rules (including independence requirements), SEC 
rules, and the applicable financial reporting framework to perform the 
work requested by the lead auditor.\41\ Other examples identified 
through PCAOB and SEC oversight activities include audits in which: (i) 
the lead auditor failed to ascertain whether the other auditors, each 
of whom played a substantial role in the audit,\42\ were registered 
with the PCAOB; \43\ (ii) the

[[Page 39686]]

lead auditor failed to obtain, review, and retain the results of the 
other auditor's procedures relating to risks; \44\ (iii) the lead 
auditor failed to instruct the other auditor to perform an audit in 
accordance with PCAOB standards; \45\ (iv) the lead auditor failed to 
supervise the other auditors or provide specific instructions to them, 
including detailed audit plans, appropriate modifications to audit 
plans based on identified risks, the audit objectives to be 
accomplished, or the need to maintain proper documentation; \46\ (v) 
the lead auditor failed to adequately supervise the work of foreign 
audit staff in circumstances in which the engagement partner did not 
speak, read, or write the language used by the foreign staff; \47\ and 
(vi) the lead auditor failed to adequately analyze whether it could 
serve as the principal auditor, relied on the work of an other auditor 
that was not registered with the PCAOB, and failed to determine whether 
the other auditor's work complied with PCAOB auditing standards.\48\ In 
recent years, there have been indications of increased involvement by 
some firms in the supervision of other auditors, as discussed below.
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    \41\ See, e.g., In the Matter of Gregory & Associates, LLC, and 
Alan D. Gregory, CPA, PCAOB Release No. 105-2019-018 (Aug. 21, 
2019).
    \42\ See PCAOB Rule 2100, Registration Requirements for Public 
Accounting Firms (providing that any firm that plays a substantial 
role in the preparation or furnishing of an audit report with 
respect to any issuer, broker, or dealer must be registered with the 
Board); see also PCAOB Rule 1001(p)(ii), Definitions of Terms 
Employed in Rules (defining the phrase ``play a substantial role in 
the preparation or furnishing of an audit report'').
    \43\ See, e.g., BDO Canada LLP, SEC AAER No. 3926; KPMG Inc., 
SEC AAER No. 3927.
    \44\ See In the Matter of Ron Freund, CPA, PCAOB File No. 105-
2009-007 (Jan. 26, 2015), at 1 (Board order summarily affirming 
hearing officer's finding of violation and imposition of sanction) 
(finding a violation of AU 543.12b, which was reorganized by the 
PCAOB in March 2015 as AS 1205.12b, and which required that ``the 
principal auditor must obtain, and review and retain, . . . [a] list 
of significant fraud risk factors, the auditor's response, and the 
results of the auditor's related procedures . . . .'').
    \45\ See BDO Canada LLP, SEC AAER No. 3926.
    \46\ See, e.g., Anderson Bradshaw PLLC, Russell Anderson, CPA, 
Sandra Chen, CPA, and William Denney, CPA, SEC AAER No. 3856 (Jan. 
26, 2017); Sherb & Co., LLP, Steven J. Sherb, CPA, Christopher A. 
Valleau, CPA, Mark Mycio, CPA, and Steven N. Epstein, CPA, SEC AAER 
No. 3512 (Nov. 6, 2013).
    \47\ See, e.g., In the Matter of Acquavella, Chiarelli, Shuster, 
Berkower & Co., LLP, PCAOB Release No. 105-2013-010 (Nov. 21, 2013); 
In the Matter of David T. Svoboda, CPA, PCAOB Release No. 105-2013-
011 (Nov. 21, 2013).
    \48\ See In the Matter of Morgan & Company LLP, PCAOB Release 
No. 105-2021-002 (Mar. 30, 2021).
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Divided-Responsibility Audits
    As noted above, audits in which the lead auditor divides 
responsibility with one or more other accounting firms are relatively 
uncommon.\49\ For example, division of responsibility between auditors 
might occur for an equity method investment or a late-year acquisition 
of a company audited by another auditor.
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    \49\ According to PCAOB staff analysis of Form AP filings with 
the PCAOB, lead auditors currently divide responsibility with 
another auditor in about 40 issuer audits per year. Form AP filings 
in 2021, 2020, 2019, and 2018 disclosed 36, 41, 37, and 42 divided-
responsibility audits, respectively.
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Evolution of Inspection Findings
    As noted above, some firms, particularly larger firms affiliated 
with global networks, have increased their supervision of other 
auditors in light of other standards. In recent years, some larger U.S. 
firms have made further changes to their audit methodologies, perhaps 
in response to deficiencies identified by PCAOB inspections, 
enforcement cases by regulators, and ongoing rulemaking developments. 
Specifically, some firms have encouraged a greater level of supervision 
by the lead auditor, such as frequent comprehensive communications with 
other auditors and review of other auditors' work papers in the areas 
of significant risk.
    There have been some indications from PCAOB inspections that these 
firms' revisions to methodologies may have contributed to a decline in 
inspection-observed audit deficiencies at the firms' foreign affiliates 
with respect to work performed at the lead auditor's request.\50\ In 
2014, for example, PCAOB inspections staff observed a decrease in the 
number of significant audit deficiencies in work performed by other 
auditors.\51\ Since 2014, the rate of deficiencies has fluctuated but 
remained below the 2013 level. Thus, the changes to the methodologies 
of some firms appear to have contributed to some improvements in the 
quality of audits.
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    \50\ For data regarding deficiencies in audits that involve 
other auditors, see discussion below.
    \51\ See PCAOB, Staff Inspection Brief: Information about 2017 
Inspections, Vol. 2017/3 (Aug. 2017), at 7. The observed decrease is 
in comparison to the rate of deficiencies in certain inspected work 
in 2011, 2012, and 2013, when inspections staff, in each year 
respectively, identified significant audit deficiencies in about 32, 
38, and 42 percent of the inspected work performed for lead auditors 
by non-U.S. members of the six largest global networks. See Audit 
Committee Dialogue, PCAOB Release No. 2015-003 (May 7, 2015), at 9 
(graph entitled ``Deficiencies in Non-U.S. Referred Work''). Because 
issuer audit engagements and aspects of those engagements are 
selected for inspection based on a number of risk-related and other 
factors, the deficiencies included in inspections reports are not 
necessarily representative of the inspected firms' issuer audit 
engagement practice.
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    In 2019, some of the Board's inspections focused on certain topics 
in audits involving other auditors, including planning and risk 
assessment, determining the appropriateness of serving as lead auditor, 
and communications between the lead auditor and other auditors. The 
inspectors observed improved audit quality when the lead auditor and 
other auditors communicated regularly and consistently. They also 
observed areas for improvement, including the documentation of required 
procedures, reporting of certain audit participants, and compliance 
with independence requirements.\52\
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    \52\ See PCAOB, Spotlight: Staff Update and Preview of 2019 
Inspection Observations (Oct. 8, 2020), at 5-6.
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Reasons To Improve Auditing Standards
    The increasing globalization of business, especially among large 
public companies, has led to expanded use of other auditors and 
increasingly significant roles for other auditors within the audit. 
When other auditors participate in an audit, it is important for 
investor protection that the engagement partner and, in turn, lead 
auditor assure that the audit is performed in accordance with PCAOB 
standards and that sufficient appropriate evidence is obtained through 
the combined work of the lead auditor and other auditors to support the 
lead auditor's opinion in the audit report on the company's 
consolidated financial statements. Among other things, this means that 
the lead auditor should be appropriately involved in the audit so that 
the work of all audit participants is properly planned and supervised, 
the results of the work are properly evaluated, and the lead auditor is 
in a position to conclude that the financial statements are presented 
fairly in all material respects. Lack of adequate lead auditor planning 
or supervision can result in deficient audits.
    As noted above, some firms have made changes to their audit 
methodologies regarding the use of other auditors. However, other firms 
that have not made significant improvements to their methodologies 
concerning the planning and supervision of audits involving other 
auditors may have greater risk of lower quality audits when they use 
other auditors.
    Additionally, observations from PCAOB oversight activities indicate 
that further improvements are needed. PCAOB staff continues to identify 
deficiencies in the work of other auditors in critical audit areas, 
deficiencies that lead auditors had not identified or sufficiently 
addressed. In some cases, these deficiencies occurred even when lead 
auditors did not violate existing requirements related to the use of 
other auditors, for example, if the lead auditor performed the 
procedures described in AS 1205 but did not identify these 
deficiencies. Such findings indicate that investor protection could be 
improved by, among

[[Page 39687]]

other things, increased involvement in, and evaluation of, the work of 
other auditors by the lead auditor.
Areas for Improvement
    To enhance audit practice among all firms using other auditors, the 
Board identified the following areas for improvement in the current 
standards:
    <bullet> Applying a risk-based supervisory approach. Applying a 
risk-based supervisory approach to the lead auditor's oversight of 
other auditors' work should result in more appropriate involvement by 
the lead auditor in audits involving other auditors. Unlike the Board's 
standards for determining the scope of multi-location audit engagements 
and general supervision of the audit, which require more audit 
attention to areas of greater risk, the existing standard for using the 
work of other auditors does not explicitly require the lead auditor to 
tailor its planning and oversight of other auditors for the associated 
risks. Applying a risk-based supervisory approach will direct the lead 
auditor's attention to the areas of greatest risk.
    <bullet> Providing additional specificity. Providing additional 
specificity for the lead auditor's application of the principles-based 
supervisory requirements of PCAOB standards to the supervision of other 
auditors should help address the unique aspects of supervising other 
auditors. Additional specificity should also help the lead auditor 
assure that its participation in the audit is sufficient for it to 
carry out its responsibilities and issue an audit report based on 
sufficient appropriate evidence.
    <bullet> Taking into account recent changes in auditing practice. 
Revising PCAOB auditing standards to take into account recent changes 
that some firms have implemented to make their auditing practices more 
rigorous for audits that involve other auditors should make those 
improved practices more uniform across all accounting firms and enable 
the PCAOB to enforce more rigorous provisions across all firms.
    Because of the lead auditor's central role in an audit involving 
multiple firms, the amendments adopted by the Board seek to strengthen 
the existing requirements and impose a more uniform approach to the 
lead auditor's oversight of other auditors' work. These improvements 
are intended to increase the lead auditor's involvement in and 
evaluation of the work of other auditors generally, improve 
communication among the lead auditor and other auditors, enhance the 
ability of the lead auditor to prevent or detect deficiencies in the 
work of other auditors, and thus facilitate improvements in the quality 
of audits involving other auditors and promote investor protection.
Comments on the Reasons for Standard Setting
    A number of commenters on the proposing releases broadly expressed 
support for enhancing PCAOB standards for using the work of other 
auditors and referred-to auditors, or stated that the proposed 
rulemaking would lead to improvements in audit quality. Some of the 
same commenters and others supported the Board's objective of 
establishing requirements for overseeing other auditors' work that are 
risk-based and more closely aligned with the Board's risk assessment 
standards than the existing standards are. Some commenters supported 
updating PCAOB standards in light of, among other things, changes in 
the business environment, company structure, accounting firm and 
network structure, regulation, and financial reporting, and the 
increased prevalence of audits involving other auditors. Some other 
commenters supported providing a more uniform approach to the lead 
auditor's supervision of other auditors. However, in the view of one 
commenter, some of the root causes of poor audit performance are not 
obvious, they have specific effects that are hard to isolate, and not 
all can be remedied by auditors and the PCAOB.
    Although commenters generally supported applying a risk-based 
approach to the lead auditor's oversight of other auditors' work, some 
commenters on the proposing releases expressed concerns about certain 
aspects of the amendments and their economic impact. Some recommended 
further improvements to the proposed amendments. In the view of some 
commenters, the amendments should include additional direction in 
certain areas, be more scalable and better aligned with the risk-based 
approach, and provide more latitude for the lead auditor to exercise 
professional judgment, e.g., in determining the nature, timing, and 
extent of supervisory activities. The Board's consideration of the 
comments received is discussed further in this document.
    In adopting the amendments, the Board took into account the 
comments received on the proposing releases. Based on information 
available to the Board--including the current regulatory baseline, 
observations from the Board's oversight activities, academic 
literature, and comments--the Board believes that investors will 
benefit from strengthened and clarified auditing standards in this 
area. While the Board does not expect that the revisions to the 
standards will (or ever could) entirely eliminate audit deficiencies in 
this area, the revisions will clarify the auditor's responsibilities, 
align the applicable requirements with the PCAOB's risk-based 
supervisory standards, and improve the quality of audits.
Overview of Final Rules
    The amendments the Board adopted are intended to strengthen the 
existing requirements and impose a more uniform approach to the lead 
auditor's supervision of other auditors.\53\ As discussed in more 
detail in this document, they are designed to increase the lead 
auditor's involvement in, and evaluation of, the work of other 
auditors, enhance the lead auditor's ability to prevent or detect 
deficiencies in the work of other auditors, and facilitate improvements 
in the quality of the work of other auditors. In addition, the Board 
adopted a new auditing standard that will apply when the lead auditor 
divides responsibility for an audit with another accounting firm. The 
key aspects of the amendments and new standard include:
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    \53\ The amendments apply to audits of issuers, as defined in 
Section 2(a)(7) of Sarbanes-Oxley, 15 U.S.C. 7201(7), and also to 
audits of brokers and dealers, as defined in Sections 110(3) and (4) 
of Sarbanes-Oxley, 15 U.S.C. 7220(3)-(4).
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    <bullet> Planning the audit. AS 2101, Audit Planning, as amended 
\54\ will provide that:
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    \54\ The amendments to AS 2101 and AS 1201 appear in the main 
body of each standard and in Appendix A of AS 2101. As originally 
proposed, most of the amendments to these standards would have 
appeared in a new Appendix B of each standard. As adopted, the 
provisions that would have appeared in Appendix B are instead 
integrated in the main body of the standards. See 2021 SRC at 9.
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    <bullet> In audits involving other auditors or referred-to 
auditors, the engagement partner should determine whether the 
participation of his or her firm is sufficient for the firm to carry 
out the responsibilities of a lead auditor and to report as such on the 
company's financial statements.\55\ The amendments also describe 
considerations for making the sufficiency determination. (AS 2101.06A)
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    \55\ Under the amended standard, in an integrated audit of 
financial statements and internal control over financial reporting 
(``ICFR''), the lead auditor's participation in the audit of ICFR 
must also be sufficient to provide a basis for it to serve as the 
lead auditor of ICFR. (AS 2101.06C)
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    <bullet> In audits involving referred-to auditors, the Board has 
established that participation of the engagement partner's firm is 
ordinarily not sufficient for it to serve as lead auditor if more than 
50 percent of the assets or revenues are audited by referred-to 
auditors. (AS 2101.06A)

[[Page 39688]]

    <bullet> Another amended PCAOB standard, AS 1220, Engagement 
Quality Review, will expressly require that the engagement quality 
reviewer for the audit review the engagement partner's determination 
about the sufficiency of his or her firm's participation in the audit 
to serve as lead auditor. (AS 1220.10a)
    <bullet> In audits that involve work performed by other auditors 
regarding locations or business units, the lead auditor's involvement 
(through planning and performing audit procedures and supervising other 
auditors) should be commensurate with the risks of material 
misstatement associated with those locations or business units. (AS 
2101.06B)
    <bullet> When determining the engagement's compliance with 
independence and ethics requirements in audits involving other 
auditors, the lead auditor should:
    <bullet> Understand the other auditor's knowledge of SEC 
independence requirements and PCAOB independence and ethics 
requirements (``independence and ethics requirements''), and experience 
in applying the requirements. (AS 2101.06Da)
    <bullet> Obtain and review written affirmations \56\ regarding (1) 
the other auditor's policies and procedures regarding independence and 
ethics requirements and, if there are none, a description of how it 
determines its compliance; (2) the other auditor's compliance with 
independence and ethics requirements, which also describe the nature of 
any instances of non-compliance; and (3) a description of all 
relationships between the other auditor and the audit client or persons 
in financial reporting oversight roles that may reasonably be thought 
to bear on independence. (AS 2101.06Db)
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    \56\ The terms ``obtain,'' ``retain,'' ``written,'' or ``in 
writing'' do not mandate that documents related to the audit be 
paper-based. See paragraph .04 of AS 1215, Audit Documentation 
(audit documentation may be in the form of paper, electronic files, 
or other media).
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    <bullet> Inform the other auditor of changes that affect 
determining compliance with independence and ethics requirements and 
are relevant to the other auditor's affirmations and descriptions. (AS 
2101.06Dc(1))
    <bullet> Request that the other auditor update its affirmations and 
descriptions to reflect any changes in circumstances. (AS 2101.06Dc(2))
    <bullet> If the other auditor would play a substantial role in the 
audit,\57\ the lead auditor may use the other auditor only if the other 
auditor is registered with the PCAOB. (AS 2101.06G)
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    \57\ See PCAOB Rule 1001(p)(ii) (defining the phrase ``play a 
substantial role in the preparation or furnishing of an audit 
report''), including conforming amendments for the term ``lead 
auditor'' as revised in this document.
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    <bullet> With respect to the other auditor's knowledge, skill, and 
ability, the lead auditor should:
    <bullet> Understand the knowledge, skill, and ability of the other 
auditor's engagement team members who assist the lead auditor with 
planning and supervision. (AS 2101.06Ha)
    <bullet> Obtain a written affirmation from the other auditor that 
its engagement team members possess the knowledge, skill, and ability 
to perform the assigned tasks. (AS 2101.06Hb)
    <bullet> Determine that it can communicate with other auditors and 
gain access to their audit documentation. (AS 2101.06Hc)
    <bullet> In multi-tiered audits, a first other auditor may assist 
the lead auditor in performing procedures with respect to second other 
auditors concerning independence and ethics requirements; the 
knowledge, skill, and ability of the second other auditors; and 
communications with second other auditors. (AS 2101.06E, .06I)
    <bullet> Supervising the audit. AS 1201, Supervision of the Audit 
Engagement, as amended will require that the lead auditor:
    <bullet> Supervise other auditors under the Board's standard on 
supervision of the audit engagement (AS 1201) when the lead auditor 
assumes responsibility for the other auditor's work (i.e., does not 
divide responsibility for the audit with an other auditor).\58\
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    \58\ The work of engaged assistants from outside the firm (e.g., 
leased staff, secondees, staff from a shared service center) will be 
governed by the same standards that apply to the work of assistants 
inside the firm (e.g., firm partners, shareholders, employees), 
including the supervision provisions in AS 1201.05-.06. See, e.g., 
Staff Audit Practice Alert No. 6, at 7-11 (July 12, 2010) 
(discussing engaging assistants from outside the firm).
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    <bullet> Inform other auditors of the scope of their work and the 
following items with respect to the work requested to be performed: 
identified risks of material misstatement associated with the location 
or business unit, tolerable misstatement, and the amount (if 
determined) below which misstatements are clearly trivial and do not 
need to be accumulated. (AS 1201.08)
    <bullet> Obtain and review the other auditor's written description 
of procedures to be performed and discuss with, and communicate in 
writing to, the other auditor any needed changes to the planned 
procedures. (AS 1201.09-.10)
    <bullet> Obtain and review a written affirmation from the other 
auditor as to whether the other auditor has performed work in 
accordance with the lead auditor's instructions, and, if the other 
auditor has not performed such work, a description of the nature of, 
and explanation of the reasons for, the instances where the work was 
not performed in accordance with the instructions, including (if 
applicable) a description of the alternative work performed. (AS 
1201.11)
    <bullet> Direct other auditors to provide specified documentation 
concerning work performed.\59\ (AS 1201.12)
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    \59\ Under PCAOB standards, the lead auditor's necessary extent 
of review of the other auditors' documentation depends on the 
necessary extent of supervision by the lead auditor (see AS 
1201.06). The documentation to be reviewed by the lead auditor 
should include, at a minimum, the documentation described in AS 
1215.19.
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    <bullet> Determine whether the other auditor performed the work as 
instructed and whether additional audit evidence needs to be obtained. 
(AS 1201.13)
    <bullet> Evaluate, in a multi-tiered audit where the lead auditor 
seeks assistance from a first other auditor to perform any of the above 
responsibilities with respect to second other auditors,\60\ the first 
other auditor's supervision of second other auditors. (AS 1201.14)
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    \60\ For a more detailed discussion of multi-tiered audits, see 
discussion below.
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    <bullet> Dividing responsibility for the audit. When the lead 
auditor divides responsibility for the audit with another accounting 
firm, new auditing standard AS 1206, Dividing Responsibility for the 
Audit with Another Accounting Firm, will provide that:
    <bullet> The lead auditor should determine that audit procedures 
are performed to test and evaluate the consolidation or combination of 
the financial statements of the business units audited by the referred-
to auditor into the company's financial statements. (AS 1206.03)
    <bullet> The lead auditor should communicate in writing to the 
referred-to auditor the plan to divide responsibility for the audit. 
(AS 1206.04)
    <bullet> The lead auditor should obtain written representation from 
the referred-to auditor that it is independent under PCAOB and SEC 
requirements and duly licensed to practice. (AS 1206.05)
    <bullet> The lead auditor may divide responsibility for the audit 
with a referred-to auditor only if:
    <bullet> The referred-to auditor represents it performed its audit 
and issued its report in accordance with PCAOB standards;
    <bullet> The lead auditor determines that the referred-to auditor 
is familiar with the relevant financial reporting requirements and 
PCAOB standards;

[[Page 39689]]

    <bullet> The referred-to auditor is registered with the PCAOB if it 
played a substantial role in the audit or its report is with respect to 
a business unit that is itself an issuer, broker, or dealer;
    <bullet> In case of the conversion of business unit financial 
statements from another financial reporting framework to the financial 
reporting framework of the company, the lead auditor or the referred-to 
auditor audits the conversion adjustments, and the lead auditor 
indicates in its report which auditor was responsible for that. (AS 
1206.06)
    <bullet> In situations where the lead auditor is unable to divide 
responsibility, the lead auditor should: plan and perform procedures 
necessary to issue an auditor's report that expresses an opinion; 
qualify or disclaim an opinion; or withdraw from the engagement. (AS 
1206.07)
    <bullet> The lead auditor's audit report must indicate clearly the 
division of responsibility, identify the referred-to auditor by name 
and refer to its report, and disclose the magnitude of the portion of 
the financial statements (or internal controls over financial 
reporting) audited by the referred-to auditor. (AS 1206.08)
    <bullet> If the referred-to auditor's report is not a standard 
(i.e., unqualified) report, the lead auditor should make reference to 
the departure, unless the matter is clearly trivial to the financial 
statements. (AS 1206.09)
    <bullet> Additional amendments. The amendments the Board adopted 
also:
    <bullet> Rescind AS 1205, Part of the Audit Performed by Other 
Independent Auditors.
    <bullet> This change, in effect, requires lead auditors to 
supervise (directly or through other auditors) work performed by other 
auditors under AS 1201 in all cases, unless the lead auditor divides 
responsibility for the audit with another (referred-to) auditor, in 
which case AS 1206 applies.
    <bullet> Revise AS 1015, Due Professional Care in the Performance 
of Work, to emphasize that other auditors are responsible for 
performing their work with due professional care.
    <bullet> Revise AS 1215 to expressly state that, in an audit 
involving other auditors, an other auditor must retain documentation of 
the work that it performs, and that its documentation is subject to the 
requirements related to subsequent modification.
    <bullet> Amend Appendix B, Audit Evidence Regarding Valuation of 
Investments Based on Investee Financial Results, of AS 1105, Audit 
Evidence, to distinguish it from requirements involving other auditors 
or referred-to auditors, by using a more descriptive term, ``investee 
auditor'' (including in situations involving equity method investees), 
and making certain other clarifying edits.
    <bullet> Include definitions of key terms ``engagement team,'' 
``lead auditor,'' ``other auditor,'' and ``referred-to auditor'' in AS 
2101.
    <bullet> Revise other PCAOB standards and rules to conform to these 
amendments.

Additional Discussion of the Amendments and New Standard

Introduction

    The changes to PCAOB standards the Board adopted were intended to 
improve the quality of audits that involve one or more public 
accounting firms, and accountants at those firms, that are outside the 
accounting firm issuing the auditor's report. This section discusses in 
more detail amendments to auditing standards and a new auditing 
standard adopted by the Board relating to the use of other auditors and 
dividing responsibility for the audit with another accounting firm 
(collectively, ``amendments'' or ``final amendments''). The Board 
adopted these amendments after taking into account public comments that 
were received on the requirements proposed in 2016 and in response to 
supplemental requests for comment issued in 2017 and 2021 as discussed 
in more detail below in connection with the amendments.
    In brief, the amendments include:
    <bullet> Amendments to AS 1015, Due Professional Care in the 
Performance of Work; AS 1105, Audit Evidence; AS 1201, Supervision of 
the Audit Engagement; AS 1215, Audit Documentation; AS 1220, Engagement 
Quality Review; and AS 2101, Audit Planning;
    <bullet> A new auditing standard, AS 1206, Dividing Responsibility 
for the Audit with Another Accounting Firm, for situations in which the 
accounting firm issuing the auditor's report divides responsibility for 
the audit with another accounting firm; and
    <bullet> Other related amendments to PCAOB auditing standards.
    In general, the amendments extend the risk-based supervision 
requirements of PCAOB auditing standards to all situations in which 
other auditors participate in an audit, unless the lead auditor divides 
responsibility for the audit with another auditor.\61\ The amendments 
also strengthen the requirements and provide additional direction to 
the lead auditor about its responsibilities. For the relatively 
infrequent situations when the lead auditor divides responsibility for 
the audit with another auditor, the amendments strengthen the existing 
approach under PCAOB standards.
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    \61\ For situations involving auditors of the financial 
statements of the company's investees, see discussion below.
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    The amendments also rescind AS 1205, Part of the Audit Performed by 
Other Independent Auditors, and AI 10, Part of the Audit Performed by 
Other Independent Auditors: Auditing Interpretations of AS 1205.
    The amendments to AS 1201 and AS 2101 appear in the main body of 
each standard and in Appendix A of AS 2101. As originally proposed, 
most of the amendments to these standards would have appeared in a new 
Appendix B of each standard. As proposed in the 2021 SRC, the 
provisions that would have appeared in Appendix B were instead 
relocated to the body of the two standards (AS 1201 and AS 2101) to 
enhance the readability and usability of the amendments and to better 
facilitate their implementation. One commenter on the 2021 SRC 
commended the PCAOB for relocating the amendments from Appendix B of 
each standard to the body of the standards, stating that it improves 
usability and clarity.

Definitions of Engagement Team, Lead Auditor, Other Auditor, and 
Referred-to Auditor

See paragraphs .A3-.A6 of AS 2101
    To operationalize the requirements included in this release, the 
amendments define the terms ``engagement team,'' ``lead auditor,'' 
``other auditor,'' and ``referred-to auditor,'' as discussed below. A 
commenter on the 2021 SRC recommended alignment of the terminology used 
in the PCAOB's standards with that of the International Auditing and 
Assurance Standards Board (``IAASB'') and the American Institute of 
Certified Public Accountants Auditing Standards Board (``ASB''). After 
considering the comment, the Board adopted the definitions 
substantially as proposed, because they are designed for the 
requirements of this rulemaking, which differ from those in the 
analogous IAASB and ASB standards. These definitions are included in 
Appendix A of AS 2101 and referenced in other PCAOB standards, where 
applicable.
Definition of ``Engagement Team''
See paragraph .A3 of AS 2101
    Under existing PCAOB standards, the engagement partner is 
responsible for the engagement and its performance, including the 
proper supervision of the work of engagement team members and

[[Page 39690]]

for compliance with PCAOB standards.\62\ The term ``engagement team'' 
is commonly used in PCAOB auditing standards but has not been defined. 
The definition of ``engagement team'' that the Board adopted in AS 2101 
will apply to AS 1201 and AS 2101, as amended, and to the new standard, 
AS 1206. The term specifies, for example, the persons subject to the 
lead auditor's supervision under AS 1201, which standard will now apply 
to the relationship between the lead auditor and all other auditors for 
whose work the lead auditor assumes responsibility, including those 
currently covered by rescinded AS 1205.
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    \62\ See AS 1201.03.
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    The Board adopted a revised definition to conform to previous 
amendments to the Board's standards and to address 2021 SRC comments 
received. Subparagraph (2) of the revised definition conforms to 
terminology used in Appendix C, Supervision of the Work of Auditor-
Employed Specialists, of AS 1201, which the Board adopted in 2018.\63\ 
As revised, the definition of ``engagement team'' includes:
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    \63\ See Amendments to Auditing Standards for Auditor's Use of 
the Work of Specialists, PCAOB Release No. 2018-006 (Dec. 20, 2018).
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    (1) Partners, principals, and shareholders of, and accountants \64\ 
and other professional staff employed or engaged by, the lead auditor 
or other accounting firms who perform audit procedures on an audit or 
assist the engagement partner in fulfilling his or her planning or 
supervisory responsibilities on the audit pursuant to AS 2101 or AS 
1201; and
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    \64\ See paragraph (a)(ii) of PCAOB Rule 1001, Definitions of 
Terms Employed in Rules, which defines the term ``accountant.'' 
(This footnote referring to Rule 1001 is included in the definition 
of ``engagement team'' appearing in AS 2101.A3.)
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    (2) Specialists who, in connection with the audit, (i) are employed 
by the lead auditor or an other auditor participating in the audit and 
(ii) assist that auditor in obtaining or evaluating audit evidence with 
respect to a relevant assertion of a significant account or 
disclosure.\65\
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    \65\ The final amendments add the phrase ``in connection with 
the audit'' and replace ``assist their firm'' with ``assist that 
auditor'' for clarity.
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    The definition excludes:
    (1) The engagement quality reviewer and those assisting the 
reviewer (to which AS 1220 applies);
    (2) Partners, principals, and shareholders of, and other 
individuals employed or engaged by, another accounting firm in 
situations in which the lead auditor divides responsibility for the 
audit with the other firm under AS 1206; and
    (3) Engaged specialists.\66\
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    \66\ AS 1210, Using the Work of an Auditor-Engaged Specialist, 
establishes requirements that apply to the use of specialists 
engaged by the auditor's firm. Appendix A of AS 1105 sets forth the 
auditor's responsibilities for using the work of a specialist 
employed or engaged by the company. (This footnote referring to AS 
1210 and AS 1105 is included in the definition of ``engagement 
team'' appearing in AS 2101.A3.)
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    In general, the engagement team, as defined, encompasses the 
engagement partner and individual accountants who perform procedures to 
obtain and evaluate audit evidence, as well as specialists employed by 
one of the participating audit firms who perform audit procedures. The 
following table illustrates the distinction between engagement team 
members and parties who are not engagement team members under the 
definition the Board adopted.

------------------------------------------------------------------------
                                             Examples of parties who are
    Examples of engagement team members      NOT engagement team members
------------------------------------------------------------------------
<bullet> Engagement partner                 <bullet> Auditor-engaged
                                             specialists.\67\
<bullet> Personnel from the engagement      <bullet> Engagement quality
 partner's firm \68\ who perform audit       reviewer and those
 procedures on the audit                     assisting the reviewer.\69\
                                            <bullet> Appendix K or
                                             filing reviewer.\70\
                                            <bullet> Service auditors of
                                             a third-party service
                                             organization.\71\
<bullet> Personnel of accounting firms and  <bullet> A firm professional
 individual accountants outside the          who performs a
 engagement partner's firm who perform       contemporaneous quality
 audit procedures on the audit (supervised   control function (e.g.,
 under AS 1201) \72\                         internal inspection or
                                             quality control review) but
                                             does not perform audit
                                             procedures or help plan or
                                             supervise the audit work
<bullet> A firm professional in the         <bullet> Individuals
 national office or centralized group in     employed or engaged by the
 the firm (including within the firm's       company being audited, such
 network) who performs audit procedures on   as a company's internal
 the audit or assists in planning or         auditors, a company's
 supervising the audit                       specialists, and a
                                             company's consultants.\73\
------------------------------------------------------------------------

     
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    \67\ The term ``engagement partner's firm'' is used in this 
rulemaking to describe the registered public accounting firm issuing 
the auditor's report. (See first note to AS 2101.A4.)
    \68\ See AS 1210.
    \69\ AS 1220 applies to those persons.
    \70\ Reviewers under Appendix K of SEC Practice Section 
(``SECPS'') Section 1000.45, SECPS Member Firms with Foreign 
Associated Firms That Audit SEC Registrants, would not be considered 
members of the engagement team. Those reviewers, similar to the 
engagement quality reviewer, do not make decisions on behalf of the 
engagement team or assume any of the responsibilities of the 
engagement team.
    \71\ AS 2601, Consideration of an Entity's Use of a Service 
Organization, sets forth the auditor's responsibilities with respect 
to using the work of service auditors who issue reports on the 
controls of a third-party service organization.
    \72\ This includes personnel of accounting firms described in 
rescinded AS 1205 as other auditors for whose work the ``principal 
auditor'' (which is the term used in AS 1205) assumes 
responsibility. By including these individuals in the engagement 
team, the amendments expand the lead auditor's responsibility to 
apply the risk-based supervision approach to all accounting firms 
involved in the audit, except in situations in which the lead 
auditor divides responsibility for the audit with another accounting 
firm. (If the lead auditor divides responsibility for the audit with 
another accounting firm, that firm is considered a referred-to 
auditor under AS 1206.)
    \73\ Because of their roles at the company, the work of 
individuals employed or engaged by the company is not subject to 
supervision under AS 1201; they are not considered members of the 
engagement team under the adopted definition. PCAOB standards 
include requirements regarding the auditor's use of work performed 
by some of these individuals. See, e.g., AS 1105, Appendix A; AS 
2201, An Audit of Internal Control Over Financial Reporting That Is 
Integrated with An Audit of Financial Statements; AS 2605, 
Consideration of the Internal Audit Function.
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    A commenter on the 2021 SRC asked whether the Board considered the 
potential ramifications of the difference between the proposed 
definition of ``engagement team'' and the analogous term ``audit 
engagement team'' in SEC independence requirements. One commenter 
acknowledged that the Board addressed this question in the 2016 
Proposal and recommended that the Board add an explanatory footnote to 
the rule text in the definition of ``engagement team.''
    The Board purposely adopted a definition of ``engagement team'' 
that is narrower than the definition of ``audit engagement team'' in 
the SEC's independence rules. See Rule 2-01(f)(7)(i) of Regulation S-X, 
17 CFR 210.2-01(f)(7)(i). In addition to the individuals within the 
Board's definition of ``engagement team,'' the definition in SEC Rule 
2-01(f)(7)(i) also encompasses certain individuals who are not included 
in the Board's definition, such as the engagement quality reviewer. The 
Board noted that neither the definition of ``engagement team'' nor any 
other amendments in this

[[Page 39691]]

release affect the definitions within, or the applicability of, the 
independence requirements of the SEC.
    Another commenter expressed concern that the definition of 
``engagement team'' for purposes of AS 2101, AS 1201, and AS 1206 could 
have implications for other standards. This commenter cited other 
auditing standards outside of these three standards that use the term 
``engagement team'' and encouraged the PCAOB to revisit these instances 
to determine the implications for those standards of the new 
definition. The Board noted that, although the definition is not 
repeated across all other PCAOB standards, the term ``engagement team'' 
in other PCAOB standards has the same meaning as the defined term in AS 
2101.A3.\74\
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    \74\ See proposed rule text for further amendments made to PCAOB 
standards in order to clarify that the term ``engagement team'' has 
the same meaning (or, where applicable, analogous meaning) as the 
defined term in AS 2101.A3.
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    Finally, a couple of commenters recommended clarifying the 
definition of ``engagement team'' with respect to auditor-employed 
specialists. One commenter suggested specifying that auditor-employed 
specialists can be engagement team members only if they participate in 
the audit, while the other suggested changing the proposed reference to 
``their firm'' to instead employ the defined terms ``lead auditor'' and 
``other auditor.'' The Board made corresponding clarifying edits to 
subparagraph (2) of the definition. Apart from making these changes and 
certain minor clarifying edits, the Board adopted the definition of 
``engagement team'' as proposed in the 2021 SRC.
Definition of ``Lead Auditor''
See paragraph .A4 of AS 2101
    The amendments introduce the new term ``lead auditor'' for both 
types of scenarios addressed by this rulemaking: supervising other 
auditors' work under AS 1201, and dividing responsibility for the audit 
with another accounting firm under AS 1206.\75\ The term ``lead 
auditor'' replaces the term ``principal auditor'' that is currently 
used in several PCAOB standards.\76\ Under the amendments, the term 
``lead auditor'' means the firm issuing the auditor's report, the 
engagement partner of that firm, and other personnel of that firm (or 
their functional equivalents) who perform planning or supervisory 
responsibilities from that firm.
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    \75\ The amendments rescind AS 1205, which uses the term 
``principal auditor.''
    \76\ See Other Related Amendments to PCAOB Auditing Standards.
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    The definition is key to this rulemaking because it identifies the 
firm and individuals who are responsible for carrying out the 
requirements under the amendments:
    Lead auditor--
    (a) The registered public accounting firm \77\ issuing the 
auditor's report on the company's financial statements and, if 
applicable, internal control over financial reporting; and
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    \77\ See paragraph (r)(i) of PCAOB Rule 1001, which defines the 
term ``registered public accounting firm.'' This footnote is 
included within the definition appearing in AS 2101.A4.
---------------------------------------------------------------------------

    (b) The engagement partner and other engagement team members who 
both:
    (1) Are partners, principals, shareholders, or employees of the 
registered public accounting firm issuing the auditor's report (or 
individuals who work under that firm's direction and control and 
function as the firm's employees); and
    (2) Assist the engagement partner in fulfilling his or her planning 
or supervisory responsibilities on the audit pursuant to AS 2101 or AS 
1201.\78\
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    \78\ See paragraph .05a of AS 2301, The Auditor's Responses to 
the Risks of Material Misstatement, which describes making 
appropriate assignments of significant engagement responsibilities. 
See also AS 1015.06, according to which ``[e]ngagement team members 
should be assigned to tasks and supervised commensurate with their 
level of knowledge, skill, and ability.'' This footnote is included 
within the definition appearing in AS 2101.A4.
---------------------------------------------------------------------------

    Note: The registered public accounting firm issuing the auditor's 
report is also referred to in this standard as ``the engagement 
partner's firm.''
    Note: Individuals such as secondees \79\ who work under the 
direction and control of the registered public accounting firm issuing 
the auditor's report would function as the firm's employees.
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    \79\ For this purpose, the term ``secondee'' refers to an 
individual participating in a secondment arrangement in which, for 
at least three consecutive months, (1) a professional employee of an 
accounting firm in one country works for a registered public 
accounting firm that is located in another country and is issuing an 
auditor's report, and (2) the professional employee performs audit 
procedures with respect to entities and their operations in that 
other country and does not perform more than de minimis audit 
procedures in relation to entities or business operations in the 
country of his or her employer. A secondee can be either physically 
located in that other country or working through a remote work 
arrangement. This footnote is included within the definition 
appearing in AS 2101.A4.
---------------------------------------------------------------------------

    Several commenters on the 2021 SRC indicated that the definition of 
``lead auditor'' was sufficiently clear. One commenter on the 2021 SRC 
stated there was lack of clarity about the use of the term ``lead 
auditor'' in circumstances when the audit does not involve other 
auditors or referred-to auditors. This commenter suggested that the 
proposed standard explicitly acknowledge either: (1) the registered 
public accounting firm that issues the auditor's report is always the 
lead auditor, including when there are no other auditors or referred-to 
auditors or (2) the registered public accounting firm that issues the 
auditor's report is only a lead auditor if the audit involves other 
auditors or referred-to auditors (and therefore modifications would 
need to be made to the definition of engagement team).
    In the proposing releases, the Board stated that the term ``lead 
auditor'' would apply to these scenarios: supervising other auditors 
under AS 1201 and dividing responsibility for the audit under proposed 
AS 1206. In addition, the amendments already clearly indicate that the 
term will apply when other auditors or referred-to auditors are 
involved in the audit.\80\
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    \80\ See, e.g., AS 2101.04.
---------------------------------------------------------------------------

    The description of ``secondee'' was added to the proposed 
amendments in the 2021 SRC.\81\ Several commenters said that the 
description was too prescriptive, given the flexibility in location 
where audit professionals may work, as demonstrated throughout the 
COVID-19 pandemic. Most of these commenters were supportive of its 
inclusion as an example in the rule text, but recommended that 
``secondee'' not be defined so narrowly. They also suggested that 
individuals who work at shared service centers be included as an 
example in the rule text given the continued increase in their use. In 
addition, one commenter said that it did not agree with the Board that 
at all times (now and in the future) individuals who work at shared 
service centers will work under the direction and control of and 
function as employees of the lead auditor firm.
---------------------------------------------------------------------------

    \81\ See 2021 SRC at A1-16 (proposed footnote 5 of AS 2101.A4).
---------------------------------------------------------------------------

    After considering the comments received, the Board is revising 
footnote 5 of AS 2101.A4 to be similar to revised Form AP staff 
guidance \82\ on secondees. Those revisions recognized that, because of 
the recent advances in technology and remote work arrangements, 
location should not necessarily be a factor in determining whether 
secondees work under the direction and control of the firm and function 
as their employees. Further, the Board agrees that under the amendments 
secondees from other accounting firms and employees of

[[Page 39692]]

shared service centers who both work under the firm's direction and 
control (as with other individuals who work in the role of firm 
employees) and assist the engagement partner in fulfilling planning or 
supervisory responsibilities on the audit are part of the lead auditor.
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    \82\ See Staff Guidance, Form AP, Auditor Reporting of Certain 
Audit Participants, and Related Voluntary Audit Report Disclosure 
Under AS 3101, The Auditor's Report on an Audit of Financial 
Statements When the Auditor Expresses an Unqualified Opinion (Dec. 
17, 2021).
---------------------------------------------------------------------------

    Regarding the comment that individuals at shared service centers 
would not always function as ``employees of the lead auditor's firm,'' 
the amendments do not provide that all shared service center staff 
would function as employees of the lead auditor firm. For example, 
staff at a shared service center could be working on the audit under 
the direction and control of an audit firm other than the lead auditor. 
In that case, the individuals at the shared service center would 
function as employees of the other auditor, not the lead auditor firm.
    The Board considered these comments and determined that the 
proposed definition of lead auditor is sufficiently clear and, except 
for the revision to the footnote regarding secondees discussed above, 
adopted it as proposed in the 2021 SRC.
Definitions of ``Other Auditor'' and ``Referred-to Auditor''
For the Term ``Other Auditor,'' See Paragraph .A5 of AS 2101, and For 
the Term ``Referred-to Auditor,'' See Paragraph .A6 of AS 2101
    Several existing PCAOB standards use the term ``other auditor'' to 
encompass any auditors outside the lead auditor that participate in an 
audit, regardless of whether the lead auditor supervises them under AS 
1201, assumes responsibility for their work under AS 1205, or makes 
reference to them under AS 1205.\83\ The amendments define two terms: 
``other auditor,'' and ``referred-to auditor.'' These definitions are 
as follows:
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    \83\ For example, AS 1205 uses the term ``other auditors'' to 
describe accounting firms whose work the lead auditor uses or with 
which it divides responsibility for the audit. By contrast, AS 
1215.18-.19 uses the term ``other auditors'' when describing offices 
of the firm issuing the audit report and other firms participating 
in the audit.
---------------------------------------------------------------------------

    Other auditor--
    (a) A member of the engagement team who is not:
    (1) A partner, principal, shareholder, or employee of the lead 
auditor or
    (2) An individual who works under the direction and control of the 
registered public accounting firm issuing the auditor's report and 
functions as that firm's employee; and
    (b) A public accounting firm, if any, of which such engagement team 
member is a partner, principal, shareholder, or employee.
    Referred-to auditor--
    A public accounting firm, other than the lead auditor, that 
performs an audit of the financial statements and, if applicable, 
internal control over financial reporting, of one or more of the 
company's business units \84\ and issues an auditor's report in 
accordance with the standards of the PCAOB to which the lead auditor 
makes reference in the lead auditor's report on the company's financial 
statements and, if applicable, internal control over financial 
reporting.\85\
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    \84\ The term ``business units'' includes subsidiaries, 
divisions, branches, components, or investments. This footnote is 
included within the definition appearing in AS 2101.A6.
    \85\ See AS 1206, which sets forth the lead auditor's 
responsibilities regarding dividing responsibility for the audit of 
the company's financial statements and, if applicable, internal 
control over financial reporting, with a referred-to auditor. This 
footnote is included within the definition appearing in AS 2101.A6.
---------------------------------------------------------------------------

    Several commenters on the 2021 SRC indicated that the definition of 
``other auditor'' was sufficiently clear, and no commenters expressed 
concern about the definition of ``referred-to auditor.'' Some 
commenters on the 2016 Proposal asked whether the term ``referred-to 
auditor'' is aligned with the term ``principal accountant'' used by the 
SEC. The Board noted that the definitions it adopted do not affect the 
applicability of SEC terms or rules to audits involving other auditors 
or referred-to auditors, including the definition of ``principal 
accountant.''
    In addition, one commenter on the 2016 Proposal stated that the 
only difference between the definitions of other auditor and referred-
to auditor appears to be divided responsibility, but noted the 
definitions are substantially different. The Board notes that these 
definitions reflect differences in lead auditor responsibilities with 
respect to the other auditor and referred-to auditor. As noted above, 
under the amendments, the term ``other auditor'' encompasses both the 
individuals participating in the audit and their firm. In contrast, the 
lead auditor divides responsibility for the audit with the referred-to 
auditor, which issues the auditor's report on the financial statements 
(and, if applicable, internal control over financial reporting) of a 
company's business unit. Thus, the term ``referred-to auditor'' applies 
only to the firm because the firm issues an auditor's report in the 
divided-responsibility situation.
    The Board considered the comments and determined that the 
definitions of ``other auditor'' and ``referred-to auditor'' are 
sufficiently clear and adopted them as proposed in the 2021 SRC.
Planning the Audit
See Amendments to AS 2101
    In general, the amendments to AS 2101 carry forward and update 
certain requirements of AS 1205 and include certain procedures to be 
performed by the lead auditor.
    This section discusses planning requirements in AS 2101 for audits 
in which the lead auditor supervises the work of other auditors in 
accordance with AS 1201. It also discusses certain planning 
requirements, which appear in AS 2101, for audits in which the lead 
auditor divides responsibility for the audit with referred-to auditors 
in accordance with AS 1206.\86\ This section on planning requirements 
addresses the following topics:
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    \86\ In addition, this document discusses requirements for the 
lead auditor in AS 1206 relating to the referred-to auditor's (1) 
compliance with the SEC independence and PCAOB independence and 
ethics requirements, (2) registration pursuant to the rules of the 
PCAOB, and (3) knowledge of the relevant accounting, auditing, and 
financial reporting requirements.
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    <bullet> Serving as the lead auditor in an audit that involves 
other auditors or referred-to auditors (determining sufficiency of 
participation);
    <bullet> Other auditors' compliance with independence and ethics 
requirements;
    <bullet> PCAOB registration status of other auditors;
    <bullet> Knowledge, skill, and ability of and communications with 
other auditors; and
    <bullet> Determining locations or business units at which audit 
procedures should be performed.
Serving as the Lead Auditor in an Audit That Involves Other Auditors or 
Referred-to Auditors (Determining Sufficiency of Participation)
See Paragraphs .06A-.06C of AS 2101
    Under AS 2101 as amended, in audits involving other auditors or 
referred-to auditors, the engagement partner should determine whether 
the participation of his or her firm is sufficient for the firm to 
carry out the responsibilities of a lead auditor and to report as such 
on the company's financial statements. The considerations for 
determining the sufficiency of the firm's participation apply to audits 
in which the lead auditor supervises other auditors' work, divides 
responsibility for the audit with another accounting firm, or both. In 
contrast, the 50-percent participation threshold (discussed below) 
applies only to audits in which the lead auditor divides responsibility 
for the audit with another accounting firm.

[[Page 39693]]

    Planning is not a discrete phase of an audit, but rather is a 
continual and iterative process that continues until the completion of 
the audit.\87\ Therefore the engagement partner is expected to revisit 
his or her determination of the sufficiency of the lead auditor's 
participation throughout the audit if circumstances change. This may 
occur, for example, because of changes due to business combinations, 
divestitures, or other events that could affect the audit plan or 
allocation of work between the lead auditor and other auditors.
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    \87\ See AS 2101.05.
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Considerations for Serving as the Lead Auditor
See First Paragraph of .06A(a-c) of AS 2101
    AS 1205, which is being rescinded, provides that when significant 
parts of the audit are performed by other auditors (``other auditors'' 
and ``referred-to auditors'' under the amendments), the principal 
auditor (``lead auditor'' under the amendments) must decide whether the 
principal auditor's own participation is sufficient to enable it to 
serve as the principal auditor and issue the auditor's report on the 
company's financial statements. Under AS 1205.02, when determining 
whether the firm sufficiently participates in the audit, the principal 
auditor is required to consider, among other things, (i) the 
materiality of the portion of the financial statements audited in 
comparison with the portion audited by other auditors; (ii) the extent 
of the auditor's knowledge of the overall financial statements; and 
(iii) the importance of the components audited by the auditor in 
relation to the enterprise as a whole.
    The amendments to AS 2101 strengthen the existing requirement for 
determining the sufficiency of participation by: (i) extending the 
determination requirement to all audits involving other auditors and 
referred-to auditors,\88\ not just audits that have been covered by AS 
1205; (ii) imposing the determination requirement specifically on the 
engagement partner; and (iii) specifying certain considerations, based 
on risk and other factors, that should be taken into account in making 
the determination.
---------------------------------------------------------------------------

    \88\ Below, this document discusses further conditions to be met 
in order to divide responsibility with another accounting firm.
---------------------------------------------------------------------------

    In general, the sufficiency requirement is intended to increase the 
likelihood that the firm issuing the auditor's report (i.e., the lead 
auditor) meaningfully participates in the audit. The Board believes 
that compliance with this requirement should benefit all audits 
involving other auditors and referred-to auditors, not only audits that 
have been covered by AS 1205. Imposing the sufficiency requirement on 
the engagement partner is consistent with the engagement partner's 
existing responsibilities under PCAOB standards for planning the audit 
\89\ and for assigning tasks to and supervising engagement team 
members.\90\
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    \89\ See AS 2101.03.
    \90\ See AS 1015.06.
---------------------------------------------------------------------------

    The amendments require that, when making the sufficiency 
determination, the engagement partner take into account the following, 
in combination, i.e., the engagement partner should take into account 
all three considerations:
    <bullet> Importance--The importance of the locations or business 
units for which the engagement partner's firm performs audit procedures 
in relation to the financial statements of the company as a whole, 
considering quantitative and qualitative factors;
    <bullet> Risk--The risks of material misstatement associated with 
the portion of the company's financial statements for which the 
engagement partner's firm performs audit procedures, in comparison with 
the portions for which the other auditors perform audit procedures or 
the portions audited by the referred-to auditors; and
    <bullet> Extent of supervision--The extent of the engagement 
partner's firm's supervision of the other auditors' work for portions 
of the company's financial statements for which the other auditors 
perform audit procedures.\91\
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    \91\ In a multi-tiered audit (see AS 1201.14), the consideration 
regarding extent of supervision applies only to the firm's 
supervision of a first other auditor and any other auditor that is 
supervised directly by the firm. See discussion of multi-tiered 
audits below.
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    Of these three considerations, only the risk consideration was 
included in the 2016 Proposal. Although it was intended to encompass 
both quantitative and qualitative aspects of participation, some 
commenters on the 2016 Proposal viewed a determination based solely on 
risk as too narrow, and some viewed it as primarily quantitative. 
Commenters expressed concern that it might result in denying a firm the 
ability to serve as lead auditor if it performed procedures only at the 
corporate headquarters and not at the company's operating units (which 
were audited by other auditors), even if that firm is otherwise best 
positioned to serve as lead auditor.
    The importance consideration was added in the 2017 SRC, after 
considering comments received on the 2016 Proposal. The addition was 
intended to more expressly address circumstances in which the lead 
auditor audits the locations or business units where the primary 
financial reporting decisions are made and consolidated financial 
statements are prepared, even though those locations or business units 
might not constitute a significant portion of the company's 
operations.\92\ A number of commenters on the 2017 SRC commented 
favorably on the importance consideration, noting generally that it 
would more directly enable the engagement partner to consider both 
quantitative and qualitative factors when determining the sufficiency 
of participation.
---------------------------------------------------------------------------

    \92\ See 2017 SRC at 9.
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    Some commenters on the 2017 SRC viewed the sufficiency 
determination based on the two proposed considerations (importance and 
risk) as too restrictive for certain audits. Examples provided by the 
commenters included companies with highly dispersed management and 
financial reporting functions, especially those whose operations, 
headquarters, and financial reporting functions are primarily outside 
the company's corporate domicile. Commenters stated that applicable 
laws and regulations might require that the company's audit report be 
issued by a firm located in the jurisdiction where the company is 
domiciled, regardless of how much of the audit is performed by that 
auditor compared to other auditors. To address this issue, the 
commenters suggested providing additional considerations for the 
sufficiency-of-participation determination, including the firm's extent 
of supervision.
    The third consideration (extent of supervision) was added in the 
2021 SRC. This addition was designed to allow for a more comprehensive 
determination of the prospective lead auditor's involvement.
    Several commenters on the 2021 SRC generally supported the proposed 
addition of the consideration related to the extent of the engagement 
partner's firm's supervision of other auditors' work. Some of these 
comments also agreed that the sufficiency-of-participation 
determination by the engagement partner should be a risk-based 
assessment involving quantitative and qualitative considerations. One 
commenter on the 2021 SRC stated its understanding that an engagement 
partner may determine that his or her firm can serve as lead auditor by 
adjusting the extent of his or her firm's supervision of the other 
auditors' work to overcome instances where the other

[[Page 39694]]

auditors are performing audit procedures for significant parts of the 
audit. This same commenter said it would be helpful for the Board to 
acknowledge that an auditor who performs relatively fewer audit 
procedures on global business units can still be considered the lead 
auditor based on legal or regulatory requirements and his or her firm's 
supervision of other auditors.
    Other commenters continued to have concerns similar to those 
expressed in 2017 (e.g., regarding jurisdictional matters) even with 
the additional consideration. These commenters suggested that the Board 
provide further considerations, and therefore additional flexibility, 
for the determination.
    The Board believes the three considerations will enable engagement 
partners to address the multitude of scenarios encountered in practice 
when determining their firms' sufficiency of participation. With regard 
to the comments on jurisdictional challenges posed by laws and 
regulations, if the auditor's report is required to be issued by a firm 
licensed in a certain jurisdiction, under the amendments that firm 
could serve as lead auditor (subject to certain conditions such as 
necessary extent of supervision), even if it does not perform audit 
procedures on many of the company's subsidiaries. In addition, a firm 
could obtain additional staff to perform audit procedures under the 
firm's direction and control functioning as the firm's employees in 
order to be able to serve as the lead auditor. Adding more 
considerations, as some commenters suggested, could increase the risk 
that the firm issuing the auditor's report does not meaningfully 
participate in the audit, and thus was the ``lead auditor'' in name 
only.\93\ Permitting such arrangements would not achieve the intent of 
the amendments.
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    \93\ Such arrangements are sometimes referred to as ``letterbox 
audits.''
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    One commenter pointed out that with respect to divided-
responsibility situations, the lead auditor often may not be able to 
fully apply certain considerations (e.g., the concept of 
``supervision'' in AS 2101.06Ac). The Board noted that in a divided-
responsibility situation, the overall principles of .06Aa-b are the 
relevant considerations, because the consideration in .06Ac does not by 
its terms address referred-to auditors. AS 2101.06Ac states that the 
``extent of the engagement partner's firm's supervision of the other 
auditors' work for portions of the company's financial statements for 
which the other auditors perform audit procedures'' (emphasis added).
    After considering the comments received, the Board adopted the 
requirements substantially as proposed.\94\ The engagement partner will 
take into account the three considerations (importance, risk, and 
supervision) in combination to determine whether the full range of his 
or her firm's involvement in the audit constitutes sufficient 
participation to serve as the lead auditor.\95\
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    \94\ Footnote 4B to AS 2101.06Ac has been revised to add the 
following sentence: ``See also AS 1201.07, which states that for 
engagements that involve other auditors, AS 1201.08-.15 further 
describe procedures to be performed by the lead auditor with respect 
to the supervision of the work of other auditors, in conjunction 
with the required supervisory activities set forth in AS 1201.''
    \95\ The lead auditor's analysis of its sufficiency of 
participation should be documented pursuant to AS 1215.06, which 
requires, among other things, that audit documentation contain 
sufficient information to enable an experienced auditor, having no 
previous connection with the engagement, to understand the nature, 
timing, extent, and results of the procedures performed, evidence 
obtained, and conclusions reached.
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Fifty-Percent Participation Threshold for Divided-Responsibility Audits
See Second Paragraph of .06A of AS 2101
    For divided-responsibility audits,\96\ the Board determined to 
adopt, as proposed, amendments to reflect the following ``50-percent 
threshold,'' which applies in addition to two of the three 
considerations for determining the sufficiency of participation 
discussed above (importance and risk):\97\
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    \96\ According to PCAOB staff analysis of Form AP filings with 
the PCAOB, lead auditors currently divide responsibility with 
another auditor in about 40 issuer audits per year. Form AP filings 
in 2021, 2020, 2019, and 2018 disclosed 36, 41, 37, and 42 divided-
responsibility audits, respectively.
    \97\ This release, below, discusses further conditions to be met 
in order to divide responsibility with another accounting firm.

    [T]he participation of the engagement partner's firm ordinarily 
is not sufficient for it to serve as lead auditor if the referred-to 
auditors, in aggregate, audit more than 50 percent of the company's 
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assets or revenues.

    This 50-percent threshold is intended to reduce the likelihood that 
the lead auditor divides responsibility with an accounting firm or 
firms that audit a majority of the company's assets or revenue, and is 
consistent with the Board's approach to reinforcing the accountability 
of the lead auditor in audits involving other auditors.\98\ Including 
this threshold in the amendments also preserves a longstanding practice 
of the profession.
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    \98\ The threshold is similar to a quantitative threshold that 
appears in staff guidance set forth in the Financial Reporting 
Manual of the SEC Division of Corporation Finance (``Corp. Fin. 
Manual''). The Corp. Fin. Manual provides that a lead auditor is 
generally expected to have audited or assumed responsibility for at 
least 50 percent of the assets and revenues of the consolidated 
entity. See SEC, Division of Corporation Finance, Financial 
Reporting Manual, Section 4140.1.
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    One commenter on the 2021 SRC asserted (with respect to the 50-
percent threshold for divided-responsibility audits) that a firm's 
analysis as to whether it can reasonably serve as lead auditor must 
consider all the facts and circumstances, rather than simply 
consolidated assets or revenues. Another commenter asked that the 
wording of the 50-percent threshold be revised when referred-to 
auditors are involved because there are scenarios in which either 
assets or revenues audited by the referred-to auditor are greater than 
the assets or revenues audited by the lead auditor, such as when 
consolidated revenues of the company overall are nominal, but the 
amounts that do exist are audited by the referred-to auditor. This 
commenter believed that use of the term ``or'' will allow for false 
positives and restrict the ability of lead auditors to make reference 
to referred-to-auditors.
    After considering the comments, the Board adopted the 50-percent 
threshold as proposed. That threshold creates a presumption (not a 
bright line test) that the lead auditor will not divide responsibility 
with an accounting firm or firms that audit a majority of the company's 
assets or revenues.\99\ A firm could overcome the presumption and serve 
as lead auditor in exceptional situations, involving, for example, 
late-year acquisitions or other unanticipated events or conditions that 
increase the portion of assets or revenues audited by referred-to 
auditors beyond the 50-percent threshold. Under PCAOB standards, the 
firm would need to document why its participation in the audit was 
sufficient to serve as lead auditor, including how the firm satisfied 
the criteria based on the importance of the locations or business units 
it audited and risks of material misstatement associated with the 
portion of the company's financial statements that it audited.
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    \99\ Notably, while the comparison based on the importance of 
the locations or business units and risks of material misstatement 
associated with the portion of the financial statements is made 
singly (i.e., with regard to the engagement partner's firm's 
participation), the additional threshold based on assets and revenue 
is made with regard to all referred-to auditors in the aggregate.
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    The description of the 50-percent threshold in the amendments 
differs from the analogous description in the Corp. Fin. Manual because 
the PCAOB description uses terminology consistent with the amendments 
(whereas the

[[Page 39695]]

Corp. Fin. Manual's formulation uses terminology consistent with pre-
amendment standards) and because the PCAOB description is written in 
the negative: ``in an audit that involves referred-to auditors . . . 
the participation of the engagement partner's firm ordinarily is not 
sufficient for it to serve as lead auditor if the referred-to auditors, 
in aggregate, audit more than 50 percent of the company's assets or 
revenues.''
Supervising Based on Risk
See Paragraph .06B of AS 2101
    In some audits, the lead auditor might decide to increase the 
extent of its supervision of other auditors' work to provide additional 
support for the sufficiency-of-participation determination. Although 
this practice would contribute to the lead auditor's participation to 
some extent, performing additional supervisory procedures with respect 
to the other auditors does not, by itself, relieve the lead auditor of 
its own obligation to perform meaningful audit procedures in the audit.
    The amendments do not allow an audit firm to serve as lead auditor 
when all of the audit procedures are performed by other auditors, even 
under the lead auditor's supervision. A determination to serve as lead 
auditor under the amendments needs to be supported by a combination of 
supervision of other auditors by the lead auditor and the lead 
auditor's performance of audit procedures.
    In particular, the Board believes that a lead auditor, as the firm 
that issues the audit report, should perform audit procedures to a 
meaningful extent even if the company's business operations and 
financial reporting functions are located in a different country than 
the lead auditor. The following are examples \100\ of such procedures:
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    \100\ In addition, the lead auditor would perform audit 
procedures with respect to locations or business units selected for 
testing that the lead auditor assigned to itself.
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    <bullet> Procedures related to risks pervasive to the financial 
statements, such as risk assessment procedures directed to risks to the 
consolidated financial statements as a whole.\101\
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    \101\ See AS 2110.59b.
---------------------------------------------------------------------------

    <bullet> Procedures related to the consolidated financial 
statements, such as audit procedures regarding the period-end financial 
reporting process \102\ for the consolidated financial statements, and 
evaluation of the presentation of the consolidated financial 
statements, including the disclosures.\103\
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    \102\ See AS 2301.41.
    \103\ See paragraphs .30-.31 of AS 2810, Evaluating Audit 
Results.
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    <bullet> Other procedures related to the overall evaluation of 
audit results, such as performing overall analytical review procedures; 
\104\ evaluating accumulated misstatements; \105\ evaluating identified 
control deficiencies; \106\ evaluating the qualitative aspects of the 
overall financial statements, including potential management bias; 
\107\ evaluating conditions related to fraud risk assessment; \108\ and 
evaluating the sufficiency and appropriateness of the audit evidence 
obtained. \109\
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    \104\ See AS 2810.07-.09.
    \105\ See AS 2810.10-.23.
    \106\ See AS 2201.62-.70.
    \107\ See AS 2810.24-.27.
    \108\ See AS 2810.28-.29.
    \109\ See AS 2810.32-.36.
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    In these examples, the lead auditor would not need to perform these 
procedures exclusively. Rather, it could ask other auditors for 
assistance with some aspects of the above procedures, such as obtaining 
audit evidence relating to the business units assigned to the other 
auditors.
    In the amendments, AS 2101.06B, which is intended to be a reminder 
concerning existing requirements, provides that in an audit that 
involves other auditors performing work regarding locations or business 
units, the involvement of the lead auditor (through a combination of 
planning and performing audit procedures and supervision of other 
auditors) should be commensurate with the risks of material 
misstatement associated with those locations or business units. The 
requirement draws from existing requirements in AS 1201, AS 2101, and 
AS 2301, which require greater involvement in areas of greater 
risk.\110\ No commenters opposed the requirement.
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    \110\ See footnote 4C of AS 2101.06B, which cites, as examples, 
AS 1201.06, AS 2101.11 (``The auditor should assess the risks of 
material misstatement to the consolidated financial statements 
associated with the location or business unit and correlate the 
amount of audit attention devoted to the location or business unit 
with the degree of risk of material misstatement associated with 
that location or business unit.''), and, more generally, AS 2301.
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    The Board adopted this provision as proposed.
Sufficiency Considerations in an Integrated Audit of Financial 
Statements and Internal Control Over Financial Reporting
See Paragraph .06C of AS 2101
    In the amendments, AS 2101.06C states that in an integrated audit 
of a company's financial statements and its internal control over 
financial reporting (``ICFR'') that involves other auditors or 
referred-to auditors, the lead auditor of the financial statements must 
participate sufficiently in the audit of ICFR to provide a basis for 
serving as the lead auditor of ICFR. Only the lead auditor of the 
financial statements can be the lead auditor of ICFR. This amendment 
incorporates an existing requirement from AS 2201 regarding the 
sufficiency of the lead auditor's participation in the integrated audit 
of financial statements and ICFR.\111\ No commenters objected to this 
requirement, and the Board adopted it as proposed.
---------------------------------------------------------------------------

    \111\ See conforming amendments to AS 2201.C8, .C10, and .C11. 
The terminology in these paragraphs has been updated to align with 
the amendments, without changing the intent of the requirements in 
these paragraphs.
---------------------------------------------------------------------------

Other Auditors' Compliance With Independence and Ethics Requirements
See Paragraphs .06D and .06F of AS 2101 <SUP>112</SUP>
---------------------------------------------------------------------------

    \112\ See discussion below that, in multi-tiered audits, 
proposed AS 2101.06E would allow the lead auditor to seek assistance 
from the first other auditor in performing the procedures described 
in proposed AS 2101.06D. See also AS 1206 for requirements relating 
to audits involving referred-to auditors.
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    The amendments to AS 2101 relating to auditor independence and 
ethics requirements build on the existing, overarching responsibility 
of the auditor to determine compliance with independence and ethics 
requirements.\113\ The amendments are designed to position the lead 
auditor to identify matters that warrant further attention when 
determining the other auditor's compliance with those requirements. 
Commenters on the proposing releases generally agreed that the lead 
auditor should perform procedures regarding other auditors' compliance 
with these requirements. Several commenters, however, raised questions 
about specific aspects of the provisions, which are discussed below.
---------------------------------------------------------------------------

    \113\ See AS 2101.06b (requiring the auditor to ``[d]etermine 
compliance with independence and ethics requirements'' at the 
beginning of the audit and to reevaluate the determination 
throughout the audit). As noted above, the use of ``independence and 
ethics requirements'' in this release refers to PCAOB independence 
and ethics requirements and SEC independence requirements.
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Understanding the Other Auditor's Knowledge and Experience; Obtaining 
an Affirmation About Policies and Procedures, Changes in Circumstances
See Paragraphs .06Da, .06Db(1), and .06Dc(1)-(2) of AS 2101
    The Board adopted the amendments discussed in this section as they 
were proposed in the 2021 SRC. The

[[Page 39696]]

amendments in AS 2101.06D require the lead auditor to perform certain 
procedures ``in conjunction with determining compliance with'' 
independence and ethics requirements, to carry out its responsibilities 
pursuant to the existing requirements in paragraph .06b of AS 2101.
    AS 2101.06Da requires that the lead auditor obtain an understanding 
of the other auditor's knowledge of independence and ethics 
requirements and its experience in applying the requirements. AS 
2101.06Db(1) requires that the lead auditor obtain from the other 
auditor and review a written affirmation \114\ as to whether the other 
auditor has policies and procedures that provide reasonable assurance 
that it maintains compliance with independence and ethics requirements. 
If the other auditor does not have such policies and procedures, the 
lead auditor is required to obtain from the other auditor and review a 
written description of how the other auditor determines its compliance 
with the independence and ethics requirements.
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    \114\ The final amendments use the term ``affirmation'' for 
certain communications within the engagement team (see, e.g., AS 
2101.06Db, AS 2101.06F, and AS 2101.06Hb), to better differentiate 
them from certain communications outside the engagement team, which 
are described in the amendments as ``representations'' (see, e.g., 
AS 1206).
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    The amendments require the lead auditor to (i) inform the other 
auditor of changes in circumstances of which the lead auditor becomes 
aware, and (ii) request that the other auditor update its affirmations 
and descriptions for changes in circumstances of which the other 
auditor becomes aware (including changes communicated by the lead 
auditor) and provide those documents to the lead auditor upon becoming 
aware of such changes.\115\ These amendments are meant to provide the 
lead auditor with information necessary for it to reevaluate compliance 
with independence and ethics requirements.\116\ Communications required 
by the amendments also reflect policies already adopted by a number of 
registered firms.
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    \115\ See AS 2101.06Dc, which applies to all affirmations and 
descriptions required by paragraph .06Db.
    \116\ See note to AS 2101.06b regarding reevaluating compliance.
---------------------------------------------------------------------------

    The Board notes that the nature and extent of the lead auditor's 
procedures for obtaining an understanding under paragraph .06Da will 
depend on the types of information available to the lead auditor about 
the other auditor. The following are examples of types of information 
that may be relevant to the lead auditor's understanding of the other 
auditor's knowledge of independence and ethics requirements, and the 
other auditor's experience in applying the requirements:
    <bullet> The type, frequency, and substance of independence and 
ethics training that the other auditor provides to its personnel who 
participate in the audit;
    <bullet> The other auditor's policies and procedures for ensuring 
that the firm and its personnel comply with independence and ethics 
requirements, including PCAOB Rule 3520, Auditor Independence; \117\
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    \117\ See also QC 20, System of Quality Control for a CPA Firm's 
Accounting and Auditing Practice.
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    <bullet> The other auditor's process for determining that the other 
auditor, including the firm and its applicable personnel, does not have 
financial or employment relationships that might impair the lead 
auditor's independence on the audit; \118\
---------------------------------------------------------------------------

    \118\ See Rules 2-01(c)(1) and 2-01(c)(2) of Regulation S-X, 17 
CFR 210.2-01(c)(1) and 17 CFR 210.2-01(c)(2).
---------------------------------------------------------------------------

    <bullet> The other auditor's process for obtaining timely 
information about the audit client and its affiliates from which the 
other auditor firm is required to maintain independence, including an 
understanding of all non-audit services initiated or about to be 
initiated for the audit client by the other auditor; \119\ and
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    \119\ PCAOB and SEC independence rules define ``affiliate of the 
audit client.'' See PCAOB Rule 3501(a)(ii); Rule 2-01(f)(4) of 
Regulation S-X, 17 CFR 210.2-01(f)(4). For rules regarding the 
prohibition of non-audit services, see Rules 2-01(c)(4) and 2-01(b) 
of Regulation S-X, 17 CFR 210.2-01(c)(4) and 17 CFR 210.2-01(b); 
PCAOB Rule 3522, Tax Transactions; and PCAOB Rule 3523, Tax Services 
for Persons in Financial Reporting Oversight Roles. See also PCAOB 
Rule 3521, Contingent Fees.
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    <bullet> Any business relationships between the other auditor 
(including the firm and its applicable personnel) and the audit client, 
or persons associated with the audit client in a decision-making 
capacity, such as officers, directors, or substantial 
stockholders.\120\
---------------------------------------------------------------------------

    \120\ See Rule 2-01(c)(3) of Regulation S-X, 17 CFR 210.2-
01(c)(3).
---------------------------------------------------------------------------

    Sources of relevant information about the other auditor may differ 
depending, for example, on whether the lead auditor and other auditor 
are affiliated with the same network of accounting firms. In practice, 
some networks have procedures for sharing among select personnel of 
their member firms certain information about the results of internal or 
external inspections of the affiliates, conducted either by the network 
itself or by outside parties such as the PCAOB.
    Commenters on the 2021 SRC generally supported the modifications 
made to proposed AS 2101.06D, including the requirement to obtain 
written affirmations from the other auditor about whether the other 
auditor's policies and procedures provide reasonable assurance of 
compliance with independence and ethics, and whether the other auditor 
is in compliance. However, some commenters asked the Board to modify 
the requirements for the written affirmation and noted that a firm's 
quality control assessment with respect to independence is done on an 
annual basis. These commenters recommended that the Board align the 
amendments in this rulemaking with those of the PCAOB's project 
regarding quality control standards.\121\ In the view of one of these 
commenters, it was not the Board's intention to require the other 
auditor engagement team members to make their own conclusion about an 
aspect of their firm's quality control system relative to a particular 
engagement.
---------------------------------------------------------------------------

    \121\ Concept Release: Potential Approach to Revisions to PCAOB 
Quality Control Standards, PCAOB Release No. 2019-003 (Dec. 17, 
2019).
---------------------------------------------------------------------------

    Even in circumstances when other auditor engagement team members 
rely on their firm's quality control system for independence and ethics 
compliance, the Board believes it is appropriate to require the lead 
auditor to request and obtain in the context of an audit an affirmation 
that the other auditor's firm has the necessary policies and 
procedures. In practice, audit engagement teams typically exchange 
information with their own firm's quality control function relating to 
compliance with certain independence and ethics requirements. However, 
if an other auditor does not have policies and procedures that provide 
reasonable assurance that it complies with such requirements, it is 
appropriate to require that the lead auditor request and obtain a 
description of how the other auditor determines its compliance with the 
independence and ethics requirements. The Board believes that this 
requirement is appropriate today and will remain appropriate after 
firms implement the IAASB's newly adopted International Standard on 
Quality Management 1 (``ISQM 1''), which will require firms that 
perform audits under IAASB standards to evaluate the effectiveness of 
its quality control system, or under PCAOB standards if the Board were 
to adopt a similar requirement.\122\
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    \122\ The IAASB adopted ISQM 1 in December 2020, and it will 
become effective on December 15, 2022. See IAASB, ISQM 1, Quality 
Management for Firms that Perform Audits or Reviews of Financial 
Statements, or Other Assurance or Related Services Engagements (Dec. 
17, 2020).

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[[Page 39697]]

    In addition, a couple of commenters suggested requiring that the 
lead auditor make the other auditor aware of PCAOB and SEC independence 
requirements that are relevant to the company.
    The requirement for the lead auditor to obtain an understanding 
(pursuant to paragraph .06Da) is designed to assist the lead auditor in 
determining its course of action regarding the other auditor's 
independence and ethics compliance. For example, other auditors with 
less knowledge and experience may be less able to provide the 
information the lead auditor needs to determine compliance with 
independence and ethics requirements. The lead auditor may need to 
communicate PCAOB and SEC independence requirements to some other 
auditors (e.g., those who are less familiar with the requirements) but 
not to others (e.g., those who are more familiar with the 
requirements). The Board believes the amendments are sufficiently 
principles-based to allow the lead auditor to adjust its procedures 
according to the circumstances of the audit, including with respect to:
    <bullet> Making other auditors aware of the relevant independence 
and ethics requirements for the audit engagement, including affirming 
compliance not only with respect to their audit client, but also with 
respect to any affiliates of that audit client;
    <bullet> Confirming that the other auditors understand the 
requirements; and
    <bullet> Considering whether additional information for other 
auditors is necessary regarding the independence and ethics 
requirements that are relevant to the audit engagement.
    With respect to AS 2101.06Dc(1)-(2), one commenter stated that it 
is not necessary for other auditors to reaffirm in writing every update 
that is communicated by the lead auditor. The Board believes that an 
informative record of relevant matters is important for determining 
compliance with independence and ethics requirements. Auditor 
independence is critical for an effective audit; lack of independence 
can compromise the effectiveness of audit procedures performed by the 
other auditor. The amendments are designed to provide the lead auditor 
with timely information indicating that the other auditor's 
independence may be compromised, thus enabling the lead auditor to take 
any necessary action during the course of the audit.
Obtaining a Written Description of the Other Auditor's Covered 
Relationships
See Paragraph .06Db(2) of AS 2101
    Under the amendments, the lead auditor should obtain from the other 
auditor and review a written description of all relationships between 
the other auditor and the audit client or persons in financial 
reporting oversight roles at the audit client \123\ that may reasonably 
be thought to bear on independence pursuant to the requirements of 
paragraph (b)(1) of PCAOB Rule 3526, Communication with Audit 
Committees Concerning Independence.\124\ The requirement is designed to 
assist the lead auditor in obtaining information for determining 
compliance with SEC and PCAOB independence requirements and to 
facilitate auditor communications to the audit committee under Rule 
3526. The amendments do not change the applicability of Rule 3526 to 
the lead auditor's representation, including with respect to 
unaffiliated firms.\125\
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    \123\ PCAOB Rule 3501, Definitions of Terms Employed in Section 
3, Part 5 of the Rules, defines the terms ``audit client'' and 
``financial reporting oversight role.'' The terms used in AS 
2101.06Db(2) have the same meaning as defined in Rule 3501.
    \124\ Rule 3526 requires auditors to make certain communications 
to the audit committee of the audit client before accepting an 
initial engagement, and annually thereafter, including a 
description, in writing, of ``all relationships between the 
registered public accounting firm or any affiliates of the firm and 
the audit client or persons in financial reporting oversight roles 
at the audit client that, as of the date of the communication, may 
reasonably be thought to bear on independence.'' See also Staff 
Guidance, Rule 3526(b) Communications with Audit Committees 
Concerning Independence (May 31, 2019), which addresses questions 
that have arisen in practice regarding application of Rule 3526(b) 
in certain circumstances.
    \125\ See Ethics and Independence Rule 3526, Communication with 
Audit Committees Concerning Independence, PCAOB Release No. 2008-003 
(Apr. 22, 2008), at 5 note 4, which states that the Board ``expects 
the primary auditor's report to either include any covered 
relationships of any secondary auditors not affiliated with the firm 
or state that it does not do so'' (emphasis added).
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    One commenter supported the proposed requirement, noting that PCAOB 
Rule 3526 requires communication only from the lead auditor to the 
audit committee. The commenter added that the proposed new 
requirement--with respect to the lead auditor determining an other 
auditor's compliance with independence and ethics requirements rather 
than simply inquiring about it (e.g., under extant AS 1205)--aligns the 
responsibility to make such determination better with the required 
communication.
    No commenters opposed this requirement, and the Board adopted it as 
proposed.
Obtaining a Written Affirmation About the Other Auditor's Compliance 
With Independence and Ethics Requirements
See Paragraph .06Db(3) of AS 2101
    Under the amendments, the lead auditor should obtain from the other 
auditor and review a written affirmation as to whether the other 
auditor is in compliance with independence and ethics requirements with 
respect to the audit client, and if it is not in compliance, the lead 
auditor should obtain and review a written description of the nature of 
the instances of non-compliance. This requirement was originally 
introduced in the 2016 Proposal, to strengthen a requirement in AS 
1205, which is being rescinded, to make inquiries concerning the other 
auditor's independence.\126\ This provision was revised and clarified 
in the amendments proposed in the 2017 and 2021 SRCs to require in 
addition that the lead auditor obtain and review a description of the 
nature of the instances of any non-compliance.
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    \126\ See AS 1205.10b.
---------------------------------------------------------------------------

    One commenter on the 2021 SRC recommended that the Board modify the 
proposed requirement to also include the other auditor's conclusion 
regarding whether it is capable of exercising objective and impartial 
judgment on all issues encompassed in its work. In response, the Board 
noted that the lead auditor can determine its course of action based on 
the facts and circumstances of the audit engagement, without the Board 
prescribing a course of action in the amendments. Therefore, the Board 
did not make additional changes to this requirement and adopted it as 
proposed.
Following Up on Contrary Information
See Paragraph .06F of AS 2101
    The amendments to AS 2101 direct the lead auditor to follow up on 
contrary information. The amendments provide that if the lead auditor 
becomes aware of information that contradicts the other auditor's 
affirmation or description (including information about changed 
circumstances), the lead auditor should investigate the circumstances 
and consider the reliability of the affirmation or description. 
Further, if, after such investigation, or based on the other auditor's 
affirmation or description, there are indications that the other 
auditor is not in compliance with independence and ethics requirements, 
the lead auditor should consider the implications for fulfilling its 
own responsibilities under AS 2101.06b and PCAOB Rules 3520 and 3526.
    Two commenters on the 2021 SRC expressed concerns with the words 
``investigate'' and ``investigation'' in the proposed amendments. The 
Board notes that the terms are used in other PCAOB auditing standards 
and generally refer to

[[Page 39698]]

taking a closer look at a matter to determine a further course of 
action.\127\ After considering the comments, the Board adopted this 
requirement as proposed.
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    \127\ See, e.g., paragraphs .17, .20-.21 of AS 2305, Substantive 
Analytical Procedures (investigation and evaluation of significant 
differences from expectations about assertions related to the 
financial statements).
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Obtaining Information at the Individual or Firm Level
See Note to Paragraph .06D of AS 2101
    The amendments include a note to AS 2101.06D stating that 
information required to be provided to the lead auditor under AS 
2101.06D may cover the other auditor's firm and engagement team members 
who are partners, principals, shareholders, or employees of the other 
auditor firm.
    Some commenters on the proposing releases questioned the 
practicability of applying the requirements to individual engagement 
team members. Further, one commenter on the 2021 SRC specifically asked 
for clarification regarding the level (i.e., firm, individual, or both) 
at which the lead auditor is expected to apply the requirements in 
paragraph .06Da (obtaining an understanding of other auditors' 
knowledge and experience) and how to interpret the proposed note to 
paragraph .06D.
    The definition of ``other auditor'' in the amended standards 
includes both an other auditor firm and individuals at that firm. The 
affirmations and descriptions required by the amendments could be 
prepared and provided by the other auditor firm and address all covered 
relationships. In our experience, firms typically have the necessary 
information available centrally, including information about processes 
for determining compliance with independence and ethics requirements, 
and about individuals at the firm, including their level of experience 
in applying the requirements. Obtaining from a firm a written 
affirmation or description that also encompasses relevant individuals 
at the firm would satisfy the requirement to obtain a written 
affirmation or description ``from the other auditor'' for those persons 
at that firm.
PCAOB Registration Status of Other Auditors
See Paragraph .06G of AS 2101
    PCAOB Rule 2100, Registration Requirements for Public Accounting 
Firms, requires a public accounting firm to be registered with the 
PCAOB \128\ if it: (a) prepares or issues any audit report with respect 
to any issuer, broker, or dealer or (b) plays a substantial role in the 
preparation or furnishing of an audit report with respect to any 
issuer, broker, or dealer.\129\ However, there have been examples of 
firms that played a substantial role but were not registered with the 
PCAOB.\130\
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    \128\ See also Section 102(a) of Sarbanes-Oxley, 15 U.S.C. 
7212(a).
    \129\ An other auditor that is not registered with the PCAOB 
(regardless of whether such auditor is required to be registered 
with the PCAOB) is nonetheless subject to PCAOB authority when it 
acts as a person associated with a registered public accounting 
firm. See Section 2(a)(9) of Sarbanes-Oxley, 15 U.S.C. 7201(a)(9)); 
PCAOB Rule 1001(p)(i) (defining ``person associated with a public 
accounting firm''); see also Sections 104(c)(1), 105(b)(1), and 
105(c)(4) of Sarbanes-Oxley, 15 U.S.C. 7214(c)(1), 15 U.S.C. 
7215(b)(1), and 15 U.S.C. 7215(c)(4) (articulating that PCAOB 
authority extends to ``persons associated with a registered public 
accounting firm'' in connection with inspections, investigations, 
and sanctions, respectively).
    \130\ See, e.g., In the Matter of WWC, P.C., PCAOB Release No. 
105-2022-006 (Apr. 19, 2022); BDO Canada LLP (f/k/a BDO Dunwoody 
LLP), SEC AAER No. 3926 (Mar. 13, 2018); KPMG Inc., SEC AAER No. 
3927 (Mar. 13, 2018).
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    The amendments provide that the lead auditor may use the work of an 
other auditor that plays a substantial role on the audit \131\ only if 
the other auditor is registered with the PCAOB.\132\ The provision is 
intended to promote compliance with Rule 2100 and thereby enhance audit 
quality, and it does not change the rule or the related definition of 
``play a substantial role'' in Rule 1001(p)(ii). Several commenters 
supported the provision, and the Board adopted it as proposed.
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    \131\ See PCAOB Rule 1001(p)(ii).
    \132\ For audits in which the lead auditor divides 
responsibility for the audit with the referred-to auditor see AS 
1206.06c in this document. See also discussion below.
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    With regard to registration requirements more broadly, one 
commenter suggested--as an alternative to requirements concerning 
independence and ethics, and concerning knowledge, skill, and ability--
that the Board require all audit firms ``engaged in a public entit[y] 
assurance engagement'' to be registered with the PCAOB. In the 
commenter's view, this approach would provide a ``basis for consistent 
application [of PCAOB standards] for firms registered with the PCAOB.'' 
The Board is not taking the commenter's suggestion because simply 
requiring firms to register (beyond the current registration 
requirements) would not address the need for change identified in this 
rulemaking. The shortcoming of this approach is demonstrated by the 
inspection deficiencies and enforcement cases described above, which 
involve conduct by registered firms during audits involving other 
auditors.
Knowledge, Skill, and Ability of and Communications With Other Auditors
See Paragraphs .06H and .16 of AS 2101
Knowledge, Skill, and Ability of Other Auditors
See Paragraphs .06Ha-b and .16 of AS 2101
    The amendments require that, with respect to each other auditor, 
the lead auditor obtain an understanding of the knowledge, skill, and 
ability of the other auditor's engagement team members who assist the 
lead auditor with planning or supervision, including their: experience 
in the industry in which the company operates; knowledge of the 
relevant financial reporting framework, PCAOB standards and rules, and 
SEC rules and regulations; and experience in applying the standards, 
rules, and regulations. The amendments also require the lead auditor to 
obtain a written affirmation from the other auditor that its engagement 
team members possess the knowledge, skill, and ability to perform their 
assigned tasks.\133\
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    \133\ The written affirmation required by AS 2101.06Hb regarding 
the other auditor's engagement team members does not need to 
identify each member of the engagement team.
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    PCAOB standards have long recognized the importance of technical 
training and proficiency of the personnel performing the audit.\134\ 
These matters are particularly important for senior engagement 
personnel because of their role in planning the audit, supervising the 
work of other engagement team members, and making important 
professional judgments.
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    \134\ See, e.g., AS 1010, Training and Proficiency of the 
Independent Auditor, and paragraphs .11-.12 of QC 20, System of 
Quality Control for a CPA Firm's Accounting and Auditing Practice.
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    Under existing PCAOB standards, in situations where the lead 
auditor supervises an other auditor under AS 1201, the knowledge, 
skill, and ability of engagement team members with significant 
engagement responsibilities should be commensurate with the assessed 
risks of material misstatement.\135\ In situations where the lead 
auditor uses the other auditor's work and report under AS 1205, the 
lead auditor \136\ is required under existing standards to make 
inquiries concerning the professional reputation of the other 
auditor.\137\
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    \135\ See AS 2301.05a.
    \136\ ``Principal auditor'' is the term used in rescinded AS 
1205.
    \137\ See AS 1205.10.

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[[Page 39699]]

    The amendments build on and strengthen the existing provisions. 
Compliance with these amendments is not limited to preliminary 
engagement activities and should be reevaluated with changes in 
circumstances. The amendments seek to apply a balanced and practical 
approach by focusing the lead auditor's attention primarily on the 
knowledge, skill, and ability of the more senior engagement team 
members of the other auditor.
    Obtaining an understanding of the knowledge, skill, and ability of 
the other auditor's supervisory personnel is important for determining 
the extent of the lead auditor's supervision of the other auditor's 
work. As a practical matter, the knowledge, skill, and ability of the 
supervisory personnel include their experience in the company's 
industry and jurisdiction,\138\ and knowledge of the relevant financial 
reporting framework, PCAOB standards and rules, and SEC rules and 
regulations. Lack of appropriate knowledge, skill, and ability by the 
other auditor's supervisory personnel can have an adverse effect on the 
overall quality of the audit.
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    \138\ As discussed below, AS 2101.16 states that the auditor 
should determine whether specialized skill or knowledge is needed to 
perform appropriate risk assessments, plan or perform audit 
procedures, or evaluate audit results, and the amendments specify 
that such specialized skill or knowledge may include ``relevant 
knowledge of foreign jurisdictions.''
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    Several commenters supported the proposed requirements, including 
the requirement to obtain a written affirmation from the other auditor 
that its engagement team members possess the knowledge, skill, and 
ability to perform their assigned tasks. One commenter asked the Board 
to consider providing that the lead auditor's procedures for obtaining 
an understanding of the knowledge, skill, and ability of the other 
auditor be scalable based on the considerations regarding sufficiency 
of participation in AS 2101.06A. The Board noted that the requirements 
in AS 2101.06A serve a different purpose: to increase the likelihood 
that the firm issuing the auditor's report meaningfully participates in 
the audit. The requirements regarding the knowledge, skill, and ability 
are designed to focus the lead auditor and other auditors on assigning 
qualified personnel at all levels of the audit engagement.
    Another commenter suggested inserting a note after paragraph .06H 
that indicates the lead auditor's own experience working with the other 
auditor is relevant to the lead auditor's understanding of the other 
auditor's knowledge, skill, and ability. The Board agrees with the 
commenter that the lead auditor's own experience with the other auditor 
may be a source of information about the other auditor's knowledge, 
skill, and ability. However, the amendments are designed to be 
principles-based to accommodate a variety of scenarios in practice, 
whereby differing types of information about other auditors can be 
available to the lead auditor. Therefore, beyond requiring the written 
affirmation described above, the amendments do not prescribe a 
particular set of procedures or sources of information for obtaining an 
understanding of the other auditor's knowledge, skill, and ability. The 
amendments allow the lead auditor to determine the nature and extent of 
its procedures in this area. After considering the comments, the Board 
adopted the requirements as proposed.
    The amendments also add an explanatory phrase, ``including relevant 
knowledge of foreign jurisdictions,'' to AS 2101.16's existing 
requirement that the auditor should determine whether specialized skill 
or knowledge is needed to perform appropriate risk assessments, plan or 
perform audit procedures, or evaluate audit results.\139\ Identifying 
whether there is a need for specialized skill or knowledge is logically 
a prerequisite to evaluating whether someone has that skill or 
knowledge. For example, a lead auditor in its home jurisdiction may not 
have a sufficient understanding of the business practices or legal 
requirements of a foreign jurisdiction to be able to execute the audit 
effectively. In these cases, the lead auditor may want to consider 
whether to engage an other auditor (e.g., from that jurisdiction) with 
relevant knowledge of the foreign jurisdiction to appropriately assess 
risk, plan or perform audit procedures, or evaluate audit results.
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    \139\ See amended paragraph .16 of AS 2101, which provides that 
``[t]he auditor should determine whether specialized skill or 
knowledge, including relevant knowledge of foreign jurisdictions, is 
needed to perform appropriate risk assessments, plan or perform 
audit procedures, or evaluate audit results.''
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    One commenter on the 2021 SRC stated that, if added focus on 
knowledge of foreign jurisdictions is needed, additional clarity should 
be provided as to when this knowledge is needed and how it should be 
obtained. Another commenter stated that consideration of relevant 
knowledge of foreign jurisdictions may be applicable only in certain 
circumstances but acknowledged the possible need for specialized 
knowledge of foreign jurisdictions because of the other auditor's 
knowledge of the regulatory environment.
    Similar to AS 2101.06Ha-b, the amendment in AS 2101.16 allows the 
auditor to determine the nature and extent of its procedures when 
determining whether specialized skill or knowledge is needed on the 
audit. After considering the comments, the Board adopted the amendment 
as proposed.
Communication With Other Auditors
See Paragraph .06Hc of AS 2101
    The amendments to AS 2101 require the lead auditor to determine, in 
connection with using the other auditor's work, that it is able to 
communicate with the other auditor and gain access to the other 
auditor's audit documentation. The requirement is intended to help the 
lead auditor in identifying and addressing any communication or access 
issues early in the audit. For example, the lead auditor would consider 
whether it can have meaningful two-way communication with the other 
auditor \140\ and whether it needs to address any language differences. 
In another example, the lead auditor would consider whether it can 
access the other auditor's documentation remotely.
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    \140\ See, e.g., AS 2110.49-.53 (describing discussions among 
key engagement team members regarding risks of material 
misstatement).
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    The amendment also is based on the existing provisions of PCAOB 
standards that require the lead auditor to have access to the other 
auditor's documentation and obtain, review, and retain certain portions 
of it. As with the existing requirements, the amendments allow the lead 
auditor flexibility in determining the means of access (e.g., remotely 
or on-site).\141\
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    \141\ See, e.g., rescinded AS 1205.12. See also AS 1215.18-.19.
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    If the lead auditor cannot obtain sufficient appropriate audit 
evidence because of restrictions on communicating with the other 
auditor or accessing its documentation, a limitation on the scope of 
the audit may exist. Under PCAOB standards, these circumstances may 
require the lead auditor to qualify the audit opinion or disclaim an 
opinion.\142\
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    \142\ See AS 2810.35. See also paragraphs .05-.17 of AS 3105, 
Departures from Unqualified Opinions and Other Reporting 
Circumstances, which contains requirements regarding audit scope 
limitations.
---------------------------------------------------------------------------

    Those who commented on the proposed requirement in the 2016 
Proposal and 2017 SRC viewed it as a clear requirement. Some commenters 
asked for examples of acceptable modes of communication between the 
lead auditor and the other auditor, and

[[Page 39700]]

inquired whether email communication would be acceptable. The Board 
notes that the form of communication between auditors (e.g., oral or 
written) depends on the circumstances of the audit and professional 
requirements (e.g., PCAOB standards require that certain communications 
between the lead auditor and other auditor be in writing \143\). 
Although PCAOB standards do not prescribe a particular type of written 
communication (e.g., print or electronic), they require that audit 
documentation, in whatever form, contain sufficient information to 
enable an experienced auditor, having no previous connection with the 
engagement, to understand the nature, timing, extent, and results of 
the procedures performed, evidence obtained, and conclusions 
reached.\144\ In addition, the other auditor's audit documentation must 
be accessible by the lead auditor.\145\ Further, audit documentation 
should demonstrate that the engagement complied with the standards of 
the PCAOB.\146\
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    \143\ See, e.g., AS 1215.19.
    \144\ See AS 1215.06a.
    \145\ See AS 1215.18, as amended.
    \146\ See AS 1215.05a.
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    Consistent with the above discussion, the Board adopted the 
amendment as proposed.
Determining Locations or Business Units at Which Audit Procedures 
Should Be Performed
See Paragraph .14 of AS 2101
    Other auditors are often involved in audits of companies with 
operations in multiple locations or business units (``multi-location 
engagements''). In these circumstances, existing AS 2101.11-.13 address 
the determination of the locations at which audit procedures should be 
performed and the nature, timing, and extent of the audit procedures. 
Existing AS 2101.14 provides that, in situations in which AS 1205 
applies, the auditor should perform the procedures in paragraphs 
.11-.13 to determine the locations or business units where audit 
procedures should be performed.
    In light of the rescission of AS 1205, the Board amended AS 2101.14 
to specify that, in an audit involving other auditors or referred-to 
auditors, the lead auditor should perform the procedures set forth in 
AS 2101.11-.13 to determine the locations or business units at which 
audit procedures should be performed. The amendment to AS 2101.14, 
together with the amended supervisory requirements in AS 1201, is 
intended by the Board to require that the lead auditor play the central 
role in determining the scope of the audit.
    One commenter on the 2021 SRC recommended that the Board remove the 
requirements in proposed AS 2101.14 with regard to referred-to auditors 
because these requirements are not consistent with the principles 
underlying dividing responsibility (i.e., the approach would diminish 
the line between assuming and dividing responsibility). The Board noted 
that the amendment to this paragraph is consistent with the relevant 
requirements in existing AS 2101.14 applicable to audits that involve 
divided responsibility. For audits involving referred-to auditors, new 
AS 1206 describes interactions, including communication of the lead 
auditor's plan to divide responsibility, and other measures to assure 
the coordination of activities between the lead auditor and the 
referred-to auditor when dividing responsibility.\147\
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    \147\ See discussion below.
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    After considering the comments, the Board adopted the amendment as 
proposed.
Supervising Other Auditors
Overview of the Supervisory Approach
    The Board's amendments are intended to improve the quality of 
audits that involve other auditors for whose work the lead auditor 
assumes responsibility by requiring, among other things, that the lead 
auditor supervise the other auditors under AS 1201, as amended.
    Currently, the risk-based supervision approach described in AS 1201 
does not apply to situations in which the lead auditor uses the work 
and reports of other auditors under AS 1205. AS 1205, which the Board 
rescinded, requires the lead auditor \148\ to perform certain 
procedures, when using the work and reports of other auditors, that are 
more limited in scope than those required by the supervision standard, 
AS 1201. The amendments are designed to improve the lead auditor's 
oversight of other auditors by applying AS 1201 to all audits involving 
other auditors for whose work the lead auditor assumes 
responsibility.\149\ The amendments also supplement the general 
supervisory requirements in AS 1201.05 by providing direction for 
applying these requirements in an audit involving other auditors.\150\
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    \148\ ``Principal auditor'' is the term used in AS 1205.
    \149\ For situations in which the lead auditor divides 
responsibility for the audit with another accounting firm, see AS 
1206. For certain audits involving investments accounted for under 
the equity method of accounting whose financial statements are 
audited by other auditors, see proposed rule text for changes to 
Appendix B of AS 1105.
    \150\ See AS 1201.07-.15.
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    AS 1201 currently sets forth the general framework for supervision 
of engagement team members, including the nature and extent of 
supervisory activities. The standard allows the engagement partner to 
seek assistance in fulfilling his or her supervisory responsibilities 
from appropriate engagement team members, which includes team members 
from other firms involved in the audit.\151\ While AS 1201 describes 
supervisory activities, it does not, however, describe supervisory 
procedures or assign them to a particular member, or members, of the 
engagement team. Further, the standard does not differentiate between 
the supervisory responsibilities of engagement team members at the lead 
auditor and at the other auditor.
---------------------------------------------------------------------------

    \151\ See AS 1201.04.
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    Under PCAOB standards, the audit firm that issues the audit report 
is responsible for making sure that sufficient appropriate audit 
evidence has been obtained, and appropriately evaluated, to support the 
opinion in the audit report.\152\ Because of the lead auditor's central 
role in the audit, the amendments the Board adopted require that 
certain supervisory procedures be performed by the lead auditor. These 
procedures are designed to improve the effectiveness of the lead 
auditor's supervision of the work of other auditors.
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    \152\ See AS 2810 regarding evaluating the sufficiency and 
appropriateness of audit evidence.
---------------------------------------------------------------------------

    The amendments also are designed to be scalable by applying the 
existing principles in AS 1201, which are already familiar to auditors. 
When designing and performing supervisory activities the lead auditor 
determines the extent of supervision of the other auditors' work in 
accordance with paragraph .06 of AS 1201, which describes the factors 
to take into account when determining the extent of supervision 
necessary.\153\ For example, the extent of the lead auditor's 
supervision of the other auditors' work depends on, among other things, 
the risks of material misstatement to the company's financial 
statements and the knowledge, skill, and ability of the other 
auditors.\154\
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    \153\ See AS 1201.07.
    \154\ See AS 1201.06.
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    The lead auditor may determine that the necessary extent of 
supervision of the other auditor's work under AS 1201 entails 
performing supervisory procedures beyond those specified in

[[Page 39701]]

the amendments. For procedures not assigned to the lead auditor under 
the amendments, the lead auditor may seek assistance from qualified 
engagement team members (including those at the other auditor) in 
supervising the work.\155\ The approach to supervising other auditors 
under the amendments is consistent with, and takes into account, recent 
developments at some accounting firms that have been observed through 
the Board's oversight activities.\156\
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    \155\ See AS 1201.04.
    \156\ See further discussion above.
---------------------------------------------------------------------------

    Many commenters on the 2021 SRC noted that communications between 
the lead auditor and other auditors are iterative throughout the audit. 
In addition, some commenters stated that it was not clear to them 
whether under the amendments in the 2021 SRC other auditors can provide 
input to the lead auditor on certain issues.
    The Board agrees with commenters that effective supervision by the 
lead auditor typically necessitates two-way communication with the 
other auditor. Similar to the amendments proposed in the 2021 SRC, the 
final amendments are designed to foster effective interaction by 
requiring the lead auditor to, as necessary, hold discussions with and 
obtain information from the other auditors to facilitate the 
performance of the supervisory procedures.\157\
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    \157\ See, e.g., note to AS 1201.08 and AS 1201.10 (requiring 
the lead auditor to discuss with the other auditor any changes to 
its planned audit procedures), both of which were originally 
introduced in the 2016 Proposal. In addition, the amendments include 
a reference to paragraphs .49-.53 of AS 2110, Identifying and 
Assessing Risks of Material Misstatement (in a footnote to AS 
1201.08) to remind the lead auditor of certain other required 
interactions with the other auditor. See discussion below.
---------------------------------------------------------------------------

    The amendments to AS 1201 do not include the statement contained in 
rescinded AS 1205.03 that ``the other auditor remains responsible for 
the performance of his own work and for his own report.'' Nevertheless, 
the Board believes that supervision by the lead auditor does not 
relieve other auditors of their responsibilities, which include 
applying due professional care and complying with PCAOB standards. To 
reinforce this principle, the amendments add a statement to AS 1015, 
that other auditors are responsible for performing their work with due 
professional care.\158\ This statement reminds other auditors of their 
responsibility to perform work in compliance with PCAOB rules and 
standards.\159\ Commenters were supportive of this added statement, 
noting that it was clear and appropriate. That responsibility is 
further emphasized by (i) an amendment requiring an affirmation from 
the other auditor about its compliance with the lead auditor's 
instructions \160\ and (ii) an amendment regarding audit documentation 
requirements.\161\ The overall responsibility for the audit under the 
amendments remains, however, with the lead auditor, as is the case 
under the existing standards.\162\
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    \158\ See note to AS 1015.01 (``For audits that involve other 
auditors, the other auditors are responsible for performing their 
work with due professional care.'').
    \159\ This amendment would not, of course, establish the sole 
responsibilities of other auditors. Like all auditors that 
participate in an audit performed under PCAOB standards, other 
auditors must comply with all applicable PCAOB standards. See, e.g., 
PCAOB Rule 3100, Compliance with Auditing and Related Professional 
Practice Standards.
    \160\ See AS 1201.11, which is discussed below.
    \161\ See AS 1215.18, which is discussed below.
    \162\ To emphasize this point, the amendments add a footnote to 
AS 1015.01, referring to AS 2101 and AS 1201, which set forth the 
lead auditor's responsibilities for planning and supervising the 
other auditor's work.
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Supervisory Procedures To Be Performed by the Lead Auditor
    Under the amendments to AS 1201, the engagement partner remains 
responsible for the engagement and its performance. Accordingly, the 
engagement partner is responsible for proper supervision of the work of 
engagement team members, including the work of engagement team members 
outside the engagement partner's firm. In fulfilling his or her 
supervisory responsibilities, the engagement partner may seek 
assistance from appropriate engagement team members, including 
engagement team members outside the engagement partner's firm. 
Engagement team members who assist the engagement partner with 
supervision should exercise their supervisory responsibilities in 
accordance with AS 1201.
    With respect to the lead auditor's supervisory procedures in the 
amendments, other engagement team members who both: (1) are partners, 
principals, shareholders, or employees of the registered public 
accounting firm issuing the auditor's report (or individuals who work 
under that firm's direction and control and function as the firm's 
employees); and (2) assist the engagement partner in fulfilling his or 
her planning or supervisory responsibilities on the audit pursuant to 
planning and supervision, are eligible to perform such procedures. In 
addition, in multi-tiered audits, the lead auditor may seek assistance 
from a first other auditor in performing the supervisory procedures in 
the amendments.\163\
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    \163\ See AS 1201.14.
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    To provide more specific direction for supervising the other 
auditors' work, the amendments to AS 1201 establish requirements for 
the lead auditor in the following areas:
    <bullet> Informing other auditors of their responsibilities;
    <bullet> Obtaining and reviewing a description of the audit 
procedures to be performed by other auditors;
    <bullet> Obtaining and reviewing a written affirmation that other 
auditors performed their work in accordance with the lead auditor's 
instructions;
    <bullet> Directing other auditors to provide specific documentation 
regarding their work; and
    <bullet> Determining whether other auditors have performed the work 
assigned to them, and whether additional evidence should be obtained.
    As noted in AS 1201.07, these requirements supplement the 
requirements in AS 1201.05. The requirements imposed by the amendments 
are described in new paragraphs AS 1201.08-.13 and discussed in more 
detail below.\164\
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    \164\ The amendments also specify certain supervisory 
responsibilities in multi-tiered audits, as discussed below.
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Informing Other Auditors of Their Responsibilities
See Paragraph .08 of AS 1201
    AS 1201 currently requires that engagement team members be informed 
of their responsibilities, including the objectives and the nature, 
timing, and extent of the procedures to be performed, and other 
relevant matters.\165\ For audits performed in accordance with AS 1205, 
the standard does not include a specific requirement for the lead 
auditor to inform other auditors of their responsibilities.\166\
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    \165\ See AS 1201.05a.
    \166\ According to AS 1205.12, the lead auditor (or ``principal 
auditor'' in its terminology) should consider, among other things, 
reviewing the audit programs of the other auditor and issuing 
instructions to the other auditor as to the scope of audit work.
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    To promote effective supervision of other auditors' work by the 
lead auditor, the amendments to AS 1201 specifically require the lead 
auditor to inform other auditors in writing of the following matters:
    <bullet> The scope of work to be performed by the other auditor 
(e.g., location or business unit \167\ and the general type of

[[Page 39702]]

work to be performed, which could range from a few specified audit 
procedures to a standalone audit); and
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    \167\ As discussed above, in multi-location engagements that 
involve other auditors, the lead auditor is required to determine 
locations or business units at which audit procedures should be 
performed.
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    <bullet> With respect to the work requested to be performed: the 
identified risks of material misstatement,\168\ tolerable 
misstatement,\169\ and the amount (if determined) below which 
misstatements are clearly trivial and do not need to be 
accumulated.\170\
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    \168\ See AS 2110.49-.53 (referenced in a footnote to AS 
1201.08), which requires key engagement team members (including 
those in differing locations) to hold discussions regarding risks of 
material misstatement due to error or fraud, which inform the 
identification and assessment of risks. The Board has adopted an 
additional reference reminding auditors of the requirements in AS 
2110.59 regarding the auditor's responsibility to identify and 
assess the risks of material misstatement at the (consolidated) 
financial statement level and the assertion level.
    \169\ See AS 2105.08-.10 (referenced in a footnote to AS 
1201.08), which describe determining the amount or amounts of 
tolerable misstatement, including for the individual locations or 
business units, where applicable. As noted above, it is common for 
audits using other auditors to take place in different locations, 
including different countries.
    \170\ See AS 2810.10-.11 (referenced in a footnote to AS 
1201.08), which require auditors to accumulate misstatements 
identified during the audit, other than those that are clearly 
trivial, and provide that auditors may designate an amount below 
which misstatements are trivial and do not need to be accumulated. 
The requirement in the amendments indicates that the lead auditor 
makes the determination of the clearly trivial threshold under AS 
2810, if such a threshold is determined.
---------------------------------------------------------------------------

    Some commenters on the 2016 Proposal and the 2017 SRC interpreted 
the proposed amendments as requiring the lead auditor to communicate to 
other auditors all the risks of material misstatement for the location 
or business unit, or even all identified risks of material misstatement 
to the consolidated financial statements. Some of those commenters 
(some of whom also commented on the 2021 SRC) recommended that the lead 
auditor be required to communicate only the significant risks or only 
risks that are relevant to the other auditors' work. Some commenters 
agreed that the communication by the lead auditor to the other auditor 
about the scope of work, identified risks of material misstatement, and 
the amount (if determined) below which misstatements are clearly 
trivial and do not need to be accumulated, should be in writing.
    In the 2021 SRC, the Board agreed with commenters who stated that 
the lead auditor should communicate to other auditors those risks to 
the consolidated financial statements that are relevant to the other 
auditors' work. The Board therefore included in AS 1201.08b in the 2021 
SRC the qualifying phrases ``[w]ith respect to the work requested to be 
performed'' and ``to the consolidated financial statements that are 
associated with the location or business unit.'' \171\ These phrases 
remain in the final amendments. The amendments do not limit the lead 
auditor's communication to significant risks (as some commenters 
suggested) because doing so could lead to inadequate testing of 
significant accounts and disclosures where a reasonable possibility of 
material misstatement to the financial statements exists.
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    \171\ To align with similar language in AS 2101.11, the 
amendments have been revised from the 2021 SRC in AS 1201.08b(1) to 
change ``the identified risks ... that are applicable to the 
location or business unit'' to ``associated with the location or 
business unit.''
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    Some commenters on the proposing releases also questioned whether 
the lead auditor is always best suited to assess risks of material 
misstatement at locations or business units audited by other auditors. 
Further, a couple of commenters to the 2021 SRC recommended that the 
amendments not require the lead auditor to communicate identified risks 
of material misstatements that are applicable to the location or 
business unit. Instead, the commenters recommended a requirement that 
focuses the lead auditor on communicating identified risks to the 
consolidated financial statements and matters that would assist the 
other auditor in developing a more granular view of risks specific to 
the location or business unit.
    Although requiring the lead auditor to communicate to the other 
auditor the relevant risks of material misstatement to the company's 
financial statements is consistent with the lead auditor's 
responsibilities under PCAOB standards, existing PCAOB standards also 
recognize that additional risks of material misstatement to the 
company's financial statements may be identified by other auditors, who 
could be more familiar than the lead auditor with a particular location 
or business unit where such risks may originate.\172\
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    \172\ See AS 2110.49-53.
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    The Board agrees with commenters that input from other auditors may 
be necessary in identifying and assessing risks of material 
misstatement to the company's financial statements and developing an 
audit response. The amendments are designed to foster effective two-way 
communication by requiring the lead auditor to, as necessary, hold 
discussions with and obtain information from other auditors to 
facilitate the performance of the supervisory procedures.\173\ Notably, 
all key engagement team members, including those at the other auditor 
firms, are already required under existing standards to discuss the 
susceptibility of the company's financial statements to material 
misstatement due to error or fraud, as part of performing the risk 
assessment procedures.\174\ A reminder about these requirements is 
included in a footnote to AS 1201.08.\175\
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    \173\ A note to AS 1201.08 provides that the lead auditor 
should, as necessary, hold discussions with and obtain information 
from the other auditor to facilitate the performance of procedures 
described in paragraph .08.
    \174\ See AS 2110.49-.53.
    \175\ See footnote 15 to AS 1201.08, citing AS 2110.49-.53, 
which require key engagement team members (including those in 
differing locations) to hold discussions regarding risks of material 
misstatement due to error or fraud, which inform the identification 
and assessment of risks.
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    The Board also agrees with commenters that under the existing 
requirements the lead auditor identifies and assesses the risk of 
material misstatement at the level of the company's (consolidated) 
financial statements. An additional reference was added to the 
amendments reminding lead auditors of the existing requirements of AS 
2110.59 to identify and assess the risks of material misstatement at 
the financial statement level and assertion level.\176\
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    \176\ See footnote 15 to AS 1201.08.
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Obtaining and Reviewing a Written Description of the Audit Procedures 
To Be Performed by the Other Auditors
See Paragraphs .09 and .10 of AS 1201
    Existing PCAOB standards require that the auditor develop and 
document an audit plan that includes a description of, among other 
things, the planned nature, timing, and extent of the risk assessment 
procedures, tests of controls, and substantive procedures.\177\ In 
addition, pursuant to AS 1201, the auditor is required to inform 
engagement team members of their responsibilities, including the 
nature, timing, and extent of procedures they are to perform.\178\ In 
situations governed by AS 1205, the lead auditor is required to 
consider reviewing the audit programs of the other auditor.\179\
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    \177\ See AS 2101.10.
    \178\ See AS 1201.05a(2).
    \179\ See rescinded AS 1205.12.
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    Similar to the proposed amendments in the 2021 SRC, the final 
amendments to AS 1201 require the lead auditor to obtain and review the 
other auditor's written description of audit procedures to be 
performed,\180\ determine whether any changes to the other auditor's 
planned audit procedures are necessary, and if so, discuss the changes 
with, and communicate them in writing to, the

[[Page 39703]]

other auditor.\181\ Under these amendments, the lead auditor is 
required to inform the other auditor of the level of detail needed in 
the other auditor's written description of audit procedures to be 
performed, based on the necessary extent of the lead auditor's 
supervision.
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    \180\ See AS 1201.09.
    \181\ See AS 1201.10.
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    The amendments are intended to promote proper supervision of the 
other auditor's work by the lead auditor and proper coordination of 
work performed by the lead and other auditor. Importantly, the 
amendments are designed to accommodate different scenarios encountered 
in practice. For example, the other auditor who is more familiar than 
the lead auditor with a location or business unit may be better 
positioned to design detailed audit procedures for that part of the 
audit (which procedures would then be subject to the lead auditor's 
review and approval). Conversely, an other auditor who lacks experience 
in addressing certain risks may not be best suited to plan the work or 
to design detailed audit procedures in that area. The amendments 
provide that as the necessary extent of supervision increases, the lead 
auditor, rather than the other auditor, may need to determine the 
nature, timing, and extent of procedures to be performed by the other 
auditor.\182\
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    \182\ See note to AS 1201.09.
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    Many commenters on the 2021 SRC recommended that these requirements 
for the lead auditor be more principles-based to better accommodate an 
iterative process of communication between the lead auditor and other 
auditors, and the use of communication technology. For example, some 
commenters indicated that planned audit procedures and related changes 
could be communicated through video conferencing and screen sharing 
instead of in writing. These commenters encouraged the Board to revise 
AS 1201.09 and .10 to make them more principles-based and to reflect 
the recent technological innovations in communication. A couple of 
commenters went further and recommended removing from the amendments 
the requirement to ``obtain'' the information. A couple of other 
commenters either recommended that the Board allow the lead auditor to 
apply judgment in determining what changes should be communicated in 
writing to the other auditor based on the lead auditor's extent of 
supervision of the other auditor, or stated that the requirement could 
cause an other auditor that is not a member of the lead auditor's 
network to be concerned about the confidentiality of its audit 
methodology.
    In its oversight activities, the PCAOB has seen challenges in the 
coordination and communication between lead auditors and other 
auditors, particularly in coordinating their responsibilities for the 
planning and performance of audit procedures. Requiring that certain 
communications be in writing facilitates the supervision of the 
engagement by reducing the risk of miscommunication and lack of clarity 
about responsibilities.
    The terms ``obtain'' and ``in writing'' do not mandate that auditor 
working papers be paper-based.\183\ The Board believes that 
technological advances in communication including those discussed by 
commenters could improve the effectiveness and efficiency of the lead 
auditor's supervision of other auditors, and the Board noted that the 
amendments would not hamper the implementation of novel means of 
communication, including documentation and review.
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    \183\ See AS 1215.04 (audit documentation may be in the form of 
paper, electronic files, or other media).
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    For example, a lead auditor could meet with other auditors through 
video conferencing and could view and discuss documents that are shared 
by video screen. The lead auditor could also obtain documents by (i) 
receiving them via electronic mail or by downloading them via an 
electronic portal and could store them electronically or (ii) accessing 
the other auditor's electronic working papers remotely. In any case, 
audit documentation supporting the lead auditor's conclusions will need 
to contain a record that the lead auditor fulfilled its 
responsibilities under PCAOB standards, including reviewing the 
relevant documents and meeting the requirements of other provisions and 
of other standards regarding matters such as determinations related to 
other auditors' work \184\ and audit documentation.\185\
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    \184\ See, e.g., AS 1201.13 (requiring the lead auditor to make 
certain determinations based on a review of the documentation 
provided by the other auditor, discussions with the other auditor, 
and other information obtained by the lead auditor).
    \185\ See, e.g., AS 1215.06 and AS 1215.18 as amended.
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    As with paper-based documentation of the work of other auditors, 
the necessary level of detail of the other auditors' electronic 
documentation that is required to be requested, obtained, and reviewed 
by the lead auditor and the lead auditor's communication to the other 
auditors under the amendments will depend on the necessary extent of 
supervision of the other auditors' work by the lead auditor.
    Separately, requiring the lead auditor to obtain a written 
description of audit procedures to be performed from the other auditor 
and communicate changes in writing to the other auditor not only allows 
the Board to fulfill its mandates of inspecting and potentially 
investigating the lead auditor's oversight of the other auditor's work 
but it is also important for an audit firm's audit quality reviews such 
as engagement quality reviews and internal inspections. For the reasons 
discussed above, the Board adopted these requirements as proposed.
Obtaining and Reviewing the Other Auditor's Written Affirmation 
Regarding Work Performed
See Paragraph .11 of AS 1201
    As was proposed in the 2021 SRC, under the amendments the lead 
auditor is required to obtain and review a written affirmation as to 
whether the other auditor performed work in accordance with the 
instructions provided, as described in paragraphs AS 1201.08-.10, 
including the other auditor's use of applicable PCAOB standards in 
performing that work. If the other auditor has not performed the work 
in accordance with the instructions provided, the lead auditor is 
required to obtain and review a description of the nature of, and 
explanation of the reasons for, the instances where the work was not 
performed in accordance with the instructions, including (if 
applicable) a description of the alternative work performed.
    This requirement is designed to provide information to the lead 
auditor about whether the other auditor performed work in accordance 
with the lead auditor's instructions, to inform the lead auditor of 
audit areas that may require additional attention, and to emphasize the 
other auditor's responsibility for properly planning and performing its 
work in compliance with PCAOB standards. It is also consistent with the 
existing practice of affirming in writing an other auditor's compliance 
with the lead auditor's instructions (e.g., in an ``interoffice 
memorandum'') at some audit firms. AS 1201.11 does not duplicate a 
requirement in AS 1215.19 for the lead auditor to obtain, review, and 
retain certain documents relating to the other auditor's work.
    Commenters on the 2021 SRC supported the written affirmation in AS 
1201.11 as they believed it was a

[[Page 39704]]

necessary requirement, and the Board adopted it as proposed.
Directing the Other Auditors To Provide Specific Documentation
See Paragraph .12 of AS 1201
    Supervision under existing PCAOB standards necessarily involves 
review of audit documentation.\186\ For example, under AS 1201, the 
engagement partner and other engagement team members performing 
supervisory activities should review the work of engagement team 
members to evaluate whether the work was performed and documented. (AS 
1201 does not specify the documents to be reviewed.) In addition, for 
audits involving other auditors, other PCAOB standards describe certain 
documentation of the other auditor's work that the lead auditor must 
obtain, review, and retain prior to the report release date.\187\
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    \186\ See, e.g., AS 1201.05c.
    \187\ See, e.g., AS 1215.19 and rescinded AS 1205.12.
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    As the Board proposed in the 2021 SRC, the amendments supplement 
the existing standards by requiring the lead auditor to direct the 
other auditor to provide for the lead auditor's review specified 
documentation with respect to the work of the other auditor. This 
requirement is designed so that the lead auditor obtains information 
about the other auditor's work that is necessary for the lead auditor 
to carry out its supervisory responsibilities and that supports the 
lead auditor's obligation to obtain sufficient appropriate audit 
evidence to provide a reasonable basis for its opinion.
    The amendments also state that the documentation requested by the 
lead auditor from the other auditor depends on the necessary extent of 
supervision of the other auditor's work by the lead auditor (which is 
based on a number of factors, including risk). Thus, under the 
amendments, review of additional documentation (i.e., beyond the items 
listed in AS 1215.19) could be necessary to satisfy the lead auditor's 
supervisory responsibilities, for example, for work performed by less 
experienced other auditors, procedures in areas with heightened risks 
of material misstatement (including the other auditors' testing of 
controls that address the risks), or procedures to resolve significant 
issues arising during the audit. In directing the other auditor, the 
lead auditor could, for example, specify individual documents, types of 
documents, or documentation for audit areas that it intends to review.
    One commenter generally supported the changes to proposed AS 
1201.12 in the 2021 SRC that acknowledge the lead auditor's use of a 
risk-based approach in determining the documentation to review in 
performing its supervisory responsibilities. Another commenter 
recommended that the amendments clarify that determining the necessary 
incremental documentation for the lead auditor to review (in addition 
to documents described in PCAOB standards) should be based on the facts 
and circumstances of an audit engagement. Another commenter on the 2021 
SRC stated that privacy laws in certain jurisdictions may create 
obstacles for the transfer of documentation from the other auditor's 
country to the lead auditor's country. And another recommended 
clarifying that not all the documentation described in AS 1215.19 may 
be applicable in some situations. For example, in situations where the 
other auditor's involvement consists of only performing certain limited 
procedures (e.g., observing a company's physical inventory), certain 
documents in AS 1215.19 would not be applicable.
    The Board considered these comments and determined that the 
requirements as proposed were sufficiently clear. The Board therefore 
adopted the requirements as proposed. As noted previously, the 
amendments specifically state that the documentation requested by the 
lead auditor from the other auditor will be based on the necessary 
extent of supervision of the other auditor's work by the lead auditor 
(which depends on a number of factors, including risks of material 
misstatement and the knowledge, skill, and ability of the other 
auditor).
    Additionally, with regard to privacy laws and potential challenges 
to accessing working papers, if effective methods of remote access to 
the working papers are available to the lead auditor, the amendments do 
not preclude the use of such methods. However, as is the case under the 
existing requirements, engagement team members from the lead auditor 
may need to travel to the country where the working papers are located 
to access the working papers and perform their review. The amendments 
do not change the existing requirement in AS 1215.19 for obtaining, 
reviewing, and retaining certain documentation related to the other 
auditor's work by the office of the firm issuing the auditor's report. 
If the lead auditor cannot obtain sufficient appropriate audit 
evidence, a limitation on the scope of the audit may exist. This may 
require the engagement partner to qualify the audit opinion or disclaim 
an opinion.\188\
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    \188\ See AS 2810.35. See also paragraphs .05-.15 of AS 3105, 
Departures from Unqualified Opinions and Other Reporting 
Circumstances.
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    Finally, the Board agrees with the commenter that in situations in 
which the other auditor only performs select procedures for the lead 
auditor, such as observing physical inventories, the lead auditor is 
not required to obtain all of the documents described in AS 1215.19, 
because those documents would not be applicable to the limited type of 
work performed by the other auditor. However, this does not reduce the 
need for the lead auditor to obtain documentation prepared by the other 
auditor that is sufficient to fulfill its supervisory responsibilities 
under AS 1201.\189\
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    \189\ See also AS1215.A65.
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Determining Whether the Other Auditor Has Performed the Work, and 
Whether Additional Evidence Should Be Obtained
See Paragraph .13 of AS 1201
    Under the general supervisory requirements of AS 1201, the 
engagement partner and his or her assistants should review the work of 
engagement team members to evaluate whether: (i) the work was performed 
and documented; (ii) the objectives of the procedures were achieved; 
and (iii) the results of the work support the conclusions reached.\190\ 
In the scenarios that are governed by rescinded AS 1205, the lead 
auditor should consider performing one or more specified procedures in 
addition to obtaining, reviewing, and retaining certain documentation 
of the other auditor's work.
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    \190\ See AS 1201.05c. Additionally, AS 1201.05b requires the 
engagement partner or other supervisors to direct engagement team 
members to bring significant accounting and auditing issues to their 
attention so they can evaluate those issues and determine that 
appropriate actions are taken in accordance with PCAOB standards. 
That requirement also applies in the supervision of other auditors.
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    Under the amendments, AS 1201.13 provides that the lead auditor 
should determine, based on a review of the documentation provided by 
the other auditor, discussions with the other auditor, and other 
information obtained by the lead auditor during the audit: (i) whether 
the other auditor performed the work in accordance with the lead 
auditor's instructions, including the use of applicable PCAOB 
standards; and (ii) whether additional audit evidence should be 
obtained by the lead auditor or other auditors. Notably, the amendments 
do not require that in all cases the lead auditor review all the

[[Page 39705]]

documentation of the other auditor's work to determine whether the work 
has been performed. Rather, the lead auditor's determination should be 
based on the review of documents it requested from the other auditor 
under the amendments, discussions with the other auditors, and other 
information obtained during the audit.
    The requirement to determine the need for additional evidence is 
intended to address circumstances that may be encountered in practice, 
including where the other auditors did not perform the procedures as 
instructed, or where sufficient appropriate audit evidence was not 
obtained. In those situations, the lead auditor would need to determine 
the appropriate next steps. For example, the lead auditor could 
determine that it is necessary for the lead auditor or the other 
auditor to perform additional audit procedures to address a previously 
unidentified risk of material misstatement or to obtain further audit 
evidence with respect to one or more locations or business units.\191\
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    \191\ See AS 1201.13. See also AS 2810.35 and .36 (which are 
referenced in a footnote to AS 1201.13b), requiring the auditor, 
among other things, to obtain further audit evidence if sufficient 
appropriate audit evidence has not been obtained.
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    Commenters did not oppose or suggest modifications to the proposed 
requirements in AS 1201.13, and the Board adopted them as proposed.
Multi-Tiered Audits
See Paragraphs .14-.15 of AS 1201 and Paragraphs .06Ac, .06E, and .06I 
of AS 2101
Supervisory Procedures in Multi-Tiered Audits--Directing a First Other 
Auditor
    For various reasons, some engagement teams could involve multiple 
tiers of other auditors. Such ``multi-tiered'' audits are not expressly 
addressed in the existing standards.
    In addition to describing multi-tiered audits, the amendments 
clarify that in multi-tiered audits the lead auditor may seek 
assistance from an other auditor (a ``first other auditor'') in 
fulfilling certain planning and supervisory responsibilities of the 
lead auditor with respect to one or more second other auditors (i.e., 
procedures in paragraphs .08-.13 of AS 1201). Multi-tiered audits are 
described in the standard as those in which the engagement team is 
organized in a multi-tiered structure, e.g., whereby an other auditor 
assists the lead auditor in supervising a second other auditor or 
multiple second other auditors. \192\
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    \192\ See footnote 19 to AS 1201.14.
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    Under the amendments, the lead auditor determines whether to seek 
assistance from a first other auditor in supervising one or more second 
other auditors, pursuant to factors in AS 1201.06.\193\ Notably, 
however, the lead auditor is responsible for the supervision of the 
entire audit, including the supervision of all other auditors.
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    \193\ AS 1201.14.
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    For example, a multi-tiered audit of a U.S. multinational 
corporation that consolidates the results of its European operations in 
the U.K. could include the following structure:
    <bullet> A U.S. firm as lead auditor;
    <bullet> A U.K. firm as first other auditor, auditing the European 
operations; and
    <bullet> A German firm as a second other auditor, auditing a 
business unit in Germany that is consolidated into, and is a 
significant portion of, the European operations.
    In this example, under the amendments, the lead auditor could seek 
assistance from the U.K. firm in supervising the work of the second 
other auditor in Germany. In a more complex structure, the lead auditor 
could seek assistance from a first other auditor in supervising the 
work of multiple second other auditors.
    The lead auditor's determination of whether it would be appropriate 
for the first other auditor to perform supervisory procedures with 
respect to the second other auditor should be based on the factors for 
determining the extent of supervision in AS 1201.06.
    The lead auditor's use of a first other auditor is entirely within 
the lead auditor's discretion. The lead auditor could decide not to 
seek assistance from the first other auditor in supervising the work of 
second other auditors where, for example, the first other auditor's 
knowledge of a particular industry, particular accounting or auditing 
area, or PCAOB rules and standards is insufficient to effectively 
review the work of the second other auditors.
    A commenter on the 2021 SRC asserted that the description of multi-
tiered audits as proposed in footnote 19 to AS 1201.14 does not provide 
sufficient context for circumstances that might give rise to multi-
tiered audits. The commenter suggested an alternative description that 
would be based on the financial reporting structure of an entity, which 
the commenter viewed as more important to defining the concept of a 
multi-tiered audit than the audit structure.\194\ Having considered the 
comment, the Board decided to adopt the amendments as proposed in the 
2021 SRC. The description of multi-tiered audits in the amendments and 
the related requirements are discussed in the context of existing 
auditor responsibilities, to illustrate how the existing 
responsibilities apply when an audit includes one or more supervisory 
tiers.
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    \194\ The commenter provided the rationale that a multi-tiered 
audit may exist even if the first other auditor does not assist the 
lead auditor in supervising the work of a second other auditor.
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    Another commenter recommended that the description of multi-tiered 
audits be moved to the definitions section in Appendix A of AS 2101. 
The Board has decided not to relocate the description of ``multi-tiered 
audits'' to Appendix A of AS 2101, as it is not intended to be a 
defined term in the standards, but rather a description of a current 
practice.
Supervisory Procedures in Multi-Tiered Audits--Evaluating a First Other 
Auditor's Supervision of a Second Other Auditor's Work
    Under the amendments, the lead auditor is responsible for the 
supervision of the entire audit, including the supervision of all the 
other auditors' work. If a first other auditor performs supervisory 
procedures with respect to a second other auditor, the lead auditor is 
required to evaluate the first other auditor's supervision of the 
second other auditor's work.\195\ If the first other auditor assists 
the lead auditor with performing the supervisory procedures described 
in AS 1201.14, the lead auditor is required to obtain, review, and 
retain documentation identifying the scope of work to be performed by 
the second other auditor.\196\ The requirements for the supervision of 
the other auditor's work in a multi-tiered audit also apply to audits 
in which there are multiple second other auditors.\197\
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    \195\ See AS 1201.14.
    \196\ See AS 1201.14.
    \197\ See also discussion below.
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    Under the amendments, the lead auditor will consider the first 
other auditor's review of the second other auditor's work, and apply 
the provisions of AS 1201.06, including taking into account the 
knowledge, skill, and ability of the first other auditor, when 
determining the necessary extent of its review (if any) of the second 
other auditor's work.\198\ For example, the lead auditor could 
determine it needs to be less involved in supervising the second other 
auditor (including reviewing the second other auditor's work) if the 
first other auditor has adequate experience in areas audited by the 
second other auditor and maintains documentation sufficient to 
understand the supervisory

[[Page 39706]]

procedures performed with respect to the second other auditor, and if 
no unexpected issues arise during the audit.
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    \198\ See AS 1201.15.
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    For purposes of the lead auditor's compliance with AS 1215.19 with 
respect to work performed by a second other auditor, the lead auditor 
may request that the first other auditor both (i) obtain, review, and 
retain the audit documentation described in AS 1215.19 related to the 
second other auditor's work (including the second other auditor's 
supervision of the work of further tiers of other auditors \199\) and 
(ii) incorporate the information in that documentation in the first 
other auditor's documentation that it provides to the lead auditor 
pursuant to AS 1215.19.\200\ In other words, the amendments would not 
require the first other auditor to provide to the lead auditor multiple 
sets of the same type of documentation; for example, the first other 
auditor could submit to the lead auditor one schedule that incorporates 
misstatements identified during the audit by the first other auditor 
and the second other auditor(s).
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    \199\ See discussion below.
    \200\ See note to AS 1201.14.
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    One commenter on the 2021 SRC supported the requirements and stated 
that they provided the right approach to multi-tiered audits. Another 
commenter indicated that the lead auditor should be able to place 
greater reliance on a first other auditor than the proposed 
requirements allowed, including relying on the first other auditor to 
determine the extent of supervision of second other auditors. In 
addition, this commenter stated that it disagreed with the requirement 
that the lead auditor should obtain and review documentation that 
identifies the scope of work for each location or business unit in a 
multi-tiered audit, although it agreed that the lead auditor needed 
such information in order to consider whether (and if so, the extent to 
which) it should be involved in the work of the second other auditor.
    With regard to the comment that the lead auditor should be able to 
place greater reliance on a first other auditor, including relying on 
the first other auditor to determine the extent of supervision of 
second other auditors, the aim of this rulemaking is to increase the 
lead auditor's involvement in and evaluation of the other auditors' 
work. This includes the lead auditor's supervision of the work of 
second other auditors in multi-tiered audit scenarios. Allowing the 
lead auditor to simply rely on the first other auditor's supervision of 
a second other auditor, as recommended by the commenter, would not be 
consistent with this goal. As stated above, under the amendments, the 
lead auditor determines its extent of supervision of the second other 
auditor's work in accordance with the factors in paragraph AS 1201.06.
    With regard to the comment that the lead auditor should not have to 
obtain and review documentation that identifies the scope of work for 
each location or business unit in a multi-tiered audit, the Board 
continues to believe that obtaining and reviewing such documentation is 
critical for informing the lead auditor's supervision of the other 
auditors' work. Supervision of the engagement, including the work of 
second other auditors, is the lead auditor's responsibility, and the 
lead auditor's knowledge of the scope of the work of second other 
auditors is necessary to effectively discharge that responsibility.
    One commenter on the 2021 SRC expressed concerns about how the 
requirement to evaluate a first other auditor's supervision of a second 
other auditor would be operationalized, in particular what information 
would be taken into account in making the evaluation. This commenter 
recommended that requiring an up-front discussion between the lead 
auditor and the first other auditor about how second other auditors 
will be used and supervised would be more beneficial to audit quality. 
This commenter also stated that because it may not always be possible 
to observe the nature and extent of the review performed by the first 
other auditor, the standard should require the lead auditor to obtain a 
written affirmation from the first other auditor that the second other 
auditor has been supervised as agreed with the lead auditor (similar to 
the requirement in AS 1201.11).
    When evaluating the first other auditor's supervision of the second 
other auditor's work, the lead auditor would not, in normal 
circumstances, be expected to reperform the first other auditor's 
supervisory procedures. Instead, the lead auditor would evaluate 
whether the first other auditor properly performed the assigned 
supervisory procedures with respect to the second other auditor, 
coordinated its work with the second other auditor, and resolved 
significant matters arising during the audit. The lead auditor's 
evaluation may include holding discussions with the first other auditor 
and reviewing the first and second other auditors' audit plans, written 
reports, or other documentation. Overall, the extent of the lead 
auditor's evaluation of the first other auditor's supervision depends 
on the nature of the work performed by the second other auditor, the 
results of the work, and the necessary extent of the lead auditor's 
supervision of the first other auditor's work.
    The Board does not agree with the recommendation that the lead 
auditor obtain a written affirmation from the first other auditor that 
the second other auditor has been supervised as agreed with the lead 
auditor. Under the amendments, the lead auditor is responsible for 
supervision of the entire engagement, including supervision of the 
first other auditor's supervision of second other auditors. An 
affirmation, by itself, may not provide information that is sufficient 
to discharge this responsibility. In some circumstances, for example, 
where the risks of material misstatements are higher, the lead auditor 
would need to evaluate more information than an affirmation to fulfill 
its responsibility to supervise the entire engagement, including the 
involvement of other auditors, to a necessary extent under PCAOB 
standards. Having considered the comments, the Board adopted the 
amendments as proposed in the 2021 SRC.
Audit Planning in Multi-Tiered Audits--Serving as Lead Auditor and 
Seeking Assistance From a First Other Auditor Related to a Second Other 
Auditor's Qualifications
    As discussed in more detail above, the amendments include a third 
consideration for determining whether the participation of an 
engagement partner's firm is sufficient for the firm to carry out the 
responsibilities of a lead auditor and to report as such on the 
company's financial statements.\201\ This third consideration pertains 
to the extent of the engagement partner's firm's supervision of other 
auditors' work for portions of the company's financial statements for 
which the other auditors perform audit procedures. With regard to 
multi-tiered audits, this consideration applies only to the engagement 
partner's firm's direct supervision of other auditors, and not to any 
supervisory assistance that the firm might receive from a first other 
auditor in a multi-tiered audit.
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    \201\ See AS 2101.06Ac.
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    Some commenters indicated that with respect to determining the 
sufficiency of participation of the lead auditor, the amendments 
regarding supervisory assistance from other auditors in a multi-tiered 
audit are clear and appropriate. There were no comments opposing these 
amendments, and the Board adopted them as proposed.

[[Page 39707]]

    Under the final amendments, the lead auditor may seek assistance 
from a first other auditor in performing procedures relating to a 
second other auditor's qualifications, including (i) compliance with 
independence and ethics requirements (under AS 2101.06D),\202\ and (ii) 
knowledge, skill, and ability, and certain other items (under AS 
2101.06H).\203\
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    \202\ See AS 2101.06E.
    \203\ See AS 2101.06I. This provision does not change the 
existing requirement for the other auditors' documentation 
(including the second other auditor's) to be accessible to the 
office issuing the auditor's report. (See AS 1215.18 as amended.)
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    The amendments emphasize that the lead auditor remains responsible 
for determining the audit engagement's compliance with the independence 
and ethics requirements pursuant to AS 2101.06b.\204\ If the lead 
auditor seeks assistance from the first other auditor, it should 
instruct the first other auditor to inform the lead auditor of the 
results of procedures, including bringing to the lead auditor's 
attention any information indicating that a second other auditor is not 
in compliance with the independence and ethics requirements.\205\ 
Further, allowing the lead auditor to seek assistance from a first 
other auditor regarding the second other auditor's knowledge, skill, 
and ability is consistent with the existing supervisory requirement in 
AS 1201.06, which provides that an auditor (first other auditor in this 
instance) should take into account the second other auditor's 
qualifications to determine the necessary extent of supervision of the 
second other auditor's work.\206\
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    \204\ See id.
    \205\ See AS 2101.06E.
    \206\ See AS 1201.06d.
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    A couple of commenters agreed that the requirements applicable to 
multi-tiered audits relative to the planning procedures regarding a 
second other auditor's qualifications were clear and appropriate and 
supported the notion that the first other auditor is often best suited 
to perform these procedures. However, one commenter had concerns with 
the placement of the requirement related to knowledge, skill, and 
ability in a multi-tiered audit and suggested relocating it from AS 
2101.06I to a note to AS 2101.06H but did not provide reasons for the 
concern. The same commenter also recommended that the first other 
auditor be expected to communicate to the lead auditor any concerns 
about the second other auditor's knowledge, skill, and ability.
    With regard to the commenter's point on relocating the requirement 
to a note, the Board considered the comment but determined that moving 
the requirement to a note in AS 2101.06H is not necessary as its 
placement in a paragraph is sufficiently clear. Regarding a first other 
auditor's concerns about the second other auditor's knowledge, skill, 
and ability, a key element for determining the extent of supervision 
necessary is taking into account an engagement team member's knowledge, 
skill, and ability.\207\ If the first other auditor had concerns 
regarding the knowledge, skill, and ability of a second other auditor, 
the first other auditor would take this into account and increase the 
extent of its supervision of the second other auditor's work. 
Additionally, under AS 1201.13, the first other auditor is required to 
determine--based on a review of the documentation provided by the 
second other auditor (pursuant to AS 1201.09-.12), discussions with the 
second other auditor, and other information obtained by the lead 
auditor during the audit--whether the second other auditor performed 
the work in accordance with the instructions and whether additional 
audit evidence should be obtained by the first other auditor, second 
other auditor, or the lead auditor. Having considered the comments 
received, the Board adopted the requirements as proposed.
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    \207\ See id.
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Further Tiers of Other Auditors
    In addition to the first and second other auditors, some 
engagements may involve further tiers of other auditors. For example, 
in the scenario discussed above, the business unit in Germany could 
acquire a company in Belgium, audited by a local firm, and the second 
other auditor in Germany could supervise and use the work of its 
Belgian counterpart (a third other auditor). As noted, the lead auditor 
could seek assistance from the U.K. firm in supervising the work of the 
second other auditor in Germany, which would include the German firm's 
supervision of the third other auditor in Belgium.
    PCAOB standards are designed to work in situations involving 
multiple tiers of other auditors. While the amendments are focused on 
the planning and supervision responsibilities of the lead auditor, 
other requirements of PCAOB standards apply, and would continue to 
apply under the amendments, to all auditors involved in the audit. For 
example, in determining the necessary extent of supervision of the 
third other auditor's work, the second other auditor would be required 
to take into account items listed in AS 1201.06, including the nature 
of the work assigned to the third other auditor, the risks of material 
misstatement, and the third other auditor's knowledge, skill, and 
ability. No commenters expressed views different from the approach in 
the 2021 SRC regarding further tiers of other auditors. Therefore, the 
Board adopted the requirements as proposed.
Dividing Responsibility for the Audit With Another Accounting Firm
See AS 1206
    AS 1206, a new standard, specifically addresses the lead auditor's 
division of responsibility for the audit with another accounting firm 
(i.e., a referred-to auditor).\208\ It carries forward, with certain 
modifications, relevant requirements for the divided-responsibility 
scenario that are in rescinded AS 1205.\209\ Currently, divided-
responsibility engagements are relatively uncommon.\210\
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    \208\ Rescinded AS 1205 did not use the term ``referred-to 
auditor.'' The definition of referred-to auditor is discussed above 
in this release.
    \209\ As discussed above, AS 1205 also includes requirements for 
audits in which the auditor assumes responsibility for the work of 
another firm.
    \210\ According to PCAOB staff analysis of Form AP filings with 
the PCAOB, lead auditors currently divide responsibility with 
another auditor in about 40 issuer audits per year.
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    AS 1206 applies when the lead auditor divides responsibility for an 
audit of the financial statements and, if applicable, ICFR. Similar to 
AS 1205, the new standard does not require the lead auditor to 
supervise the referred-to auditor's work. Rather, each auditor is 
required to supervise its respective engagement team members in 
accordance with AS 1201.\211\
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    \211\ With respect to supervision, if there is more than one 
referred-to auditor, the requirements in AS 1206.03-.09 apply to the 
lead auditor regarding each referred-to auditor separately. If the 
lead auditor assumes responsibility for the work of another 
accounting firm, the lead auditor would be required to supervise the 
other firm's work in accordance with AS 1201.
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    These requirements apply in circumstances where the lead auditor 
decides to refer to the work of the referred-to auditor in its 
auditor's report. In such circumstances, the lead auditor does not 
assume responsibility for the work of the referred-to auditor. Instead, 
the lead auditor discloses the division of responsibility between the 
lead auditor and the referred-to auditor and the magnitude of the 
portion of the audit performed by the referred-to auditor.
    Under AS 1206, both the lead auditor and referred-to auditor remain 
responsible for their respective audits. For example, both the lead 
auditor and referred-to auditor are required to comply with PCAOB 
standards when planning and performing their

[[Page 39708]]

respective audits, including making materiality determinations, and 
issuing audit reports.\212\
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    \212\ See, e.g., AS 2101.11-.14 and AS 2105.10.
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    AS 1206 sets forth certain requirements for the lead auditor, which 
carry forward or strengthen the requirements of AS 1205. For example, 
AS 1206 requires the lead auditor to:
    <bullet> Determine that audit procedures are performed, in 
coordination with the referred-to auditor, with respect to the 
consolidation or combination of the portions of the financial 
statements audited by the referred-to auditor; \213\
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    \213\ See AS 1206.03 and AS 1205.10.
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    <bullet> Obtain a written representation from the referred-to 
auditor regarding the referred-to auditor's independence under 
requirements of the PCAOB and the SEC; \214\
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    \214\ See AS 1206.05a and AS 1205.10b.
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    <bullet> Determine, based on inquiries made to the referred-to 
auditor and other information obtained by the lead auditor during the 
audit, that the referred-to auditor is familiar with the relevant 
requirements of the applicable financial reporting framework, the 
standards of the PCAOB, and the financial reporting requirements of the 
SEC; \215\ and
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    \215\ See AS 1206.06b and AS 1205.10c(ii)-.10c(iii).
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    <bullet> Disclose in its auditor's report (i) the division of 
responsibility between the lead auditor and the referred-to auditor and 
(ii) the magnitude of the portions of the company's financial 
statements audited by the auditors.\216\
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    \216\ See AS 1206.08a and .08c, and AS 1205.07.
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    <bullet> Communicate to the referred-to auditor the decision to 
divide responsibility for the audit with the referred-to auditor \217\ 
and determine a course of action when the lead auditor is unable to 
divide responsibility.\218\
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    \217\ See AS 1206.04 and AS 1205.10(c)(i).
    \218\ See AS 1206.07 (requiring the lead auditor, if it cannot 
divide responsibility, to plan and perform procedures necessary for 
it to issue an opinion, qualify or disclaim its opinion, or withdraw 
from the engagement) and AS 1205.11.
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    In addition, AS 1206 establishes new requirements. For example, AS 
1206 requires the lead auditor to:
    <bullet> Obtain a representation from the referred-to auditor that 
the referred-to auditor is duly licensed to practice under the laws of 
the jurisdiction that apply to the referred-to auditor's work; \219\
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    \219\ AS 1206.05b.
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    <bullet> If the referred-to auditor plays a substantial role in the 
preparation or furnishing of the lead auditor's report, determine 
whether the referred-to auditor is registered with the PCAOB; \220\
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    \220\ AS 1206.06c.
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    <bullet> Disclose the name and refer to the report of the referred-
to auditor in the lead auditor's report; \221\ and
---------------------------------------------------------------------------

    \221\ AS 1206.08b.
---------------------------------------------------------------------------

    <bullet> Establish which auditor (lead auditor or referred-to 
auditor) has audited, and disclose in the lead auditor's report which 
auditor has taken responsibility for, the conversion adjustments in 
situations where the financial statements of the company's business 
unit audited by the referred-to auditor were prepared using a financial 
reporting framework that differs from the financial reporting framework 
used to prepare the company's financial statements.\222\
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    \222\ AS 1206.06d.
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    Consistent with AS 1205, a note to AS 1206.01 requires that the 
engagement partner in a divided-responsibility scenario determine the 
sufficiency of his or her firm's participation in the audit to serve as 
the lead auditor. This requirement appears in AS 2101.06A-.06C, 
discussed above.\223\
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    \223\ AS 2101.06A-.06C also address, among other things, the 
sufficiency-of-participation determination for audits subject to AS 
1201.
---------------------------------------------------------------------------

    The 2016 Proposal retained the divided-responsibility approach that 
has long been permitted in PCAOB standards \224\ and solicited views on 
whether this approach should be eliminated. Most commenters in the 2016 
Proposal supported retaining the divided-responsibility approach 
because they observed no compelling practice issues that would suggest 
a need to eliminate it. In the 2017 SRC, the approach was retained.
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    \224\ The SEC has historically accepted audit reports indicating 
a division of responsibility between a lead auditor and referred-to 
auditor that express their opinion on the respective financial 
statements.
---------------------------------------------------------------------------

    Although most commenters to the 2016 Proposal supported retaining 
the divided-responsibility approach, some commenters on both the 2016 
Proposal and the 2017 SRC expressed concern about retaining the 
approach.\225\ They stated that the lead auditor is ultimately 
responsible for the overall audit opinion and should not refer to other 
auditors.\226\
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    \225\ See Section III.F.1 of the 2021 SRC for a more detailed 
discussion of comments received (e.g., concern that a lead auditor 
might divide responsibility to avoid liability for its work on the 
audit, concern that the effectiveness of audit committee oversight 
could be reduced if the audit committee has no relationship with the 
referred-to auditor, risk of leakage of market sensitive information 
may increase if the referred-to auditor is involved in a corporate 
transaction), including the Board's responses.
    \226\ Similar comments were made by certain members of the 
Board's Standing Advisory Group (``SAG'') at the May and December 
2016 SAG meetings and the May 2017 SAG meeting. At the May 2016 and 
2017 SAG meetings, the observer from the Auditing Standards Board 
acknowledged that AICPA standards allow for divided responsibility. 
Transcript excerpts for these meetings are available in the docket 
for this rulemaking on the PCAOB's website, available at https://pcaobus.org/Rulemaking/Pages/Docket042.aspx.
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    Having considered the comments received, the Board has decided to 
retain the divided-responsibility alternative (with certain conditions 
set forth in the standard). Without the ability for auditors to divide 
responsibility, some companies may encounter situations in which no 
accounting firm is in a position to opine on the company's financial 
statements. For example, the lead auditor may be unable to plan and 
supervise another auditor's work if the subsidiary audited by the other 
auditor is acquired by the lead auditor's audit client late in a fiscal 
year. In this situation, the lead auditor may be unable to gain access 
to people (e.g., subsidiary management, other auditor's personnel) and 
documentation (e.g., subsidiary records, other auditor's working 
papers).\227\ As a result, the lead auditor may be unable to obtain 
sufficient appropriate audit evidence to support an unqualified audit 
opinion on the company's consolidated financial statements and may 
determine to withdraw from the audit engagement or disclaim its 
opinion.
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    \227\ See also discussion below regarding investee financial 
statements audited by an investee's auditor.
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Objectives
See Appendix A of AS 2101 and Paragraph .02 of AS 1206
    AS 1206, unlike AS 1205 (which the Board has rescinded), discusses 
the following objectives of the lead auditor: (i) communicate with the 
referred-to auditor and determine that audit procedures are properly 
performed with respect to the consolidation or combination of accounts 
in the company's financial statements and, where applicable, internal 
control over financial reporting; and (ii) make the necessary 
disclosures in the lead auditor's report.\228\
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    \228\ See AS 1206.02.
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    Some commenters suggested revising the proposed objectives. One 
commenter on the 2016 Proposal suggested that the objectives should 
include performing procedures necessary to make reference to the report 
of the referred-to auditor in the lead auditor's report, and making 
necessary disclosures in the report. Another commenter suggested 
broadening the objective to cover the assessment of the referred-to 
auditor's independence and competence and

[[Page 39709]]

proper communication between the lead auditor and referred-to auditor 
to clarify roles and responsibilities.
    Having considered the comments received, the Board believes that 
the recommended revisions relate to details of performance and 
reporting rather than to high-level objectives of the standard. It also 
notes that the lead auditor would effectively accomplish the objectives 
suggested by the commenters by performing the procedures described in 
AS 1206.\229\ Thus, the Board adopted the standard's objectives as 
proposed.
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    \229\ See AS 1206.03-.07 regarding performing procedures with 
respect to the audit of the referred-to auditor, and AS 1206.08-.09 
regarding making reference in the lead auditor's report. See also AS 
1206.05-.06 regarding certain qualifications of the referred-to 
auditor, and AS 1206.03-.04 regarding coordinating certain 
procedures with, and communicating certain matters to, the referred-
to auditor.
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Performing Procedures With Respect to the Audit of the Referred-to 
Auditor
Performing Procedures Regarding the Consolidation or Combination of the 
Financial Statements
See Paragraph .03 of AS 1206
    Under AS 1206.03, the lead auditor should determine that audit 
procedures are performed, in coordination with the referred-to auditor, 
to test and evaluate the consolidation or combination of the financial 
statements of the business units \230\ audited by the referred-to 
auditor into the company's financial statements. Matters affecting the 
consolidation or combination of the financial statements typically 
include items that are not in the scope of the referred-to auditor's 
audit, such as elimination of intercompany transactions with the 
business unit audited by the referred-to auditor.
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    \230\ As stated in footnote 7 of AS 1206.03, the term ``business 
units'' includes subsidiaries, divisions, branches, components, or 
investments.
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    This provision in AS 1206 builds on and strengthens a requirement 
for the lead auditor in AS 1205.10 regarding adopting appropriate 
measures to assure the coordination of the lead auditor's activities 
with those of the referred-to auditor in order to achieve a proper 
review of matters affecting the consolidating or combining of accounts 
in the financial statements. Commenters did not address this proposed 
provision, and the Board adopted it as proposed.
Communicating the Plan To Divide Responsibility
See Paragraph .04 of AS 1206
    Under AS 1206.04, the lead auditor is required to communicate to 
the referred-to auditor, in writing, its plan to divide responsibility 
for the audit with the referred-to auditor pursuant to PCAOB standards. 
A referred-to auditor who has been informed of the lead auditor's plan 
to divide responsibility will be able to take the necessary steps to 
ascertain the implications of participating in the audit of the 
company. For example, SEC rules require that the audit report prepared 
by the referred-to auditor be filed with the SEC.\231\
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    \231\ See Regulation S-X Rule 2-05, 17 CFR 210.2-05, which 
requires that, in divided-responsibility scenarios, the referred-to 
auditor's report be filed with the SEC. Rule 2-05 provides that if, 
with respect to the examination of the financial statements, part of 
the examination is made by an independent accountant other than the 
principal accountant and the principal accountant elects to place 
reliance on the work of the other accountant and makes reference to 
that effect in his report, the separate report of the other 
accountant must be filed. The term ``principal accountant'' is used 
in the rule. See discussion above regarding whether the term 
``referred-to auditor'' is aligned with the term ``principal 
accountant'' used by the SEC, noting that the definitions in this 
rulemaking do not affect the applicability of SEC terms or rules to 
audits involving other auditors or referred-to auditors, including 
the definition of ``principal accountant.''
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    This provision in AS 1206 builds on and strengthens a requirement 
for the lead auditor in AS 1205.10 regarding ascertaining that the 
referred-to auditor is aware of the divided-responsibility 
arrangement.\232\ Commenters did not address this provision, and the 
Board adopted it as proposed.
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    \232\ See AS 1205.10(c)(i).
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Requesting a Written Representation Regarding Independence and 
Licensing
See Paragraph .05 of AS 1206
    AS 1206.05a provides that the lead auditor should obtain a written 
representation from the referred-to auditor that the referred-to 
auditor is independent of the audit client under the requirements of 
the PCAOB and SEC. This provision is designed to strengthen the 
existing requirements regarding the lead auditor's responsibilities 
with respect to the independence of the referred-to auditor.\233\ 
Commenters did not address this proposed requirement, and the Board 
adopted it as proposed.
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    \233\ AS 1205.10 requires the lead auditor to ``make inquiries'' 
concerning the other auditor's independence, which inquiries ``may 
include'' procedures such as obtaining a representation from the 
other auditor that the other auditor is independent.
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    AS 1206.05b provides that the lead auditor should obtain a written 
representation from the referred-to auditor that it is duly licensed to 
practice under the laws of the jurisdiction that apply to the work of 
the referred-to auditor. This requirement is not included in AS 1205. 
Commenters did not address this proposed requirement of AS 1206, and 
the Board adopted it as proposed.
Conditions for the Lead Auditor To Divide Responsibility, and the Lead 
Auditor's Course of Action When It Is Unable To Divide Responsibility
See Paragraphs .06 and .07 of AS 1206
    AS 1206 describes the (i) conditions that must be met for the lead 
auditor to divide responsibility with the referred-to auditor and (ii) 
lead auditor's course of action when it is unable to divide 
responsibility.\234\ These provisions strengthen the requirements in AS 
1205.11.\235\ The requirements of AS 1206, which are discussed in more 
detail below, are designed to facilitate compliance with PCAOB and SEC 
independence requirements and PCAOB registration rules, and to reduce 
the likelihood of filing auditors' reports with the SEC that violate 
any relevant local licensing requirements.
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    \234\ See AS 1206.06 and .07.
    \235\ Under AS 1205.11, the lead auditor should appropriately 
qualify or disclaim its opinion on the consolidated financial 
statements if it concludes that it can neither assume responsibility 
for the work of the other auditor nor divide responsibility with the 
other auditor.
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Conditions for the Lead Auditor To Divide Responsibility
Performed an Audit and Issued an Auditor's Report in Accordance With 
PCAOB Standards, and Was Registered With PCAOB (When Applicable)
    Under AS 1206.06a, the lead auditor may divide responsibility with 
another accounting firm only if the referred-to auditor has represented 
that it has performed its audit and issued its auditor's report in 
accordance with PCAOB standards.\236\ This provision, which is not 
included in AS 1205, is consistent with existing SEC rules and guidance 
with respect to the auditors' reports filed with the SEC.\237\ Further, 
according to AS 1206.06c, the lead auditor may divide responsibility 
with another accounting firm that would play

[[Page 39710]]

a substantial role in the preparation or furnishing of the lead 
auditor's report, or, if the referred-to auditor's report is with 
respect to a business unit that is itself an issuer, broker, or dealer, 
only if that firm is registered with the PCAOB.\238\
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    \236\ AS 3101, The Auditor's Report on an Audit of Financial 
Statements When the Auditor Expresses an Unqualified Opinion, and AS 
3105, Departures from Unqualified Opinions and Other Reporting 
Circumstances, apply to auditors' reports issued for audits of 
historical financial statements that are intended to present 
financial position, results of operations, and cash flows in 
conformity with the applicable financial reporting framework. AS 
2201 applies to auditors' reports issued for audits of management's 
assessment of the effectiveness of internal control over financial 
reporting that is integrated with an audit of the financial 
statements.
    \237\ See Regulation S-X Rule 2-02(b)(1), 17 CFR 210.2-02(b)(1); 
SEC, Commission Guidance Regarding the Public Company Accounting 
Oversight Board's Auditing and Related Professional Practice 
Standard No. 1, Release No. 34-49708 (May 14, 2004).
    \238\ See Section 102(a) of Sarbanes-Oxley, 15 U.S.C. 7212(a); 
PCAOB Rule 2100, Registration Requirements for Public Accounting 
Firms; paragraph (p)(ii) of PCAOB Rule 1001 (defining the phrase 
``play a substantial role in the preparation or furnishing of an 
audit report'').
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    AS 1206 mirrors current PCAOB registration requirements. It does 
not establish additional criteria for registering with the PCAOB or 
otherwise change the registration requirements. Specifically, AS 1206 
will not allow the lead auditor to divide responsibility for the audit 
with an unregistered public accounting firm unless that firm is not 
required to be registered with the PCAOB under Sarbanes-Oxley Section 
102(a) and PCAOB Rule 2100.
    The standard the Board adopted clarifies, in a footnote to 
paragraph .06, that if the referred-to auditor is not registered with 
the PCAOB, the requirement in AS 3101 regarding stating in the 
auditor's report that the auditor is registered with the PCAOB does not 
apply to the referred-to auditor's report.\239\ The same footnote also 
points out that disclosure in the referred-to auditor's report that a 
firm is not registered with the PCAOB (or omission of a statement that 
the firm is registered) does not relieve that firm of its obligation to 
register when required. The Board received no comments on this 
provision and adopted it as proposed.
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    \239\ See AS 3101.06 and .09g, and AS 2201.85A and .85Dd.
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Knowledge of Relevant Requirements and Standards
    Under AS 1206.06b, the lead auditor may divide responsibility with 
the referred-to auditor only if the lead auditor determines, based on 
inquiries made to the referred-to auditor and other information 
obtained by the lead auditor during the audit, that the referred-to 
auditor is familiar with the relevant requirements of the applicable 
financial reporting framework, PCAOB standards, and SEC financial 
reporting requirements.
    The final standard's formulation ``is familiar with'' was included 
in the 2021 SRC, modifying the earlier formulation ``knows,'' to 
reflect the difference in the lead auditor's relationship with the 
referred-to auditor (for divided responsibility) and the other auditor 
(for supervision). As noted in the 2021 SRC, the lead auditor does not 
supervise the referred-to auditor, because the referred-to auditor is 
responsible for its audit of and audit report on the financial 
statements (and, if applicable, ICFR) of the company's business unit. 
The lead auditor does not take responsibility for the referred-to 
auditor's audit. In contrast, when an other auditor is involved in the 
audit, the lead auditor supervises the other auditor's work, takes 
responsibility for that work, and is therefore required to obtain a 
more in-depth understanding of the other auditors' knowledge, skill, 
and ability when establishing the necessary extent of supervision than 
for a referred-to auditor in a divided-responsibility audit.
    Commenters did not address this amendment, and the Board adopted it 
as proposed.
Financial Reporting Framework Used To Prepare the Company's and 
Business Unit's Financial Statements
    Under AS 1206.06d, in relatively uncommon situations when the 
financial statements of the company's business unit audited by the 
referred-to auditor are prepared using a financial reporting framework 
that differs from the framework used to prepare the company's financial 
statements, the lead auditor may divide responsibility only if (i) 
either the lead auditor or the referred-to auditor has audited the 
conversion adjustments and (ii) the auditor's report of the lead 
auditor indicates which auditor audited the conversion adjustments. (AS 
1205, which is being rescinded, does not explicitly address these 
situations.) \240\ The final standard's approach was proposed in the 
2017 SRC, reversing the restriction in the 2016 Proposal that would not 
have permitted the division of responsibility in the audit of a company 
whose applicable financial reporting framework differs from that of its 
business unit.\241\ The Board believes the resulting approach is 
practicable and balanced and adopted the provision substantially as 
proposed in the 2017 SRC.
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    \240\ PCAOB staff analyzed Form 10-K and Form 20-F filings with 
the SEC for the twelve-month period ended April 30, 2022. This 
search identified 38 divided-responsibility opinions, three of which 
the lead auditor divided responsibility with another auditor when 
the company and a business unit prepared their financial statements 
under different financial reporting frameworks. These filings did 
not state which auditor audited the conversion adjustments.
    \241\ See 2017 SRC at 25-26.
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    Commenters on the 2017 SRC largely agreed with the revised 
provision, although two commenters recommended revisions. One 
recommended an additional requirement, that the lead auditor document 
its basis for concluding that the auditor of the conversion adjustments 
has sufficient knowledge of both reporting frameworks. Another 
commenter asserted that the lead auditor's disclosure of another 
auditor's audit of conversion adjustments could be misconstrued as a 
disclaimer of responsibility for that work.
    With regard to the first commenter's recommendation, the Board 
notes that a separate documentation requirement is unnecessary because 
the lead auditor's compliance with the requirements relating to the 
referred-to auditor's knowledge of the relevant requirements is already 
required to be reflected in audit documentation under the existing 
PCAOB standards.\242\ With regard to the second commenter's argument, 
the Board notes that the required disclosure in the lead auditor's 
report would clearly identify the auditor that has taken responsibility 
for auditing the conversion adjustments and the PCAOB has inspection 
and enforcement authority over both firms.
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    \242\ See, e.g., AS 1215.05a (providing that audit documentation 
should ``[d]emonstrate that the engagement complied with the 
standards of the PCAOB'').
---------------------------------------------------------------------------

    Appendix B of AS 1206 provides examples of the introductory 
paragraphs in the lead auditor's report when the conversion adjustments 
are audited by the lead auditor (Example 3) and the referred-to auditor 
(Example 4).
Lead Auditor's Course of Action When the Lead Auditor Is Unable To 
Divide Responsibility Under AS 1206
    AS 1206.07 provides guidance for situations in which the lead 
auditor is unable to divide responsibility with another accounting 
firm. Such a situation may arise, for example, due to the lead 
auditor's concerns about the qualifications of the referred-to auditor. 
Concerns about the referred-to auditor's qualifications could encompass 
both competence and PCAOB registration status. The lead auditor may 
also have concerns about whether the referred-to auditor's audit was 
performed in accordance with PCAOB standards if, for instance, 
information comes to the lead auditor's attention that raises such 
doubt.
    For situations in which the lead auditor is unable to divide 
responsibility for the audit with another accounting firm, paragraph 
.07 of AS 1206 describes the following alternatives for the lead 
auditor's course of action:
    <bullet> Planning and performing procedures with respect to the 
portion

[[Page 39711]]

of the company's financial statements covered by the other accounting 
firm's report that are necessary for the lead auditor to express an 
opinion on the company's financial statements and, if applicable, ICFR;
    <bullet> Appropriately qualifying or disclaiming the lead auditor's 
report; \243\ or
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    \243\ AS 1206, in a note to paragraph .07b, requires the lead 
auditor to state the reasons for departing from an unqualified 
opinion and, when expressing a qualified opinion, disclose the 
magnitude of the portion of the company's financial statements to 
which the lead auditor's qualification extends. A footnote to AS 
1206.07 refers to the relevant requirements of AS 3105 and Appendix 
C of AS 2201.
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    <bullet> Withdrawing from the engagement.
    A commenter requested that the standard state that the 
circumstances described in AS 1206.07 exist in situations when the lead 
auditor originally expected to divide responsibility with the referred-
to auditor but subsequently determined that it was no longer possible. 
This commenter also stated that AS 1206.07, as proposed, limits the 
lead auditor's course of action to the three options presented and 
recommended that another option be added whereby the work would be 
performed by another accounting firm.
    The Board agrees that AS 1206.07 applies only in situations when 
the lead auditor originally expected to divide responsibility with 
another accounting firm but subsequently determined that dividing 
responsibility with that accounting firm was no longer possible. 
Further, the Board notes that the course of action suggested by the 
commenter (i.e., having another accounting firm perform the work) is 
already available to the lead auditor under AS 1206.07a, as a lead 
auditor that complies with the relevant requirements of PCAOB standards 
is permitted to plan and perform procedures with respect to the 
business unit itself, divide responsibility for that work with another 
referred-to auditor, or supervise and assume responsibility for the 
work of an other auditor.
    No further comments were received on this topic and the Board 
adopted the requirement substantially as proposed.
Making Reference in the Lead Auditor's Report to the Referred-to 
Auditor's Audit and Report
See Paragraphs .08 and .09 of AS 1206
Enhanced Requirements for Making Reference
    Paragraphs .08 and .09 of AS 1206 establish requirements for making 
reference in the lead auditor's report to the audit and auditor's 
report of the referred-to auditor.\244\ Because this rulemaking 
generally carries forward, with certain modifications, AS 1205's 
provisions for divided-responsibility audits, the requirements for 
making reference in AS 1206 are similar to the analogous provisions of 
AS 1205. For example, similar to AS 1205, AS 1206 requires that the 
lead auditor's report (or reports, if the lead auditor chooses to issue 
separate reports on the company's financial statements and internal 
control over financial reporting):
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    \244\ In addition, Appendix B of AS 1206 includes examples of 
reporting by the lead auditor (Examples 1 through 4). The Board's 
consideration of certain aspects of the examples are discussed 
below. In addition, the examples consider the requirements of AS 
3101 and AS 3501. Those standards were approved by the SEC after the 
issuance of the 2016 Proposal. See SEC Release No. 34-81916 (Oct. 
23, 2017).
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    <bullet> Indicate clearly, in the Opinion on the Financial 
Statements and, if applicable, Internal Control over Financial 
Reporting and Basis for Opinion sections, the division of 
responsibility between the portion of the company's financial 
statements and, if applicable, ICFR, covered by the lead auditor's own 
audit and that covered by the audit of the referred-to auditor; \245\ 
and
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    \245\ See AS 1206.08a.
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    <bullet> Disclose the magnitude of the portion of the company's 
financial statements and, if applicable, ICFR, audited by the referred-
to auditor (or by each of the referred-to auditors if there is more 
than one). This may be done by stating the dollar amounts or 
percentages of total assets, total revenues, or other appropriate 
criteria necessary to identify the portion of the company's financial 
statements audited by each of the referred-to auditors.\246\
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    \246\ See AS 1206.08c. See also second note to AS 1206.01, which 
states when there is more than one referred-to auditor, the lead 
auditor must apply the requirements of AS 1206.03-.09 in relation to 
each of the referred-to auditors individually.
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    If the report of the referred-to auditor includes an opinion other 
than an unqualified opinion or includes explanatory language, AS 1206, 
similar to AS 1205, requires that the lead auditor make reference in 
the lead auditor's report to the departure from the unqualified opinion 
and its disposition, or the explanatory language, or to both, unless 
the matter is clearly trivial to the company's financial 
statements.\247\ AS 1206 does not require that the lead auditor's 
report make reference to critical audit matters (CAMs) of the referred-
to auditor, as each auditor must determine whether there are any CAMs 
arising from its own audit under AS 3101.
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    \247\ See AS 1206.09. See also note to paragraph .10 of AS 2810, 
Evaluating Audit Results (describing ``clearly trivial'').
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    A commenter questioned whether, under AS 1206.08c, the magnitude of 
the portion of the company's financial statements audited by the 
referred-to auditor needs to be disclosed for each referred-to auditor 
individually. The commenter asserted that in practice the lead 
auditors' reports generally disclose the magnitude of the referred-to 
auditors' portions of the company's financial statements, and if 
applicable ICFR, in combination (not for each referred-to auditor). The 
commenter therefore recommended that the Board modify the requirement 
in line with the commenter's understanding of current practice.
    The Board believes that the lead auditor's report should disclose 
the magnitude of the portion of the company's financial statements and 
if applicable, ICFR, individually for each referred-to auditor. In 
addition to providing greater transparency to investors and other users 
of the lead auditor's report about accounting firms involved in the 
audit and their responsibilities, the individual disclosure approach is 
not inconsistent with divided-responsibility reporting observed in 
practice. Based on a staff analysis of SEC filings, most lead auditor 
opinions that refer to multiple referred-to auditors disclose the 
magnitude of the referred-to auditors' portions of the company's 
financial statements individually.\248\ The amendments state in the 
second note to AS 1206.01 that the requirements in paragraphs .03-.09 
must be applied to each referred-to auditor individually.
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    \248\ PCAOB staff analyzed Form 10-K and Form 20-F filings with 
the SEC for the twelve-month period ended April 30, 2022. This 
search identified 38 divided-responsibility opinions, two of which 
made reference to multiple-divided-responsibility audits. Both of 
those opinions presented the magnitude disclosures disaggregated.
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    The same commenter suggested replacing the proposed ``and'' (before 
the phrase ``other appropriate criteria'') in the last sentence of AS 
1206.08c with ``or'' to indicate that not all magnitude criteria need 
to be disclosed. The Board agrees that under AS 1206 the magnitude may 
be expressed by using the criteria listed in paragraph .08c, but does 
not require using all criteria. Complying with AS 1206 involves using 
criteria that are necessary to provide a clear and informative 
disclosure in the lead auditor's report of the magnitude of the portion 
of the company audited by the referred-to auditors, and that may 
require disclosure of more than one criterion in some cases. To enhance 
clarity, the Board replaced the term

[[Page 39712]]

``and'' with ``or'' as suggested by the commenter.
    The Board considered these comments and determined that the 
remaining requirements were sufficiently clear and adopted them as 
proposed.\249\
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    \249\ Paragraph .09 was modified from the version in the 2017 
SRC by: using the terminology in AS 3101 (which was amended by the 
PCAOB in 2017); adding a footnote reference to the relevant 
requirements of AS 3101, AS 3105, and AS 2201; and referencing a 
footnote in AS 1206.06 that addresses certain situations where the 
referred-to auditor is not registered with the PCAOB (as discussed 
above regarding conditions for dividing responsibility).
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Identifying the Referred-to Auditor by Name
    To enhance the clarity of disclosure to investors and other users 
of the lead auditor's report, the Board adopted a new requirement in AS 
1206.08b to identify the referred-to auditor by name in the lead 
auditor's report. SEC rules already require that the auditor's report 
of the referred-to auditor be filed with the SEC, so the name of the 
referred-to auditor is already made public.\250\
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    \250\ See Rule 2-05 of Regulation S-X, 17 CFR 210.2-05.
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    Three commenters on the 2016 Proposal and 2021 SRC objected to the 
proposed disclosure, because the reader can obtain the referred-to 
auditor's name from the referred-to auditor's report filed with the SEC 
or from Form AP filed with the PCAOB.\251\ Having considered these 
comments, the Board notes that the new provision--which builds on the 
existing disclosure of referred-to auditor responsibilities in the lead 
auditor's report, without imposing any significant compliance burden on 
the lead auditor--will provide interested parties a more convenient 
mechanism for obtaining names of the referred-to auditors, whose 
responsibilities, but not names, have long been disclosed in the lead 
auditor's report.
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    \251\ Registered public accounting firms must report to the 
Board on Form AP, pursuant to PCAOB Rule 3211, regarding the 
participation of other public accounting firms in the audit. Form AP 
disclosure applies to scenarios when responsibility for the audit is 
divided.
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Other Considerations Relating To Making Reference
    Some commenters on the Proposal and the 2017 SRC suggested 
addressing, in the reporting examples provided in AS 1206, situations 
in which the lead auditor issues separate reports on the financial 
statements and ICFR. Having considered the comments received, the Board 
included in the 2021 SRC an example of separate financial statement 
reporting in Appendix B of AS 1206 (Example 2). The Board received no 
comments on this example and adopted it as proposed. In addition, in 
the 2021 SRC, the Board modified the reporting examples to reflect the 
amendments to AS 3101 that were approved by the SEC after the issuance 
of the 2017 SRC.\252\ The examples as adopted include these modified 
examples.
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    \252\ See SEC Release No. 34-81916 (Oct. 23, 2017).
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Other Matters
Investee Financial Statements Audited by an Investee's Auditor
See Paragraphs .B1-.B2 of AS 1105
    In some audits, auditors other than the firm issuing the auditor's 
report on the company's financial statements perform audit procedures 
on the financial statements of the company's investees, for example, 
for certain investments accounted for by the company under the equity 
method (i.e., investees' auditors). Under AS 1205.14, the company's 
auditor (i.e., investor's auditor) who uses the report of an investee's 
auditor for the purpose of reporting on the investor's equity in 
underlying net assets and its share of earnings or losses and other 
transactions of the investee is in the position of a lead auditor \253\ 
using the work and reports of other auditors under AS 1205.
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    \253\ ``Principal auditor'' is used in AS 1205.
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    Under the amendments, in equity method investment situations, the 
investor's auditor would look to the requirements of Appendix B of AS 
1105, Audit Evidence, which describe the auditor's responsibilities for 
obtaining sufficient appropriate evidence in situations in which the 
valuation of an investment is based on the investee's financial 
results.\254\ Thus, under the amendments, the investor's auditor would 
be able, where appropriate, to use the work and report of the 
investee's auditor.
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    \254\ See Appendix B of AS 1105. See also Auditing Accounting 
Estimates, Including Fair Value Measurements and Amendments to PCAOB 
Auditing Standards, PCAOB Release No. 2018-005 (Dec. 20, 2018).
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    The amendments add to Appendix B of AS 1105 certain relevant 
provisions currently included in AS 1205,\255\ to further guide 
auditors in equity method investment circumstances. First, the 
amendments refer to the independence of the investee's auditor as an 
item for the investor's auditor to consider in determining whether the 
investee's auditor's report is satisfactory. Under existing AS 1105.B1, 
financial statements of the investee that have been audited by an 
investee's auditor whose report is satisfactory to the investor's 
auditor may constitute sufficient appropriate audit evidence. The 
amendments add ``making inquiries as to the . . . independence of the 
investee's auditor (under the applicable standards)'' (i.e., whether 
the investee's auditor is independent of the investee) to the list of 
procedures in AS 1105.B1 that the investor's auditor may consider 
performing. AS 2101.06b requires the auditor to determine compliance 
with independence and ethics requirements.\256\
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    \255\ See AS 1205.10.
    \256\ See SEC, Division of Corporation Finance, Financial 
Reporting Manual, Topic 4, Section 4110.5, Independent Accountants' 
Involvement (SEC staff guidance outlining the application of certain 
PCAOB requirements in various filings with the SEC).
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    Second, the amendments refer to the professional reputation or 
independence of the investee's auditor as an item for the investor's 
auditor to consider in determining whether it needs additional evidence 
regarding the investee's financial results. Under existing AS 1105.B2, 
if in the auditor's judgment additional evidence is needed concerning 
the investment, the auditor should perform procedures to gather 
evidence. The amendments add the investor's auditor's ``concerns about 
the professional reputation or independence of the investee's auditor'' 
to the list of examples that may cause the investor's auditor to 
conclude that additional evidence is needed.
    Because of a wide range of potential scenarios in practice 
involving equity method investees, the amendments do not specify which 
auditor should perform procedures to obtain additional evidence. Under 
the facts and circumstances of a particular audit, the investor's 
auditor may determine, for example, to use its own staff to perform 
procedures or seek assistance from the investee's auditor and supervise 
the investee's auditor's work under AS 1201. The amendments also 
preserve the ability of the investor's auditor (afforded in the current 
requirements) to divide responsibility for the audit with the 
investee's auditor, where appropriate. In such situations, the new 
standard AS 1206 would apply.
    Several commenters were supportive of the proposed amendments for 
investee auditors, with some noting that the requirements provide a 
reasonable approach, while not being too prescriptive to allow for the 
investor auditor to make judgments. One commenter suggested that the 
Board define the term ``investee auditor'' and clarify in the rule text 
that the investee auditor is not considered an ``other auditor.'' This 
commenter stated that this point is explicit in the release but

[[Page 39713]]

not apparent in the proposed amendments. Another commenter expressed 
concern that the proposed terms and definitions in the rulemaking, 
including the term ``investee's auditor,'' are fairly prescriptive and 
may be out of date after the Board adopts a final standard.
    The Board considered these comments in adopting the amendments. The 
term investee's auditor pertains to a concept that is not new and is 
consistent with the terminology already in the standard,\257\ and the 
Board does not believe that the term should be revised or eliminated. 
With regard to the comment that the Board should define the term 
investee auditor and clarify that the investee auditor is not 
considered an other auditor, it is possible that an investor's auditor 
may decide that it is able to supervise an investee's auditor under AS 
1201, having considered the factors in AS 2101.12. In that situation, 
the investee's auditor could be considered an other auditor under the 
amendments.
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    \257\ See AS 1105.B3, which uses the term ``investee auditor's 
report.''
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    Another commenter suggested that, in the situation involving an 
investee's auditor, sufficient appropriate audit evidence cannot be 
obtained through simple evaluation of sufficiency of the investee's 
financial statements and results. This commenter suggested that 
additional procedures may be required, such as the investor's auditor 
obtaining an understanding of the investee's control environment as 
well as performing an evaluation or assessment of prior audit risks and 
business, financial, and market risks, including how those risks have 
been managed by the investee. As noted in the 2021 SRC, unlike with the 
supervision of other auditors by the lead auditor, the investor's 
auditor may not be able to establish an arrangement with the investee's 
auditor or investee management under which the investor's auditor would 
inform, direct, and review work performed by the investee's auditor or 
obtain information from investee management. Therefore, while obtaining 
an understanding of the investee's control environment may be 
beneficial in certain cases, access issues may prevent it.
    Further, the SEC staff has previously clarified that ICFR of an 
equity method investee is not part of the investor's internal control 
over financial reporting \258\ and therefore not part of the 
assessments required under Sections 404(a) and 404(b) of the Sarbanes-
Oxley Act of 2002. Lastly, depending on the financial reporting 
framework of the investee, financial and market risks may be required 
to be disclosed within the financial statements. The Board believes 
that these disclosure requirements, if complied with, should be 
sufficient in some cases of equity method investees to contribute to an 
investor's auditor obtaining sufficient appropriate evidence. The Board 
agrees with the commenter that there may be situations in which further 
understanding by the investor's auditor of ICFR or the risks of the 
investee would be necessary. The Board notes that the amendments are 
principles-based and can be used to appropriately determine the 
necessary procedures for obtaining sufficient appropriate audit 
evidence.
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    \258\ See SEC Staff FAQ on https://www.sec.gov/info/accountants/controlfaq.htm--Question 2. Under this approach, while ICFR related 
to an investee's financial reporting is out-of-scope, internal 
control over financial reporting related to an investor's recording 
of amounts associated with its investment is in-scope.
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    A commenter requested clarification regarding a statement made in 
the 2021 SRC that AS 2101.06b requires the investor's auditor to 
determine compliance with independence and ethics requirements of the 
investee's auditor. It is not the Board's intent to change practice 
with these amendments, but it should be noted that the investor's 
auditor remains responsible for determining compliance with 
independence and ethics requirements for the entire audit, including 
work performed by the investee's auditor. The Board believes that an 
investor's auditor should determine whether the report of the 
investee's auditor is satisfactory and may consider performing 
procedures, such as making inquiries as to the investee's auditor's 
independence in making this determination.
    Footnote 1 to AS 1105.B1 discusses procedures that the investor's 
auditor may consider performing to determine whether the investee's 
auditor's report is satisfactory. One commenter suggested replacing the 
word ``visiting'' in the phrase ``visiting the investee's auditor'' 
with the phrase ``interacting (e.g., using video conferencing 
technology or visiting the other auditor) with.'' \259\ The commenter 
offered this alternate phrasing to recognize the current practice of 
using technology for remote access. Having considered the comment, the 
Board adopted the amendments as proposed. The word ``visiting'' should 
not be interpreted as requiring a physical visit or as precluding a 
virtual visit through the use of technology. Additionally, the Board 
noted that the procedures in footnote 1 to AS 1105.B1 use the qualifier 
``may consider performing;'' thus, the determination of the procedures 
to perform is at the discretion of the investor's auditor.
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    \259\ As proposed and as the Board adopted, footnote 1 to AS 
1105.B1 states: ``In determining whether the report of the 
investee's auditor is satisfactory for this purpose, the auditor may 
consider performing procedures such as making inquiries as to the 
professional reputation, standing, and independence of the 
investee's auditor (under the applicable standards), visiting the 
investee's auditor and discussing the audit procedures followed and 
the results thereof, and reviewing the audit program and/or working 
papers of the investee's auditor.'' (emphasis added).
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    Another commenter opined that the amendments do not adequately 
address the nature and extent of work to be performed by the investor's 
auditor, including the lack of consideration of knowledge, skill, and 
ability of the investee's auditor, and noted that the standard used 
``reputation'' as a consideration in footnote 1 to AS 1105.B1. Access 
to the investee's auditor is likely to impact an investor's auditor's 
ability to evaluate the knowledge, skill, and ability of an investee's 
auditor. In addition, under the circumstances, inquiries about the 
reputation and standing of the investee's auditor \260\ may uncover 
issues regarding the professional competence of the investee's auditor. 
Two commenters raised the issue of non-coterminous year ends, which one 
of the commenters characterized as ``a common problem,'' and noted a 
lack of clarity about the nature and extent of work to be performed by 
an investor's auditor in this situation, particularly with respect to 
competence, independence, and oversight of an investee's auditor. One 
of these commenters also raised the issue of differing reporting 
frameworks and auditing standards.
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    \260\ See footnote 1 to AS 1105.B1.
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    The Board noted that the amendments are based on certain principles 
relating to the auditor's responsibility for obtaining sufficient 
appropriate audit evidence. The amendments are designed to be flexible, 
considering a variety of situations that exist in practice involving an 
investee's auditor. For example, in situations of non-coterminous year-
ends, U.S. GAAP and IFRS allow for a consistent time lag between the 
fiscal year-ends of the investor and its equity method investees, which 
time lag would be reflected in the financial statements of the 
investor.\261\ The amendments

[[Page 39714]]

require obtaining sufficient appropriate audit evidence in support of 
the investee's financial results, and provide examples of procedures 
that may need to be performed in addition to reviewing the investee's 
auditor's report. With regard to differing auditing standards, the 
investor's auditor is responsible for planning and performing--in 
compliance with PCAOB standards--the audit of the investor's financial 
statements (and, if applicable, internal control over financial 
reporting), including determining what constitutes sufficient 
appropriate audit evidence.
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    \261\ See Financial Accounting Standards Board Accounting 
Standards Codifications, Subtopic 323-10, Investments-Equity Method 
and Joint Ventures, paragraph 10-35-6. See also International 
Accounting Standards Board International Accounting Standard 28, 
Investments in Associates and Joint Ventures, paragraph 34.
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    After considering all of these comments, the Board adopted the 
amendments as proposed.
Audit Documentation
See Paragraphs .18-.19 to AS 1215
    Under existing AS 1215.18, the office of the firm issuing the 
auditor's report is responsible for ensuring that all audit 
documentation sufficient to meet the relevant requirements is prepared 
and retained.
    As noted above, the amendments reinforce existing responsibilities 
of the other auditor to perform work with due care and in compliance 
with PCAOB standards. Specifically with respect to audit documentation, 
an amendment to AS 1215.18 reiterates that other auditors must comply 
with existing documentation requirements, specifically paragraphs 
.04-.17 of AS 1215, including with respect to the audit documentation 
that the other auditor provides or makes accessible to the office 
issuing the auditor's report. Additionally, the amendments to AS 
1215.18-.19 conform terminology relating to the use of the newly 
defined term ``other auditor.'' \262\
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    \262\ See discussion above. In footnote 4 of AS 1215.18, the 
final amendments do not include the proposed phrase ``in certain 
circumstances'' after the words ``other related documents'' because 
it is superfluous.
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    A commenter on the 2021 SRC was supportive of the changes proposed 
in AS 1215.18 while another commenter suggested that the term ``other 
offices of the firm'' be revised in paragraphs .18-.19 to use another 
term to clarify that this concept should be applied to offices that are 
not the office of the firm issuing the auditor's report. The Board 
considered this comment and determined that the requirements proposed 
are sufficiently clear, and adopted the requirements as proposed.
Engagement Quality Review--Amendment to AS 1220
See Paragraph .10a of AS 1220
    Existing PCAOB standards specify certain procedures the engagement 
quality reviewer should perform in evaluating the significant judgments 
made by the engagement team and the related conclusions reached in 
forming the overall conclusion on the engagement and in preparing the 
engagement report.\263\ In addition, the amendments to AS 1220 require 
the engagement quality reviewer, in an audit involving other auditors 
or referred-to auditors, to evaluate the engagement partner's 
determination that the participation of the engagement partner's firm 
is sufficient for the firm to carry out the responsibilities of a lead 
auditor and to report as such on the company's financial statements 
and, if applicable, ICFR.\264\
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    \263\ See AS 1220.09.
    \264\ The corresponding requirements for the engagement partner 
are in AS 2101.06A-.06C. The amendments added a reference to these 
requirements and to the definitions of lead auditor, other auditor, 
and referred-to auditor in AS 2101, in a footnote to AS 1220.10a.
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    Some commenters supported the amendment, while others opposed it, 
contending that the sufficiency-of-participation determination is not 
always a significant judgment and thus does not always warrant 
evaluation by the engagement quality reviewer. Having considered the 
comments received, the Board adopted the requirement as proposed. 
Although determining the sufficiency of a firm's participation in the 
audit might not always be difficult or complicated, the decision that 
the firm can serve as lead auditor is always a significant judgment 
because it affects whether it is appropriate for the firm to issue the 
audit report.\265\ Therefore, evaluating the sufficiency-of-
participation determination is important for the engagement quality 
reviewer's conclusion about whether the lead auditor's report is 
appropriate in the circumstances of a particular audit.\266\
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    \265\ See AS 2101.06A.
    \266\ See AS 1220.12.
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Conforming Amendments and Other Relevant Considerations
    This section discusses conforming amendments and other 
considerations where significant comment was received as part of this 
rulemaking. The proposed rule text includes conforming amendments 
discussed in this section and other conforming amendments to PCAOB 
auditing standards, auditing interpretations, attestation standards, 
rules, and Form AP.
Communications With Audit Committees
See Paragraph .10e of AS 1301
    The 2021 SRC proposed to conform terminology in paragraph .10d of 
AS 1301, Communications with Audit Committees, with new definitions. In 
particular, the standard would have used ``other auditors'' in lieu of 
``independent public accounting firms or persons, who are not employed 
by the auditor.'' Upon further consideration, the Board determined that 
the proposed amendment might not be consistent with the original intent 
of the requirement to communicate all participants in the audit to the 
audit committee.\267\
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    \267\ See Auditing Standard on Communications with Audit 
Committee and Related Amendments to PCAOB Standards, PCAOB Release 
No. 2012-004 (Aug. 15, 2012).
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    The change proposed in the 2021 SRC could have excluded, for 
example, individuals who work at shared service centers and are 
supervised by an other auditor, as these individuals would be subsumed 
by the replacement term ``other auditor.'' To avoid unintended 
outcomes, the Board did not amend AS 1301.10d.
    Separately, the Board made a conforming change to AS 1301.10e to 
add ``referred-to auditors'' to the phrase ``if significant parts of 
the audit are to be performed by other auditors.'' The 2017 SRC \268\ 
restored the existing phrase in AS 1301.10e, ``if significant parts of 
the audit are to be performed by [other auditors],'' that would have 
been removed by the 2016 Proposal. No subsequent comment was received 
in this area, and the Board adopted the amendment to AS 1301.10e as 
proposed in the 2017 SRC.
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    \268\ See 2017 SRC at 37.
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Certain Required Interactions With the Referred-to Auditor
See Paragraph .53 of AS 2401
    The amendments to paragraph .53 of AS 2401, Consideration of Fraud 
in a Financial Statement Audit, conform terminology by replacing 
``other independent auditor'' with ``other auditors or referred-to 
auditors.'' The amendments also replace ``subsidiaries, divisions or 
branches'' with ``locations or business units, where applicable.'' 
Further, the amendments include two new footnotes that refer to the 
definitions of ``engagement team'' and ``referred-to auditor'' in 
Appendix A of AS 2101, as well as clarify the term

[[Page 39715]]

``business units,'' used in the revised paragraph.
    A commenter stated that this amendment would go beyond current 
practice for the division of responsibility. Having considered the 
commenter's view, the Board adopted the amendments to AS 2401 
substantially as proposed.\269\ The Board believes that the amendment 
does not substantively change the example in AS 2401.53, but merely 
updates the terminology, aligning it with other amendments in this 
release.
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    \269\ The final amendments include ``locations or business 
units, where applicable,'' instead of only the term ``business 
units.''
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Amendments Relating to Certain Inquiries and Procedures Concerning 
Another Auditor
    Several PCAOB standards refer to AS 1205.10-.12 when describing 
certain inquiries and procedures concerning another auditor \270\ whose 
audit report is used as audit evidence in the audit of a company's 
financial statement (such as the audit report of a service auditor or 
predecessor auditor). In the majority of these circumstances, the 
auditor whose report is used in this manner is neither supervised by 
the lead auditor under AS 1201 nor serving as another independent 
auditor under AS 1205.\271\
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    \270\ Such inquiries include inquiring about professional 
reputation and reviewing the work of another auditor.
    \271\ Under rescinded AS 1205, for these circumstances the 
auditor who uses the audit may be in a position analogous to that of 
a principal auditor. See, e.g., AS 1205.14.
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    These amendments are amending the standards that refer to rescinded 
AS 1205.10-.12 by incorporating the relevant statements from those 
paragraphs into the text of the standards, as was the approach in the 
2016 Proposal. The Board discussed comments received on the 2016 
Proposal in the 2017 SRC and made no modifications to the proposed 
amendments.\272\
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    \272\ See 2017 SRC at 35.
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    A commenter on the 2021 SRC believed that the conforming amendment 
to AS 2601.19 would result in a change to the meaning and related user 
auditor performance requirement. This commenter suggested revisions to 
the language to highlight that the user auditor ``may give 
consideration to'' performing the procedures. The Board believes that 
the conforming amendment does not change the meaning of the 
requirement, and that it is sufficiently clear.\273\ The amendment 
states that ``the user auditor should consider performing one or more 
of the [listed] procedures.'' This language is incorporated in several 
locations, e.g., AS 2201.B23; paragraphs .18-.19 of AS 2601, 
Consideration of an Entity's Use of a Service Organization; footnote 8 
to paragraph .12 of AS 2610, Initial Audits--Communications Between 
Predecessor and Successor Auditors; and AS 3105.55.
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    \273\ The Board does not view the phrase ``should give 
consideration'' in existing AS 2601.19 as being different from 
``should consider,'' which is the terminology used in auditing and 
related professional practice standards as defined in PCAOB Rule 
3101.
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    The Board adopted the amendments as proposed.
Rescinding AI 10, Part of the Audit Performed by Other Independent 
Auditors: Auditing Interpretations of AS 1205
    The amendments (i) rescind AI 10, the auditing interpretations of 
AS 1205; and (ii) carry forward, with modifications, as an amendment to 
AS 2110, a provision in AI 10 that the other accounting firm should 
consider inquiring of the lead auditor about matters that may be 
significant to the other accounting firm's own audit (e.g., executive 
compensation arrangements).\274\
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    \274\ See AI 10.04-.07; see also new paragraph .11A to AS 2110 
in this document. The modifications address the format and 
terminology.
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    Situations in which the lead auditor divides responsibility for the 
audit with a referred-to auditor are governed by the new standard, AS 
1206. The new standard requires, among other things, that the lead 
auditor communicate with the referred-to auditor and determine that 
audit procedures are properly performed, in coordination with the 
referred-to auditor, with respect to the consolidation or combination 
of the financial statements of the business units audited by the 
referred-to auditor into the company's financial statements. For 
situations in which the lead auditor supervises the work of the other 
accounting firm, the other auditor's inquiry of the lead auditor is 
addressed by existing standards.\275\ For situations in which the lead 
auditor divides responsibility for the audit with the other accounting 
firm, an amendment to AS 2110 carries forward, with modifications, the 
existing requirement in AI 10 for the referred-to auditor's inquiries 
of the lead auditor as to matters that may be significant to the 
referred-to auditor's own audit.\276\
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    \275\ See, e.g., AS 2110.49-.51, which require discussion among 
engagement team members throughout the audit about significant 
matters affecting risks of material misstatement.
    \276\ The Board corrected a footnote number in paragraph .28A of 
AS 2110. This footnote was incorrectly numbered as 16A in a previous 
rulemaking release, Amendments to Auditing Standards for Auditor's 
Use of the Work of Specialists, PCAOB Release No. 2018-006 (Dec. 20, 
2018), and it is being changed to 16C to reflect correct sequential 
numbering of footnotes. This change does not affect the content of 
the footnote.
---------------------------------------------------------------------------

    Some commenters on the 2016 Proposal viewed rescinding AI 10 as 
appropriate, and some others suggested carrying forward all or certain 
portions of the guidance in AI 10, including the amendment the Board is 
making to AS 2110. A commenter on the 2021 SRC stated that the 
conforming amendment to AS 2110.11A was not consistent with the 
provisions of existing AS 1205.10 since, it asserted, AS 2110.11A goes 
beyond current practice. The Board rescinded AI 10, as originally 
proposed. The AI 10 direction for the lead auditor is based on the 
limited procedures in AS 1205, which the Board rescinded. The provision 
addressed to the referred-to auditor in AI 10.04-.07 was carried 
forward to AS 2110.11A, as noted above.\277\
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    \277\ In addition to the new paragraph, .11A, in AS 2110, see 
above for technical amendments to (i) AS 2110.13 and .28A (changing 
the numbering of two footnotes, to eliminate duplication) and (ii) 
AS 2110.64 (adding a footnote reference to AS 2101.11 and .12, to 
highlight relevant existing requirements for multi-location 
engagements).
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Interim Reviews
See Paragraphs .18b, .39-.40, and .52 of AS 4105
    The Board adopted conforming amendments to AS 4105, Reviews of 
Interim Financial Information. The 2016 Proposal included conforming 
amendments to that standard \278\ and requested comment on whether 
additional changes to the standards were needed for reviews of interim 
financial information that involve other auditors or referred-to 
auditors.\279\ Three commenters who responded to this question briefly 
expressed support for addressing interim reviews in the amendments but 
did not specify any recommended changes. Another commenter stated that 
any additional requirements should be scalable because the scope of an 
interim review is substantially less than that of an audit.
---------------------------------------------------------------------------

    \278\ See 2016 Proposal at A3-32.
    \279\ See Question 58 in the 2016 Proposal at A4-62.
---------------------------------------------------------------------------

    The 2017 SRC discussed the comments received on this topic, stated 
the Board's intent to adopt conforming amendments to AS 4105, and asked 
for any additional comment.\280\ No further comments were submitted on 
this topic in response to the 2017 SRC or 2021 SRC.
---------------------------------------------------------------------------

    \280\ See 2017 SRC at 36.
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    Having considered the comments received, the Board adopted 
conforming amendments to AS 4105 to appropriately reflect changes to 
other

[[Page 39716]]

PCAOB standards in this rulemaking and preserve the scalable approach 
to interim reviews. The conforming amendments have been revised from 
the form in which they were proposed in 2016. As adopted, footnote 11 
to AS 4105.18b clarifies that, if an accountant (i.e., auditor) who 
conducts a review of interim financial information obtains a report 
from another accountant engaged to conduct a review of interim 
financial information of significant components of the reporting entity 
or its other business units, the accountant that obtains the report is 
ordinarily in a position similar to that of, as applicable, (i) a lead 
auditor that obtains the results of the work of an other auditor (see 
generally AS 1201 (audit supervision) and AS 2101 (audit planning)) or 
(ii) an investor's auditor that obtains a report from an investee's 
auditor (see generally Appendix B of AS 1105 (audit evidence)).
Application to Audits of Brokers and Dealers
    The amendments, if approved by the SEC, will apply to audits of 
brokers and dealers as defined in Sections 110(3)-(4) of Sarbanes-
Oxley.\281\ The proposing releases solicited comment on such 
applicability. No commenters opposed, and several commenters supported, 
applying the amendments to audits of brokers and dealers. In response 
to the 2021 SRC, one commenter said that it was not aware of any strong 
arguments that would indicate that the audits of brokers and dealers 
should be excluded from the application of the proposed amendments, and 
the commenter expressly supported applying the proposed amendments to 
audits of brokers and dealers. One commenter said that it did not 
believe that the revisions discussed in the 2021 SRC presented specific 
issues regarding audits of brokers and dealers.
---------------------------------------------------------------------------

    \281\ For attestation engagements in conjunction with Exchange 
Act Rule 17a-5, 17 CFR 240.17a-5, the supervision requirements of 
Attestation Standard No. 1, Examination Engagements Regarding 
Compliance Reports of Brokers and Dealers, or Attestation Standard 
No. 2, Review Engagements Regarding Exemption Reports of Brokers and 
Dealers, apply to the supervision of the work of other auditors. See 
Standards for Attestation Engagements Related to Broker and Dealer 
Compliance or Exemption Reports Required by the U.S. Securities and 
Exchange Commission and Related Amendments to PCAOB Standards, PCAOB 
Release No. 2013-007, at A4-30 (Oct. 10, 2013).
---------------------------------------------------------------------------

    As the Board noted in the 2016 Proposal, the auditing standards 
that currently govern the use of other auditors and referred-to 
auditors in audits of brokers and dealers are the same as those for 
audits of issuers. The application of the amendments to audits of 
brokers and dealers will continue this approach.
    Staff analysis of PCAOB inspections data for audits of brokers and 
dealers indicates that there are no brokers or dealers that are 
currently issuers, although some of the largest brokers and dealers are 
subsidiaries of issuers. Information from PCAOB inspections and from 
annual reports filed by registered firms indicates that other auditors 
played a substantial role \282\ in a small number of audits of brokers 
and dealers.\283\ Further, information obtained by PCAOB staff has not 
identified any audits of brokers and dealers in which the lead auditor 
divided responsibility for the audit with another accounting firm.
---------------------------------------------------------------------------

    \282\ See PCAOB Rule 1001(p)(ii) (defining the phrase ``play a 
substantial role in the preparation or furnishing of an audit 
report'').
    \283\ Firms that conduct non-issuer audits in accordance with 
PCAOB standards, including audits of brokers and dealers reporting 
under Exchange Act Rule 17a-5, are not required to file a report on 
Form AP regarding such audits. See Staff Guidance: Form AP, Auditor 
Reporting of Certain Audit Participants, and Related Voluntary Audit 
Report Disclosure Under AS 3101, The Auditor's Report on an Audit of 
Financial Statements When the Auditor Expresses an Unqualified 
Opinion (Dec. 17, 2021), at 3. Thus, unlike in the case of audits of 
issuers (including EGCs), Form AP data on the extent of use of other 
auditors and referred-to auditors in audits of brokers and dealers 
is not available.
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    The Board's determination that the amendments will apply to audits 
of brokers and dealers is based on the observation that auditing plays 
a key role in enhancing the reliability of financial information 
provided by brokers and dealers, which is important to investor 
protection. The audit of brokers and dealers is intended to mitigate 
problems related to information asymmetry between customers of brokers 
and dealers, who use the services of brokers and dealers to invest in 
securities and other financial instruments, and management of brokers 
and dealers, who prepare financial information. This information 
asymmetry between customers and management of brokers and dealers may 
be significant. Customers of brokers and dealers are likely to be 
numerous, geographically distributed, and not expert in the management 
or operation of brokers and dealers. This information asymmetry makes 
the role of auditing important in enhancing the reliability of 
financial information. In addition, the audit of brokers and dealers 
may also help attenuate information asymmetry between management of 
brokers and dealers and other users of financial statements, such as 
counterparties and regulatory authorities.
    The amendments are not expected to have a widespread impact on the 
audits of brokers and dealers that are not subsidiaries of issuers, 
since there are likely few instances in which such audits involve the 
use of other auditors. However, in those instances in which other 
auditors are used, the expected improvements in audit quality described 
above will benefit the customers of the broker or dealer, along with 
investors and the capital markets. Because of the scalability of the 
risk-based requirements, the costs of performing the procedures are 
unlikely to be disproportionate to the benefits of the procedures.
Effective Date
    The Board has determined that the amendments will take effect, 
subject to approval by the SEC, for audits of financial statements for 
fiscal years ending on or after December 15, 2024.
    In the proposing releases, the Board sought comment on the amount 
of time auditors would need before the proposed amendments would become 
effective, if adopted by the Board and approved by the SEC. A number of 
commenters on the 2021 SRC recommended that the Board provide an 
effective date at least two years after Board adoption and SEC 
approval. Some preferred, if SEC approval were to occur in the last 
half or quarter of the year, an effective date at least three years 
afterwards. In support of the time needed before effectiveness, 
commenters offered that audit firms will need enough time to implement 
the amended standards throughout the firm (such as through methodology, 
tools, guidance, quality control system changes, and training) and to 
discuss and coordinate implications of the amendments with other 
auditors and referred-to auditors. Some commenters also stated that 
because the amendments relate to matters that occur at the beginning of 
the audit, the implementation needs to occur before the beginning of 
the fiscal year of the financial statements to be audited.
    The Board recognized the preferences expressed by commenters. It 
also appreciated the efforts already undertaken by many audit firms to 
raise their standards of practice in advance of the adoption of these 
amendments. The effective date the Board adopted is designed to provide 
all auditors with a reasonable period of time to implement the 
amendments, without unduly delaying the intended benefits resulting

[[Page 39717]]

from these improvements to PCAOB standards.\284\
---------------------------------------------------------------------------

    \284\ See Auditing Accounting Estimates, Including Fair Value 
Measurements and Amendments to PCAOB Auditing Standards, PCAOB 
Release No. 2018-005 (Dec. 20, 2018) (providing an effective date 
approximately one year after PCAOB adoption); Amendments to Auditing 
Standards for Auditor's Use of the Work of Specialists, PCAOB 
Release No. 2018-006 (Dec. 20, 2018) (same).
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D. Economic Considerations and Application to Audits of Emerging Growth 
Companies Economic Analysis

    The Board is mindful of the economic impacts of its standard 
setting. This economic analysis describes the economic baseline, 
economic need, expected economic impacts of the amendments, and 
alternative approaches considered. Because there are limited data and 
research findings available to estimate quantitatively the economic 
impacts of the amendments, the Board's economic discussion is 
qualitative in nature. However, where practicable, the analysis 
incorporates quantitative information, including analysis of Form AP 
data and PCAOB inspections findings.
    The Board sought information relevant to the economic analysis over 
the course of this rulemaking.\285\ To the extent that commenters 
expressed views related to the economic analysis, commenters generally 
found the economic analysis in the 2016 Proposal and the discussion of 
economic topics in the 2017 and 2021 SRCs to be reasonable. Commenters 
did not provide additional quantitative data or research that could be 
used in the analysis. The Board considered all comments received and 
has developed the following economic analysis that evaluates the 
expected benefits and costs of the final amendments, discusses 
potential unintended consequences, and facilitates comparison to 
alternative actions considered.
---------------------------------------------------------------------------

    \285\ See 2016 Proposal at 30-49; 2017 SRC at 42; 2021 SRC at 
62.
---------------------------------------------------------------------------

Baseline
    The discussion above describes current PCAOB standards that apply 
specifically when other auditors and referred-to auditors participate 
in an audit and the influence of other standard setters on audit 
practice in this area. This section expands on that discussion by 
describing the economic baseline against which the impact of the 
amendments can be considered. Specifically, this section:
    <bullet> Discusses the extent of the use of other auditors and 
referred-to auditors by analyzing data in AuditorSearch, which is the 
PCAOB's public Form AP database.\286\
---------------------------------------------------------------------------

    \286\ See https://pcaobus.org/resources/auditorsearch. See also 
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 Release No. 2015-008 (Dec. 
15, 2015). Form AP provides information on other accounting firms, 
but not individual accountants at those firms. Hence, the terms 
``other auditors'' and ``referred-to auditors'' in the analysis 
presented in this section refer only to accounting firms.
---------------------------------------------------------------------------

    <bullet> Summarizes auditing practices related to the use of other 
auditors and referred-to auditors, including PCAOB staff analysis of 
audit firm methodologies and data on deficiencies in audits that 
involve other auditors.
    <bullet> Provides a concise survey of academic research on the use 
of other auditors and its impact on audit quality.
Extent of the Use of Other Auditors and Referred-to Auditors
    As discussed in the 2016 Proposal, many companies have significant 
operations in jurisdictions outside the country or region of the lead 
auditor.\287\ Audits of such multinational businesses often require the 
participation of accounting firms other than the lead auditor and can 
often involve multiple other firms.\288\ The use of other auditors is 
also more prevalent in audits of larger companies audited by larger 
accounting firms.\289\ In addition, work performed by other auditors 
can comprise a significant share of a given audit.\290\
---------------------------------------------------------------------------

    \287\ See 2016 Proposal at 6.
    \288\ See id. at 6 note 4.
    \289\ See id. at 7.
    \290\ See id. at 6-7 and note 5 (noting that in audits selected 
by the PCAOB for inspection in 2013 and 2014 that involved other 
auditors, the other auditors audited on average between one-third 
and one-half of the total assets and total revenues of the company 
being audited).
---------------------------------------------------------------------------

    Observations in the 2016 Proposal regarding the use of other 
auditors and referred-to auditors are confirmed by more specific 
information that the PCAOB has subsequently received and made available 
to the public on its website. After June 30, 2017, registered public 
accounting firms began to report certain information about the 
participation of other accounting firms in audits on PCAOB's Form AP. 
Figures 2, 3, and 4 present staff analysis of Form AP filings between 
January 1, 2021, and December 31, 2021, and update similar information 
presented in the 2021 SRC.\291\
---------------------------------------------------------------------------

    \291\ See 2021 SRC at 49-55 (providing data based on Form AP 
filings in 2020). The analysis of Form AP data presented in Figures 
2, 3, and 4 is limited to issuers other than investment company 
vehicles and employee benefit plans.

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[[Page 39718]]

[GRAPHIC] [TIFF OMITTED] TN01JY22.002

    The statistics presented in Figure 2 describe the percentage of 
issuer audits that use other firms and the maximum number of other 
firms used in an individual audit, based on 2021 Form AP filings. The 
results are largely consistent with the 2020 Form AP data presented in 
the 2021 SRC and indicate that other firms are involved in many audits 
of issuers.
---------------------------------------------------------------------------

    \292\ Global network firms (``GNFs'') are the member firms of 
the six global accounting firm networks that include the largest 
number of PCAOB-registered non-U.S. firms (BDO International Ltd., 
Deloitte Touche Tohmatsu Ltd., Ernst & Young Global Ltd., Grant 
Thornton International Ltd., KPMG International Cooperative, and 
PricewaterhouseCoopers International Ltd.). The discussion in this 
release uses ``U.S. GNF'' to refer to a GNF member firm based in the 
United States, and ``non-U.S. GNF'' to refer to a GNF member firm 
based outside the United States. Non-affiliate firms (``NAFs'') are 
both U.S. and non-U.S. accounting firms registered with the Board 
that are not GNFs. Some of the NAFs belong to international 
networks.
    \293\ Disclosures on Form AP include the name, extent of 
participation, and headquarters location of an other accounting firm 
that participated in an audit and contributed 5% or more of the 
total audit hours. For firms that contributed less than 5% of the 
total audit hours, the number of firms and their aggregate extent of 
participation is disclosed. Form AP reporting is required not only 
in situations when an other accounting firm performed part of an 
audit under AS 1201 or AS 1205, but also when the personnel of an 
other accounting firm, but not the firm itself, was involved in the 
lead auditor's audit. See Form AP, Item 3.2 (Note) (providing that 
an other accounting firm participated in the lead auditor's audit 
for Form AP reporting purposes if any of its principals or 
professional employees was subject to supervision under AS 1201). 
Thus, not all of the audits in the table may have involved, and not 
all of the firms in the table may have been, other auditors that 
performed part of the audit under AS 1205 or were themselves 
supervised under AS 1201.
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    Overall, other firms are involved in about 26 percent of all issuer 
audit engagements.\294\ Their use is especially

[[Page 39719]]

common in audits performed by firms that are members of global 
networks; about 39 percent of U.S. GNF engagements and about 58 percent 
of non-U.S. GNF engagements involved the use of other firms. In 
comparison, only about seven percent of U.S. NAF and 13 percent of non-
U.S. NAF audit engagements involved other firms.
---------------------------------------------------------------------------

    \294\ The 2021 SRC presented data showing that other firms were 
involved in about 30 percent of all issuer audit engagements. See 
2021 SRC at 51. The change from 30 percent in the 2021 SRC to 26 
percent in this release appears to be mostly due to the recent 
increase in special purpose acquisition company audits, which rarely 
involve the participation of other firms. Between 2018 (the first 
full year of Form AP data) and 2020 (the year presented in the 2021 
SRC), the percentage of audits that use other firms remained 
relatively stable.
---------------------------------------------------------------------------

    When analyzed from the perspective of the domicile of the issuer, 
other firms are involved in about 23 percent of audit engagements of 
issuers domiciled in the U.S., and about 41 percent of audit 
engagements of issuers domiciled outside the U.S. Alternately, when 
analyzed by issuer size, other firms are involved in about 68 percent 
of Fortune 500 issuer audits and about 57 percent of large accelerated 
filer audits.\295\ In contrast, only about 36 percent of accelerated 
filer audits and about 12 percent of non-accelerated filer audits 
involved the use of other firms.
---------------------------------------------------------------------------

    \295\ For an explanation of accelerated filer criteria, see 
https://www.sec.gov/corpfin/secg-accelerated-filer-and-large-accelerated-filer-definitions.
---------------------------------------------------------------------------

    Some issuer audits involve many other firms, particularly when the 
issuer is large. For example, the audit of one Fortune 500 issuer 
involved 27 other firms and the audit of one large accelerated filer 
involved 63. By contrast, the maximum number of other firms used on an 
audit of an accelerated filer and a non-accelerated filer was somewhat 
lower, at 14 and 21 other firms, respectively. The maximum number of 
other firms used is highest for issuer audits conducted by GNFs. For 
example, one non-U.S. GNF audit involved 63 other firms and one U.S. 
GNF audit used 27. Non-affiliated firms can also use multiple other 
firms when conducting issuer audits; on one audit a non-U.S. NAF used 
17 other firms and one U.S. NAF audit involved 10.
[GRAPHIC] [TIFF OMITTED] TN01JY22.003

    The statistics shown in Figure 3 describe how often more than one 
other firm is used when an audit involves such use, based on 2021 Form 
AP filings. The results are largely consistent with the 2020 Form AP 
data presented in the 2021 SRC and indicate that when other firms are 
used, it is common that multiple other firms are used.\296\ For 
example, among all issuer audits involving the use of other firms, 
about 61 percent involved two or more other firms, about 28 percent 
involved five or more, about 11 percent involved ten or more, and about 
two percent involved twenty or more. When examined by the domicile of 
the issuer, the results are similar.
---------------------------------------------------------------------------

    \296\ Form AP data also indicates that when multiple other 
auditors are used, it is common for the other auditors to be located 
in multiple countries outside the lead auditor's country.

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[[Page 39720]]

    When examined by audit firm type, the data shows that GNFs tend to 
use more other firms than NAFs do. For example, in issuer audits 
conducted by U.S. GNFs that involved other firms, about 66 percent 
involved two or more other firms, about 32 percent involved five or 
more, about 11 percent involved ten or more, and about one percent 
involved twenty or more. Similarly, in audit engagements of issuers 
conducted by non-U.S. GNFs that involved other firms, about 71 percent 
involved two or more other firms, about 31 percent involved five or 
more, about 16 percent involved ten or more, and about four percent 
involved twenty or more. By contrast, in audit engagements of issuers 
conducted by U.S. NAFs that involved other firms, only about 19 percent 
involved two or more other firms, and about two percent involved five 
or more. In audit engagements of issuers conducted by non-U.S. NAFs 
that involved other firms, about 34 percent involved two or more other 
firms, and about five percent involved five or more.
[GRAPHIC] [TIFF OMITTED] TN01JY22.004

    The statistics presented in Figure 4 describe the share of audit 
work performed by other firms, based on 2021 Form AP filings. The other 
firms' share of total audit hours provides a simple measure of the 
significance of their work, but may not reflect the level of risk 
associated with that work. The results are largely consistent with the 
2020 Form AP data presented in the 2021 SRC and show that work 
performed by other firms can, however, account for a significant share 
of the audit. To illustrate this finding, consider the following data 
regarding the frequency with which other firms' hours exceeded a 
relatively lower (10 percent of total audit hours) and relatively 
higher (30 percent) threshold of other auditor involvement.
---------------------------------------------------------------------------

    \297\ Using a higher threshold of other firms' involvement (50 
percent of total audit hours) would further reduce the percentages 
reported in Figure 4. Specifically, in audits of issuers that 
involved other firms, other firms performed more than 50 percent of 
total audit hours in about six percent of all issuer audits, about 
two percent of U.S. GNF audits, about 16 percent of non-U.S. GNF 
audits, about four percent of U.S. NAF audits, and about 29 percent 
of non-U.S. NAF audits.

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[[Page 39721]]

    Looking first at the relatively lower threshold of involvement, in 
audits of issuers that involved other firms, other firms performed more 
than 10 percent of total audit hours in about 52 percent of all issuer 
audits, about 52 percent of U.S. GNF audits, about 58 percent of non-
U.S. GNF audits, about 37 percent of U.S. NAF audits, and about 63 
percent of non-U.S. NAF audits. When examined by the domicile of the 
issuer, other firms performed more than 10 percent of the total audit 
hours in about 48 percent of audits of issuers domiciled in the U.S., 
and about 61 percent of audits of issuers domiciled outside the U.S.
    Turning to the relatively higher threshold of involvement, in 
audits of issuers that involved other firms, other firms performed more 
than 30 percent of the total audit hours in about 19 percent of all 
issuer audits, about 13 percent of U.S. GNF audits, about 34 percent of 
non-U.S. GNF audits, about 18 percent of U.S. NAF audits, and about 41 
percent of non-U.S. NAF audits. Other firms performed more than 30 
percent of the total audit hours in about 12 percent of audits of 
issuers domiciled in the U.S., and about 35 percent of audits of 
issuers domiciled outside the U.S.
Auditing Practice Related to the Use of Other Auditors and Referred-to 
Auditors
PCAOB Staff Analysis of Audit Methodologies
    PCAOB staff has reviewed the methodologies of firms related to the 
use of other auditors and referred-to auditors. Specifically, the staff 
compared methodologies of GNFs and methodologies commonly used by 
smaller U.S. firms to current PCAOB standards and the amendments. The 
staff performed this analysis to understand the extent to which firms 
would need to update their methodologies to implement the amendments 
and new standard.
    In general, the staff observed that the methodologies of larger 
firms already incorporate some of the concepts included in the 
amendments and new standard. For example, methodologies of larger firms 
increasingly emphasize the responsibility of the lead auditor for 
overseeing the work of other auditors using a risk-based approach. Some 
larger firms have also made changes to their audit methodologies in 
recent years to encourage a greater level of supervision by the lead 
auditor, such as more frequent and comprehensive communications with 
other auditors and review of other auditors' work papers in areas of 
significant risk. Larger firms have also continued to issue practice 
alerts, templates, and other guidance to emphasize that the lead 
auditor should be sufficiently involved in the work of other auditors. 
Smaller U.S. firms' methodologies generally do not require the lead 
auditor to perform or consider supervisory procedures beyond the 
requirements of AS 1205.
    The staff's analysis of audit methodologies also identified 
variation in the extent to which larger firms have already incorporated 
the amendments and new standard in their methodologies. For example, 
the staff observed that some larger firms' methodologies do not yet 
incorporate the amendments to supervisory procedures in multi-tiered 
audits or the amendments to AS 1220 regarding engagement quality 
reviews. Similarly, many firms may need to revise their approaches to 
determining whether the firm's participation in an audit is sufficient 
for it to serve as lead auditor.
    Commenters on the 2016 Proposal who addressed audit methodologies 
regarding the use of other auditors and referred-to auditors generally 
agreed that the Proposal accurately described existing audit practices. 
Some of those commenters indicated that many firms, particularly larger 
and mid-size firms, have updated their methodologies to comply with the 
relevant standards of the PCAOB, IAASB, and ASB. Another commenter 
indicated that firms utilize a range of approaches to group audits to 
address the varied business structures of their audit clients.
    A commenter on the 2021 SRC observed the increased use of 
technology in auditing, which accelerated in response to the global 
COVID-19 pandemic. Some stated that, as a result of the use of 
technology, audit firms increasingly digitize their documentation and 
are able to communicate more efficiently. Others observed that the 
increased use of technology has permitted the remote performance of 
audit work, and that physical location is not as important as it was 
previously. One commenter noted changes in the management of audits, 
including the increased use of shared service centers and the existence 
of more complex group audit structures. Some commenters, however, 
stated that they had not seen significant changes in auditor practices 
related to the use of other auditors.
Deficiencies in Audits Involving Other Auditors
    Previous discussion in this release describes observations from 
recent PCAOB inspections and PCAOB and SEC enforcement cases related to 
the work of other auditors and lead auditors. This section supplements 
the discussion by describing data regarding deficiencies in work 
performed by other auditors (or ``referred work engagements'').
    Over the last decade, PCAOB inspections staff has observed Part I.A 
deficiencies \298\ in roughly 25 to 45 percent of referred work 
engagements selected for review. As shown in Figure 5, following a peak 
deficiency rate in 2012 and 2013 of approximately 40 percent, 
deficiency rates declined and have remained relatively consistent since 
then at approximately 30 percent.
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    \298\ A Part I.A deficiency is identified through inspection and 
included in a PCAOB inspection report when it is ``of such 
significance that the Board believes that the firm, at the time it 
issued its audit report, had not obtained sufficient appropriate 
audit evidence to support its opinion on the issuer's financial 
statements and/or ICFR.'' See PCAOB, PCAOB Inspection Procedures: 
What Does the PCAOB Inspect and How Are Inspections Conducted?, 
available at https://pcaobus.org/oversight/inspections/inspection-procedures.

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[[Page 39722]]

[GRAPHIC] [TIFF OMITTED] TN01JY22.005

Academic Research on the Use of Other Auditors
    As discussed above, audits involving other auditors often use other 
auditors located in different countries, and may use multiple other 
auditors, particularly in audits of multinational companies. Academic 
research on the challenges of distributed work (but not exclusively on 
auditing) finds that coordination and communication problems may arise 
when: (i) work is conducted by teams distributed across cities, 
countries, or continents; (ii) there are differences in language, 
culture, or regulation; or (iii) teamwork is required that involves a 
number of interdependent activities.\299\
---------------------------------------------------------------------------

    \299\ See 2016 Proposal at 29-30 and notes 61-64; see also 2021 
SRC at 55 and note 147.
---------------------------------------------------------------------------

    If the cost to the auditor of overcoming these challenges (e.g., 
through additional supervision of other auditors) exceeds the lead 
auditor's perception of the benefits of doing so (e.g., in terms of 
reduced risks of litigation, reputational loss, and regulatory 
sanction, as a result of improving audit quality), then audit quality 
may suffer.\300\ The impact on audit quality could be especially 
significant because the lead auditor makes important decisions about 
how the audit is performed, including whether the lead auditor performs 
a sufficient portion of the audit to issue the audit report.
---------------------------------------------------------------------------

    \300\ See 2016 Proposal at 29 note 61.
---------------------------------------------------------------------------

    Although relatively few empirical studies have explicitly examined 
the relationship between the use of other auditors and audit quality, 
several papers have been published recently that shed light on this 
issue. This growing body of research suggests that there is a 
relationship between the use of other auditors and audit quality, and 
that the facts and circumstances of the audit may be influential in 
determining whether this is a positive or negative relationship.\301\
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    \301\ See 2016 Proposal at 29 note 61; see also 2021 SRC at 56 
notes 148-149 (citing academic research); see also Elizabeth Carson, 
Roger Simnett, Ulrike Th[uuml]rheimer, and Ann Vanstraelen, 
Involvement of Component Auditors in Multinational Group Audits: 
Determinants, Audit Quality, and Audit Fees (2022) (accepted for 
publication in Journal of Accounting Research; available at https://doi.org/10.1111/1475-679X.12418) (``[I]nvolvement of component 
auditors benefits audit quality as long as the principal auditor 
conducts a substantial amount of work. Once the involvement of 
component auditors exceeds a certain level, audit quality 
decreases.'').
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Need
    This section discusses the problem that the amendments are intended 
to address and explains how the amendments are expected to address it. 
Specifically, an incentive problem may arise from information 
asymmetries between investors and the lead auditor and between the lead 
auditor and other auditors, among other factors. The amendments will 
help address the problem by increasing the accountability of the lead 
auditor and requiring a more uniform, risk-based approach to the lead 
auditor's planning and supervision of the work of other auditors. The 
amendments aim to clarify and strengthen the lead auditor's planning 
and supervisory requirements to provide lead auditors with better 
direction and a stronger regulatory incentive to more consistently 
produce high quality audits when using other auditors. The amendments 
will increase the lead auditor's involvement in, and evaluation of, the 
work of other auditors, enhance the ability of the lead auditor to 
prevent or detect deficiencies in the work of other auditors, and 
facilitate improvements in the quality of the work of other auditors.
Problem To Be Addressed
    As discussed in the 2016 Proposal, incentive problems may arise 
from information asymmetry between investors and the lead auditor.\302\ 
Specifically, in audits involving other auditors, a market failure 
\303\ may be caused, at least in part, by an information asymmetry 
between investors and the lead auditor regarding the lead auditor's 
effort in supervising other auditors. Investors, for example, may be 
uncertain about the procedures performed by the lead auditor to oversee 
the work of other auditors, leading to uncertainty about audit quality 
and the risks associated with the use of other auditors. The 
uncertainty may reduce public confidence in financial information, 
decrease the efficiency of capital allocation decisions, and increase 
the cost of capital.\304\
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    \302\ See 2016 Proposal at 30-33 and notes 66-73.
    \303\ The term ``market failure'' refers to a situation in which 
markets fail to function efficiently. See 2016 Proposal at 31 note 
67.
    \304\ See 2016 Proposal at 37 note 78.
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    Because of this information asymmetry and other factors such as 
cost considerations, the lead auditor may not be adequately motivated 
to (i) gather information about the competence of, and work performed 
by,

[[Page 39723]]

the other auditor, or (ii) monitor and review (i.e., adequately 
supervise) the other auditor's work, leading to a moral hazard 
problem.\305\
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    \305\ The term ``moral hazard'' refers to a situation in which 
an agent could take actions (such as not putting forth sufficient 
effort) that are difficult for the principal to monitor and would 
benefit the agent at the expense of the principal. See 2016 Proposal 
at 31 note 69; Amendments to Auditing Standards for Auditor's Use of 
the Work of Specialists, PCAOB Release No. 2018-006 (Dec. 20, 2018), 
at 40-42.
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    Further, as discussed in the 2021 SRC, incentive problems may also 
arise from information asymmetry between lead auditors and other 
auditors.\306\ For example, as described in the 2016 Proposal, under 
current standards lead auditors may not have sufficient access to 
information regarding the work performed by other auditors.\307\ Other 
auditors also may not be sufficiently incentivized to perform 
sufficient and appropriate audit procedures. A commenter on the 2021 
SRC agreed that information asymmetry may exist between auditors.
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    \306\ See 2021 SRC at 61.
    \307\ See 2016 Proposal at 19-21.
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How the Amendments Will Address the Need
    The amendments are expected to increase the accountability of the 
lead auditor and require a more uniform, risk-based approach to the 
lead auditor's oversight of other auditors. Specifically, the 
amendments rescind AS 1205 and amend AS 2101 and AS 1201 to apply in 
all situations in which the lead auditor involves other auditors. The 
amendments include additional risk-based requirements to provide the 
lead auditor with more specificity and clarity about the lead auditor's 
supervisory responsibilities.
    Strengthening the performance requirements for lead auditors can 
augment the lead auditor's incentive to monitor the performance of 
other auditors through adequate supervision of other auditors' work. By 
addressing more clearly the responsibilities of the lead auditor (e.g., 
for planning the audit and supervising other auditors), the amendments 
position the lead auditor to align the incentives and auditing 
behaviors of other auditors with investors' interests in reducing the 
risks of material misstatement in the financial statements. In 
particular, the amendments should incentivize lead auditors to 
anticipate potential problems that may arise in their relationships 
with other auditors and take action to address such matters. Investors 
should form expectations of audit quality under the more standardized 
and improved supervisory framework, and thus should have greater 
certainty about the lead auditor's approach to supervision and the 
quality of the audit.\308\ Additionally, by adding specificity and 
reducing ambiguity regarding the lead auditor's responsibilities, the 
amendments address risks arising from potential systematic, welfare-
decreasing auditor and investor errors in judgment.\309\
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    \308\ See 2016 Proposal at 35 note 75 (citing academic 
research).
    \309\ See 2021 SRC at 61 note 175.
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    Examples of amendments that are expected to strengthen and clarify 
the performance requirements for lead auditors and augment their 
incentive to monitor the performance of other auditors include the 
following:
    <bullet> In audits involving other auditors, the amendments to AS 
2101 and AS 1220 will enhance the requirements related to the 
engagement partner's assessment of whether his or her firm performs 
sufficient work on the audit to warrant serving as lead auditor, and 
the engagement quality reviewer's evaluation of that assessment. In 
addition, in audits that involve work performed by other auditors 
regarding locations or business units, the lead auditor's involvement 
(through planning and performing audit procedures and supervising other 
auditors) will be required to be commensurate with the risks of 
material misstatement associated with those locations or business 
units. The amendments also describe the actions that the lead auditor 
should take with respect to each other auditor to determine compliance 
with independence and ethics requirements. Further, the amendments have 
specific requirements regarding the lead auditor's responsibilities 
with respect to the other auditors' knowledge, skill, and ability.
    <bullet> Currently, lead auditors can apply two different 
approaches: supervising the other auditors' work under AS 1201 or using 
the work and reports of other auditors under AS 1205. Under the 
amendments, AS 1205 will be rescinded, and lead auditors will be 
required to supervise other auditors under the amended AS 1201 when 
they assume responsibility for the other auditors' work.
    The amendments to AS 1201 provide additional direction to the lead 
auditor on how to apply the principles-based provisions of the standard 
to the supervision of other auditors. For example, the amendments 
require the lead auditor to: (i) inform other auditors of the scope of 
their work and, with respect to such work requested, the identified 
risks of material misstatement, tolerable misstatement, and clearly 
trivial amounts (if determined); (ii) obtain and review the other 
auditor's written description of procedures to be performed, and 
discuss with, and communicate in writing to, the other auditor any 
needed changes to the planned procedures; (iii) obtain and review a 
written affirmation from the other auditor as to whether the other 
auditor has performed work in accordance with the lead auditor's 
instructions, and, if it has not, a description of the nature of, and 
an explanation of the reasons for, the instances where work was not 
performed in accordance with the instructions, including (if 
applicable) a description of the alternative work performed; (iv) 
direct other auditors to provide specified documentation regarding work 
performed; and (v) determine whether the other auditor performed the 
work as instructed and whether additional audit evidence needs to be 
obtained.\310\
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    \310\ The amendments for the planning and supervision of other 
auditors also include provisions, in AS 1201 and AS 2101, that are 
designed to make the standard scalable for multi-tiered audits in 
which the lead auditor may seek assistance from a first other 
auditor in supervising second other auditors.
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Economic Impacts
    This section discusses the expected benefits and costs of the 
amendments and potential unintended consequences. Overall, the 
magnitude of the benefits and costs is likely to be affected by the 
extent to which other auditors are involved in audits, including the 
number of other auditors used and the amount of time spent by other 
auditors. Benefits and costs are also likely to be affected by the 
nature of the work and the risks involved in the work performed by 
other auditors, because more complex work and work in areas of greater 
risk will likely require greater supervisory efforts by the lead 
auditor. In addition, benefits and costs are likely to be affected by 
the degree to which accounting firms have already adopted audit 
practices that are similar to those the amendments will require. 
Overall, the Board expects that the benefits of the amendments will 
justify any costs and unintended negative effects.
Benefits
    As discussed above, the amendments are expected to benefit 
investors and the public by mitigating information asymmetries between 
investors and the lead auditor and between the lead auditor and other 
auditors. The new requirements should strengthen the

[[Page 39724]]

supervision of other auditors, which in turn should improve audit 
quality and increase the likelihood that auditors detect material 
misstatements in the financial statements and material weaknesses in 
internal controls over financial reporting. Improving the quality of 
audits and financial reporting can reduce investors' uncertainty about 
the information being provided in company financial statements, foster 
increased public confidence in the financial markets, and enhance 
capital formation. In particular, improving the quality of the 
information available to financial markets can increase the efficiency 
of capital allocation decisions and decrease the cost of capital.\311\
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    \311\ See 2016 Proposal at 37 note 78.
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    Specifically, the amendments address audit deficiencies of other 
auditors that continue to be observed in practice (see Figure 5 above) 
and provide more transparency to investors about how lead auditors 
supervise other auditors by increasing the accountability of the lead 
auditor and introducing a more uniform, risk-based approach to the lead 
auditor's supervision of other auditors. The amendments require the 
lead auditor to determine the sufficiency of its participation in the 
audit based on quantitative and qualitative factors and be better 
informed about the qualifications and performance of the other auditor. 
The amendments also increase the requirements for the lead auditor to 
monitor and review (i.e., supervise) the work of other auditors.
    Investors also may benefit from the amendments indirectly. For 
example, under existing standards, the auditor is required to 
communicate to the audit committee its overall audit strategy, 
significant risks, and results of the audit, including work performed 
by other auditors, among other things.\312\ Because of the lead 
auditor's enhanced involvement in the work of other auditors, the 
quality of communications with audit committees could also be enhanced, 
specifically as it relates to risks of material misstatements in the 
financial statements related to the component(s) of the company audited 
by the other auditor(s). Such enhanced discussions with the audit 
committee could improve the audit committee's oversight of the audit by 
highlighting areas where audit committees and companies should increase 
attention to ensure the quality of their financial statements, 
including related disclosures. This increased attention by audit 
committees and companies could result in higher quality financial 
reporting, which benefits investors.
---------------------------------------------------------------------------

    \312\ See paragraphs .09-.24 of AS 1301, Communications with 
Audit Committees.
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    The Board expects that the amendments will lead to improved 
supervision of other auditors' work and an increase in audit quality. 
Auditors also may benefit from the amendments due to the reduced risk 
of failure to detect material misstatements. As a result, associated 
costs such as the risk of litigation, regulatory sanction, or 
reputational loss faced by auditors could decrease.
    Some commenters provided information responding to the discussion 
of potential benefits to investors and other financial statement users. 
One commenter said that many of the changes contemplated in the 2016 
Proposal would improve the quality of audits involving other auditors 
and benefit investors. Another commenter stated that the proposed 
changes should decrease the overall likelihood of misstatement by 
enhancing the verification process of information relied upon by other 
auditors, and therefore should serve as added safeguards for investors 
and the general public through their ability to rely on the financial 
statement data and related disclosures. Another commenter said that the 
proposed amendments would provide more transparency about audits 
involving other auditors and would therefore benefit investors and the 
public. Similarly, in response to the 2021 SRC, commenters agreed that 
the amendments would enhance audit quality and protect the interests of 
investors. These comments are consistent with the benefits identified 
in this section.
Costs
    The Board recognizes that imposing new requirements may result in 
additional costs to auditors and the companies they audit.
    Auditors may incur certain fixed costs (costs that are generally 
independent of the number of audits performed) related to implementing 
the amendments. These include costs to update audit methodologies and 
tools, and to prepare training materials and conduct training. Large 
firms are likely to update methodologies using internal resources, 
whereas small firms are more likely to purchase updated methodologies 
from external vendors.\313\ The costs to update methodologies likely 
depend on the extent to which the new requirements have already been 
incorporated in the firms' current methodologies. For firms that have 
implemented supervisory procedures like those required by the 
amendments, the costs of updating methodologies may be lower than for 
firms that currently do not have such procedures. Larger accounting 
firms, which often perform audits involving other auditors, will likely 
take advantage of economies of scale by distributing fixed costs over a 
larger number of audit engagements. Smaller accounting firms, which 
less often perform audits that involve other auditors, will likely 
distribute their fixed costs over fewer audit engagements.
---------------------------------------------------------------------------

    \313\ See 2016 Proposal at 38.
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    In addition, auditors may incur certain engagement-level variable 
costs related to implementing the amendments. For example, to implement 
the additional requirements, both lead auditors and other auditors may:
    <bullet> Increase the number of engagement team members and 
engagement quality reviewer assistants; or
    <bullet> Increase the amount of time incurred by the existing team 
members and engagement quality reviewers and their assistants.\314\
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    \314\ The 2016 Proposal also mentioned the potential additional 
costs incurred by traveling to a company's locations or business 
units at which audit procedures are to be performed. See 2016 
Proposal at 38. As remote work and virtual meetings became more 
common in recent years, these costs may be less significant.
---------------------------------------------------------------------------

    The magnitude of the variable costs likely depends on several 
factors. For firms that have required greater lead auditor involvement 
and already have applied some of the new requirements in practice, the 
variable costs may be lower than for firms that currently require less 
lead auditor involvement. The variable costs are also likely to be 
affected by the nature of the engagement, including the extent of 
involvement of other auditors (e.g., the number of other auditors used 
and the amount of time spent by other auditors), and the level of risk 
associated with the audit work performed by other auditors. Finally, 
the total variable costs are related to the number of audits using 
other auditors.
    Since the total fixed and variable costs of the amendments likely 
depend on the interaction of all the factors discussed above, it is not 
clear whether these costs, as a percentage of total audit costs, will 
be greater for larger or for smaller accounting firms.
    For audits in which the lead auditor divides responsibility for the 
audit with another accounting firm, the anticipated impact of the 
amendments on the lead auditor's costs is not likely to be significant. 
Currently, about 40 audits per year involve divided responsibility, and 
the amendments to PCAOB

[[Page 39725]]

standards that apply to those scenarios are not as significant as other 
amendments.
    In addition to auditors, companies being audited may also incur 
costs related to the amendments, both directly and indirectly. 
Companies could incur direct costs from engaging with or otherwise 
supporting the auditor performing the audit. For example, some 
companies could face costs of producing documents and responding to 
additional auditor requests for audit evidence, due to more rigorous 
evaluation of audit evidence by lead and other auditors. To the extent 
that auditors incur higher costs to implement the amendments and are 
able to pass on at least part of the increased costs through an 
increase in audit fees, companies could incur an indirect cost.\315\
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    \315\ See 2016 Proposal at 40 note 80.
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    In response to the 2016 Proposal, one commenter agreed that the 
incremental cost due to the 2016 Proposal is likely to be limited 
because some accounting firms already had implemented many aspects of 
the 2016 Proposal in their methodology and/or in practice, and because 
of the risk-based approach taken in the 2016 Proposal. Another 
commenter stated that audit firms not already complying with the 
requirements would experience higher costs, but most firms already 
performed audits under GAAS standards, and for them the increased costs 
would not be prohibitive. In response to the 2021 SRC, two commenters 
described potential increased costs when the lead auditor and other 
auditor are part of the same network. The commenters suggested that the 
potential increased costs would be caused by the inability to 
sufficiently leverage common systems of quality control, resulting in 
unnecessary effort to understand the other auditor's audit procedures. 
As discussed in the 2017 and 2021 SRCs, however, affiliation through a 
network does not automatically provide the lead auditor with an 
understanding of the other affiliates' processes and experience.\316\ 
One commenter recommended the PCAOB consider the difficulties 
encountered and resources used by firms in complying with PCAOB 
standards, AICPA AU-Cs, and IAASB ISAs. The Board's considerations are 
discussed below.
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    \316\ See 2017 SRC at 14; 2021 SRC at 24.
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Potential Unintended Consequences
    In addition to the benefits and costs discussed above, the 
amendments could have unintended economic impacts. The 2016 Proposal 
described a number of potential unintended consequences, resulting in 
public comments on those topics and others. This section discusses the 
potential unintended consequences as well as the Board's consideration 
of such consequences in adopting the amendments.\317\ The discussion 
also addresses, where applicable, factors that mitigate the potential 
consequences, including revisions to the proposed amendments reflected 
in the amendments the Board is adopting and the existence of other 
countervailing factors.
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    \317\ In addition to the potential unintended consequences 
discussed in this section, potential results of certain other 
aspects of the proposed amendments were described by some commenters 
as ``unintended.'' These and other comments are discussed in 
elsewhere in this release in conjunction with the following aspects 
of the final amendments: the sufficiency-of-participation 
determination for serving as the lead auditor; other auditors' 
compliance with independence and ethics requirements; other 
auditors' knowledge, skill, and ability; informing other auditors of 
their responsibilities; directing other auditors to perform certain 
supervisory procedures in a multi-tiered audit; and dividing 
responsibility for the audit.
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Accountability of Other Auditors
    Unlike AS 1205, AS 1201 does not contain a statement that ``the 
other auditor remains responsible for the performance of his own work 
and for his own report.'' Thus, it is possible that the other auditor 
could feel less accountable given that the amendments focus the 
responsibility for providing direction and supervision of the other 
auditor on the lead auditor. If this occurred, audit quality could 
decrease.
    Commenters expressed differing views on the 2016 Proposal's 
potential impact on other auditors' accountability. Several commenters 
stated that the proposed amendments would not diminish other auditors' 
overall accountability. Other commenters stated that if the amendments 
are applied correctly, the lead auditor's supervision should hold the 
other auditors to a higher level of overall accountability and improve 
the overall quality of other auditors' work.
    Other commenters expressed concern that the 2016 Proposal did not 
include the statement in AS 1205.03 about other auditors' 
responsibility. Omitting this provision, in their view, may be 
interpreted as a reduction in the responsibility and accountability of 
other auditors, which could have adverse effects on audit quality. Some 
commenters recommended retaining the existing provision or including an 
analogous requirement to address the other auditors' responsibility.
    To mitigate this potential negative consequence, AS 1015 is being 
amended to emphasize that the other auditors are responsible for 
performing their work with due professional care.\318\ This amendment 
was proposed in the 2017 SRC and supported by commenters. Notably, 
under the amended standards, the other auditor remains responsible for 
performing its assigned work with due professional care and otherwise 
in conformance with PCAOB standards. This responsibility is reflected 
in the auditor documentation the other auditor must prepare regarding 
the work performed, including written affirmation to the lead auditor 
regarding whether the other auditor performed its work in accordance 
with the lead auditor's instructions, including applicable PCAOB 
standards. In addition, the other auditor's work is subject to greater 
oversight by the lead auditor under the amended standards, which will 
reduce the other auditor's opportunities for performing insufficient 
work without detection. Finally, the other auditor's work continues to 
be subject to PCAOB oversight activities due to its participation in 
the audit.
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    \318\ The PCAOB's underlying standards governing the work of 
other auditors and referred-to auditors will similarly continue to 
apply to their work.
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Time of Lead Auditor
    Because lead auditor personnel will be required to perform 
additional supervisory responsibilities, such team members might have 
less time to perform other work on the same engagement. This could 
potentially reduce the likelihood that the auditor detects material 
misstatements in the portion of the financial statements for which the 
lead auditor performs procedures and could potentially lead to 
inefficient allocation of audit resources. Several commenters on the 
2016 Proposal agreed that this potential unintended consequence could 
arise, adding that the increased planning and supervisory effort 
required of the lead auditor could also leave less time for the lead 
auditor to consider important issues.
    The Board's inclusion of risk-based supervision requirements in the 
amended standards is intended to mitigate the possibility that the lead 
auditor will neglect work it intends to perform because of the 
attention it devotes to other auditors. In particular, the additional 
supervisory procedures required for the lead auditor's supervision of 
work performed by other auditors are intended to provide the lead 
auditor with a basis for concluding whether the financial statements 
are free of material misstatement. Thus, under the amended standards, 
the lead auditor

[[Page 39726]]

should be focusing its efforts on audit areas with the greatest risk of 
material misstatement to the financial statements, whether those areas 
are audited by the lead auditor directly or by an other auditor under 
the lead auditor's supervision. Further, as lead auditor personnel gain 
experience and become more efficient in applying the new requirements 
related to other auditors, the likelihood that the lead auditor 
misallocates its time and resources should decrease.
Involvement by Other Auditors
    In response to (i) the potential costs or any practical 
difficulties of supervising other auditors under the amended standards 
or (ii) the sufficiency-of-participation requirements, the lead 
auditor, in some circumstances, may decrease the share of work 
performed by other auditors and increase the share of its own work. 
While this may be an efficient and effective response in certain 
circumstances, limiting other auditors' involvement in the engagement 
may negatively affect audit quality to the extent the other auditors 
possess knowledge of important country-specific information. Two 
commenters on the 2016 Proposal agreed that this unintended consequence 
may arise.
    This potential outcome, however, would be contrary to the following 
requirements in PCAOB standards:
    <bullet> ``Engagement team members should be assigned to tasks and 
supervised commensurate with their level of knowledge, skill, and 
ability so that they can evaluate the audit evidence they are 
examining.'' \319\
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    \319\ AS 1015.06.
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    <bullet> ``The knowledge, skill, and ability of engagement team 
members with significant engagement responsibilities should be 
commensurate with the assessed risks of material misstatement.'' \320\
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    \320\ Paragraph .05a of AS 2301, The Auditor's Responses to the 
Risks of Material Misstatement.
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    <bullet> Firms are required to have policies and procedures in 
place that provide reasonable assurance that the firm will undertake 
``only those engagements that the firm can reasonably expect to be 
completed with professional competence.'' \321\
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    \321\ Paragraph .15a of QC 20, System of Quality Control for a 
CPA Firm's Accounting and Auditing Practice.
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    In addition, legal restrictions in some countries that prohibit a 
foreign auditor from providing professional services in the country 
could limit a foreign lead auditor's ability to take on more work and 
assign less work to other auditors in the country. The Board 
anticipates that lead auditors will find the appropriate balance 
between the lead auditor and other auditor involvement in the audit as 
accounting firms gain experience in implementing the new requirements 
and seek to maximize the effectiveness and efficiency of audit 
engagements.
Occurrence of Divided Responsibility
    Some auditors who currently use an other auditor's work under AS 
1205 may view compliance with the supervision requirements of AS 1201 
(as amended) as too costly and decide instead to divide responsibility 
for the audit. Several commenters on the 2016 Proposal agreed that this 
unintended consequence may arise, although some of them added that the 
likelihood was low. There are limited research findings available 
regarding the division of responsibility,\322\ and it is not clear how 
an increase in audits with divided responsibility would affect audit 
quality. To provide transparency about such situations, the amendments 
require that, in a divided-responsibility scenario, the lead auditor 
disclose in its audit report: (i) the part of the audit that is 
performed by another accounting firm; (ii) the magnitude of the portion 
of the company's financial statements audited by the referred-to 
auditor; (iii) the referred-to auditor's name; and (iv) which auditor 
(lead or referred-to) has audited the conversion adjustments when the 
financial statements of the company and its business unit are prepared 
using different financial reporting frameworks.\323\
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    \322\ See 2016 Proposal at 42 and note 84; see also Juan Mao, 
Michael Ettredge, and Mary Stone, Group Audits: Are Audit Quality 
and Price Associated with the Lead Auditor's Decision to Accept 
Responsibility?, 39(2) Journal of Accounting and Public Policy 1 
(2020) (examining whether a lead auditor's disclosure of its choice 
to accept or decline (i.e., divide) responsibility for the work of 
another firm is associated with differences in audit fees or audit 
quality, and finding that ``[l]ead auditors accepting responsibility 
charge higher audit fees but provide audits of no higher quality, 
and possibly of even lower quality'').
    \323\ See paragraphs AS 1206.06d and .08. Rule 2-05 of 
Regulation S-X, 17 CFR 210.2-05, includes requirements regarding 
filing the referred-to auditor's report with the SEC.
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Impact on Smaller Firms
    The amendments will likely have an economic impact on audits 
performed by smaller firms that use other auditors. This is because 
smaller firms (i) are less likely to perform today the procedures 
described in the amendments and (ii) generally lack the economies of 
scale to distribute the additional fixed costs over many audits.\324\ 
The 2016 Proposal also noted that additional supervisory requirements 
could decrease competition in the audit market for audits involving 
other auditors if smaller firms are less able to compete with larger 
firms.\325\
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    \324\ See discussion above.
    \325\ See 2016 Proposal at 43.
---------------------------------------------------------------------------

    Several commenters on the 2016 Proposal agreed that this unintended 
consequence may arise. One commenter stated that, for smaller firms, 
complying with the proposed supervisory responsibilities may increase 
costs to such an extent that some smaller firms may exit the market for 
audits involving other auditors. Another commenter said that it would 
be harder for smaller firms than for larger firms to meet the proposed 
threshold for serving as lead auditor.
    However, as discussed above, staff analysis using Form AP data 
shows that smaller firms already perform relatively fewer audits that 
involve other accounting firms than larger firms, and when they do, 
they use fewer other accounting firms.\326\ Thus, any impact on 
competition in the overall audit market is likely to be relatively 
small.
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    \326\ See Figures 2 and 3 above.
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    The Board's risk-based and scalable approach to designing the 
amendments is also intended to maintain a level playing field for all 
auditors choosing to involve other auditors in their audit, regardless 
of their size. Scalability is a characteristic of policy that typically 
refers to circumstances where requirements are general enough (e.g., 
principles-based) to be adapted effectively and efficiently under 
different facts and circumstances. Risk-based requirements are usually 
scalable because the necessary level of audit effort varies depending 
on the level of complexity and risk. Thus, risk-based requirements are 
likely to be relatively efficient (or at least not inefficient), 
because the auditor's incentives and discretion are likely to result in 
costs being incurred primarily in circumstances involving a 
corresponding, and potentially larger, risk-mitigation benefit to 
investors.\327\ Under the amendments, the lead auditor would be 
required to determine the extent of supervision of other auditors based 
on, among other things, the nature of work, and risk of material 
misstatement.
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    \327\ See 2017 SRC at 40.
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Benefit From Additional Requirements
    It is possible that some audits (e.g., those previously conducted 
under AS 1205) will not benefit from the new requirements. This could 
occur, for example, on very simple low-risk audits that involve highly 
qualified other auditors. In such circumstances, the

[[Page 39727]]

lead auditor could incur incremental costs to comply with the 
additional planning and supervisory requirements in the amended 
standards without yielding a corresponding benefit to audit quality.
    This inefficient outcome is mitigated by the risk-based and 
scalable aspects of the amended standards, which rely on the lead 
auditor to make judgments about the nature and extent of supervision of 
other auditors based on risks. The Board anticipates that as lead 
auditors gain experience implementing the new requirements, they will 
make appropriate judgments that are efficient and effective at 
achieving the desired level of audit quality. The Board received no 
comments on this potential unintended consequence described in the 2016 
Proposal.
Alternatives Considered
    The development of this rulemaking involved the consideration of a 
number of alternative approaches to address the problems described 
above. This section explains (i) why standard setting is preferable to 
other policy-making approaches, such as providing interpretive guidance 
or enhancing inspection or enforcement efforts; (ii) other standard-
setting approaches that were considered; and (iii) key policy choices 
made by the Board in determining the details of the standard-setting 
approach in this rulemaking.
Why Standard Setting Is Preferable to Other Policy-Making Approaches
    The Board's policy tools include alternatives to standard setting, 
such as issuing additional interpretive guidance or an increased focus 
on inspections or enforcement of existing standards. The Board 
considered whether providing guidance or increasing inspection or 
enforcement efforts would be effective corrective mechanisms to address 
concerns with the supervision of other auditors and the sources of 
information asymmetry discussed above. The Board concluded that 
interpretive guidance, inspections, or enforcement actions alone would 
be less effective in achieving the Board's objectives than in 
combination with amending the auditing standards. Interpretive guidance 
inherently provides additional information about existing standards. 
Inspections and enforcement actions take place after insufficient audit 
performance (and potential investor harm) has occurred. Devoting 
additional resources to guidance, inspections, and enforcement 
activities without improving the relevant performance requirements for 
auditors would, at best, focus auditors' performance on existing 
standards and would not gain the benefits associated with improving the 
standards. Two commenters expressed support for an approach that 
includes standard setting.\328\ The Board's approach reflects its 
conclusion that standard setting is needed to fully achieve the 
benefits resulting from improvement in audits involving multiple 
auditors.
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    \328\ These commenters also suggested improving the 
practicability of proposed requirements by allowing the lead auditor 
to seek assistance from other auditors in supervising the audit to a 
greater extent than the Board proposed. In response to these and 
other comments, the Board made a number of changes in the 2021 SRC 
to address the practicability concern, including in connection with 
multi-tiered audits.
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Other Standard-Setting Alternatives Considered
    The Board also considered certain standard-setting approaches, 
including: (i) retaining the existing framework but requiring the lead 
auditor to disclose which standard (AS 1201 or AS 1205) governs the 
relationship between the lead auditor and other auditors; (ii) amending 
AS 1205 or extending the approach in that standard to cover all 
arrangements involving other auditors and referred-to auditors; (iii) 
developing a new standard, in addition to the Board's risk assessment 
standards, that would address all arrangements with other auditors and 
referred-to auditors; or (iv) amending existing standards to address 
the oversight of multi-location audit engagements generally (including 
multi-location engagements performed by a single firm), in addition to 
amending the standards to address the auditor's use of other auditors 
and referred-to auditors.
Disclosing Which Standard Applies Under Existing Framework
    The Board considered but is not adopting a requirement that the 
lead auditor disclose, in the audit report or elsewhere, whether the 
lead auditor applied AS 1205 or AS 1201 in its oversight of the other 
auditor. Such a disclosure approach would not achieve the benefits of 
applying AS 1201 (as amended) to all audits that involve other 
auditors, and inconsistencies between firms in their approaches to the 
oversight of other auditors would remain.
    From an economic perspective, it is more efficient and effective to 
address the reasons for change described above by amending existing 
auditing standards on supervision than by disclosing which standard 
applies. The amendments directly address the lead auditor's incentives, 
whereas disclosing which one of the standards (before the amendments) 
applies would do so indirectly at best. For disclosure to sufficiently 
change the lead auditor's incentives, investors would need to apply 
significant market pressure on auditors to improve their supervisory 
procedures beyond requirements in PCAOB standards (before the 
amendments). This approach seems unlikely given the wide dispersion of 
share ownership among investors and the costs of engaging in collective 
action.
Amending AS 1205
    The Board considered, but is not adopting, two alternative 
approaches that would amend rather than rescind AS 1205. The first 
approach would have amended AS 1205 to strengthen its oversight 
requirements but otherwise retained the existing two-standard framework 
in which an engagement involving other auditors could be governed by 
either AS 1205 or AS 1201, depending on the circumstances of the 
engagement. The second approach would have amended AS 1205 to extend 
its application to all arrangements involving other auditors and 
referred-to auditors such that AS 1201 would no longer apply.
    The Board determined that the risk-based supervision approach in AS 
1201 promotes a more appropriate involvement by the lead auditor than 
the approach in AS 1205. The supervisory approach in AS 1201 requires 
that the level of supervision be commensurate with the associated 
risks, and that would apply to the supervision of the other auditors' 
work. From an economic perspective, the risk-based approach, which is 
now a well-established and understood auditing practice, requires the 
lead auditor to take into account the facts and circumstances of an 
audit engagement to inform a variety of resource allocation decisions, 
including the nature, timing, and extent of its supervision of other 
auditors. This approach enables the lead auditor to better align its 
supervisory effort with the level of risk, focusing more attention on 
the riskiest areas of the audit and thus provide more risk mitigation 
benefit to investors. Similarly, the other auditors' communication of 
important and relevant information to the lead auditor allows the lead 
auditor to make better-informed decisions regarding the work of the 
other auditor.
    In contrast, AS 1205 employs an approach that allows the lead 
auditor to use the work of other auditors based on the performance of 
certain limited procedures that are not explicitly required to be 
tailored for the associated

[[Page 39728]]

risks. Thus, the approach of AS 1205 would not address the problems 
described in this release as effectively as the supervisory approach of 
AS 1201.
Developing a New Standard for All Arrangements with Other Auditors and 
Referred-to Auditors
    The Board also considered developing a new, separate standard to 
govern all arrangements with other auditors and referred-to auditors. 
In that regard, some commenters suggested the PCAOB align a new 
standard with the relevant standards of other standard setters such as 
the IAASB. Although the IAASB has a separate standard for group audits, 
ISA 600, the Board believes that adopting a separate standard in its 
auditing standards is not necessary for most audits in which the lead 
auditor uses the work of other auditors. (The Board is, however, 
adopting a separate standard, AS 1206, to govern divided-responsibility 
audits, which are relatively uncommon.) Specifically, the existing 
standard on supervision, AS 1201, which is integrated with the Board's 
other risk assessment standards, already includes principles-based 
requirements that apply to audits involving other auditors in 
situations not covered by AS 1205.
    Extending the requirements of AS 1201 to all situations involving 
other auditors and adding to AS 1201 more specific requirements for 
supervising the other auditor's work is a more efficient way to 
incorporate these requirements into the existing framework of PCAOB 
auditing standards. In addition, as discussed above, some commenters 
supported the Board's objective of establishing requirements for using 
other auditors' work that are risk-based and more closely aligned with 
the Board's risk assessment standards than existing standards. 
Accordingly, this rulemaking takes an integrated approach that involves 
enhancing the existing standard through targeted amendments that impose 
certain requirements on the lead auditor, rather than creating an 
entirely new standard.
Amending To Address Oversight of Multi-Location Engagements
    The Board considered, but is not adopting, amendments to existing 
standards that would apply to oversight of multi-location audit 
engagements generally (including multi-location engagements performed 
by a single firm), in addition to amendments that apply to the 
auditor's use of other auditors and referred-to auditors. The Board is 
not adopting such amendments because existing PCAOB auditing standards 
already specifically address multi-location engagements.\329\ 
Additional requirements for these audits, along with requirements for 
supervising other auditors, could create unnecessary complexity and 
redundancy with existing requirements. Finally, the Board through its 
oversight has seen less cause for concern regarding single-firm multi-
location engagements compared to audits involving other auditors.
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    \329\ Requirements for multi-location engagements are 
specifically addressed in risk assessment standards adopted by the 
Board in 2010 and in certain other standards. See, e.g., AS 2101; AS 
2105, Consideration of Materiality in Planning and Performing an 
Audit; AS 2110, Identifying and Assessing Risks of Material 
Misstatement; AS 2301. See also AS 2401, Consideration of Fraud in a 
Financial Statement Audit; Paragraphs A60-A67 of AS 1215, Appendix 
A: Background and Basis for Conclusions; AS 6115, Reporting on 
Whether a Previously Reported Material Weakness Continues to Exist.
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Key Policy Choices
    Given a preference for amending AS 1201, the Board considered 
different approaches to addressing key policy issues.
Sufficiency of the Lead Auditor's Participation
    To increase the likelihood that a lead auditor is meaningfully 
involved in the audit, the amendments require that the lead auditor 
determine the sufficiency of its participation in each audit that 
involves other auditors or referred-to auditors.\330\ Sufficient 
participation by the lead auditor is required so that the work of all 
audit participants is properly planned and supervised, the results of 
the work are properly evaluated, and the lead auditor is in a position 
to conclude that the financial statements are presented fairly in all 
material respects. In evaluating the alternative approaches, the Board 
weighed the practical implications of specific criteria or conditions 
on the efficiency and effectiveness of the audit. The Board also 
evaluated, among other things, relevant information from its oversight 
activities and views from Standing Advisory Group (SAG) members.\331\
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    \330\ See paragraphs .06A-.06C of AS 2101.
    \331\ See SAG Meeting Archive (May 18, 2016; Dec. 1, 2016; May 
24, 2017; Nov. 30, 2017), available at https://pcaobus.org/about/advisory-groups/archive-advisory/standing-advisory-group/sagmeetingarchive. Transcripts of the relevant portions of SAG 
meetings related to this project are available in the docket for 
this rulemaking on the PCAOB's website (https://pcaobus.org/Rulemaking/Pages/Docket042.aspx).
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    The requirement for determining sufficiency of participation which 
the Board is adopting is based on the following criteria: (i) the 
importance of the locations or business units for which the engagement 
partner's firm performs audit procedures in relation to the financial 
statements as a whole, considering quantitative and qualitative 
factors; (ii) the risks of material misstatement associated with the 
portion of the financial statements audited by the engagement partner's 
firm in comparison with the other auditors' or referred-to auditors' 
portions; and (iii) the extent of the engagement partner's firm's 
supervision of the other auditors' work. The second consideration is 
aligned with the principle of determining the scope of work in a multi-
location audit, as both take into account the risk associated with the 
respective locations or business units. The first and third 
considerations cover specific situations that may arise in audits 
involving other auditors or referred-to auditors, where applicable; 
these considerations address concerns about the practicability of the 
proposed requirements that were expressed by some commenters on the 
2016 Proposal, the 2017 SRC, and the 2021 SRC.
    The Board considered prescribing additional considerations for 
determining sufficiency of participation based on the location of the 
company's principal assets, principal operations, and corporate 
offices. Such additional considerations were not adopted because the 
considerations in the final amendments already encompass them to the 
extent they reflect the importance of the location or pose risks of 
material misstatement to be addressed in the audit. Moreover, as 
further discussed in this release, the Board is concerned that adding 
more considerations could increase the risk that the firm issuing the 
auditor's report would not meaningfully participate in the audit, and 
thus would be the ``lead auditor'' in name only.
Lead Auditor's Supervisory Requirements
    When other auditors are involved in an audit, the Board considered 
whether the lead auditor (which includes the engagement partner and 
other supervisory personnel of the firm issuing the audit report) 
should be specifically required to perform certain supervisory 
procedures, and what the scope of any such procedures should be. PCAOB 
standards allow the engagement partner to seek assistance from 
appropriate engagement team members in fulfilling his or her 
supervisory responsibilities, but the standards for supervision 
(without the amendments) do not specify which supervisory procedures 
must be performed by the lead auditor.

[[Page 39729]]

    In many audits, engagement partners seek assistance in fulfilling 
their supervisory responsibilities from engagement team members at 
other accounting firms that participate in the audit. By increasing the 
lead auditor's monitoring responsibilities, the supervisory procedures 
for the lead auditor that are described in the amendments should 
enhance the ability of the lead auditor to prevent or detect 
deficiencies in the work of other auditors and facilitate improvements 
in the quality of the work of other auditors. Thus, these amendments 
aim to change auditor behavior by strengthening the incentives of the 
lead auditor and therefore addressing the information and incentive 
problems discussed above.
    The Board considered, but is not adopting, a requirement that the 
lead auditor obtain an understanding of the qualifications of all 
engagement team members outside the lead auditor's firm. Instead, the 
amended standards require that the lead auditor obtain an understanding 
of the knowledge, skill, and ability of the other auditor's engagement 
team members who assist the engagement partner with planning or 
supervision.\332\ Further, in response to comments on the proposed 
requirements, the amendments provide that in audits involving multiple 
tiers of other auditors, the lead auditor may seek assistance from the 
first other auditor in performing this procedure with respect to the 
second other auditor.\333\ The requirement the Board is adopting is 
designed to result in a more effective allocation of audit resources by 
focusing the lead auditor's efforts on the engagement team members 
outside the firm with whom the lead auditor primarily communicates and 
who are responsible for planning or supervising the work performed by 
other engagement team members.
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    \332\ See AS 1015.06 and AS 2101.06Ha, according to which 
``[e]ngagement team members should be assigned to tasks and 
supervised commensurate with their level of knowledge, skill, and 
ability . . . .'' This provision is discussed in more detail above 
in this release.
    \333\ This provision is discussed in more detail above in 
relation to ``multi-tiered audits'' in this release.
---------------------------------------------------------------------------

    The Board also considered, but is not adopting, a requirement that 
the lead auditor determine the nature, timing, and extent of audit 
procedures to be performed by the other auditors. Instead, the amended 
standards require that the lead auditor determine the scope of the work 
of other auditors and review the other auditors' written description of 
audit procedures to be performed pursuant to the scope of work 
requested. The amended standards also require that the lead auditor 
determine whether there are any changes necessary to the procedures and 
discuss the changes with, and communicate them in writing to, other 
auditors. This approach is more effective because the lead auditor 
generally has better visibility of the entire audit, and the other 
auditors generally have more detailed information than the lead auditor 
about audit areas in which they are involved.
Special Considerations for Audits of Emerging Growth Companies
    Pursuant to Section 104 of the Jumpstart Our Business Startups 
(``JOBS'') Act, rules adopted by the Board subsequent to April 5, 2012, 
generally do not apply to the audits of emerging growth companies 
(i.e., EGCs), as defined in Section 3(a)(80) of the Securities Exchange 
Act of 1934, unless the SEC ``determines that the application of such 
additional requirements is necessary or appropriate in the public 
interest, after considering the protection of investors, and whether 
the action will promote efficiency, competition, and capital 
formation.'' \334\ As a result of the JOBS Act, the rules and related 
amendments to PCAOB standards that the Board adopts are generally 
subject to a separate determination by the SEC regarding their 
applicability to audits of EGCs.
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    \334\ See Public Law 112-106 (Apr. 5, 2012). See Section 
103(a)(3)(C) of Sarbanes-Oxley, 15 U.S.C. 7213(a)(3)(C), as added by 
Section 104 of the JOBS Act also provides that any rules of the 
Board requiring (1) mandatory audit firm rotation or (2) a 
supplement to the auditor's report in which the auditor would be 
required to provide additional information about the audit and the 
financial statements of the issuer (auditor discussion and analysis) 
shall not apply to an audit of an EGC. The amendments do not fall 
within either of these two categories.
---------------------------------------------------------------------------

    The proposing releases sought comment, including any available 
empirical data, on how the proposed amendments to the auditing 
standards would affect EGCs, and whether they would protect investors 
and promote efficiency, competition, and capital formation.\335\ 
Commenters generally supported applying the proposed requirements to 
audits of EGCs. One noted the increased risks associated with EGCs and 
that applying the amendments to EGC audits could help to address those 
risks. Others emphasized that consistent requirements should apply for 
similar situations encountered in any audit of a company, whether that 
company is an EGC or not. One commenter on the 2021 SRC agreed with the 
Board's statements that the benefits to audit quality through improved 
planning and supervision may be especially significant for EGC audits, 
and that the amendments could contribute to an increase in the 
credibility of EGCs' financial reporting.
---------------------------------------------------------------------------

    \335\ See 2016 Proposal at 51; 2017 SRC at 43; 2021 SRC at 66.
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    To inform consideration of the application of auditing standards to 
audits of EGCs, PCAOB staff prepares a white paper annually that 
provides general information about characteristics of EGCs.\336\ As of 
the November 15, 2020 measurement date, PCAOB staff identified 1,940 
companies that self-identified with the SEC as EGCs and filed audited 
financial statements in the 18 months preceding the measurement 
date.\337\
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    \336\ For the most recent EGC report, see Characteristics of 
Emerging Growth Companies and Their Audit Firms at November 15, 2020 
(Jan. 24, 2022), available at https://pcaob-assets.azureedge.net/pcaob-dev/docs/default-source/economicandriskanalysis/projectsother/documents/white-paper-on-characteristics-of-emerging-growth-companies-at-november-15-2020.pdf?sfvrsn=ee0e6910_3.
    \337\ See id. at 1. Approximately 97 percent of EGCs were 
audited by accounting firms that also audit issuers that are not 
EGCs, and 40 percent of EGC filers were audited by firms that were 
subject to inspection on an annual basis by the PCAOB because they 
issued audit reports for more than 100 issuers in the year preceding 
the measurement date. See id. at 16, 20. As of the November 15, 2021 
measurement date, PCAOB staff identified approximately 3,100 
companies that self-identified with the SEC as EGCs and filed 
audited financial statements in the 18 months preceding the 
measurement date. The increase from 2020 to 2021 is, in large part, 
driven by special purpose acquisition companies. Special purpose 
acquisition company audits rarely involve the participation of other 
auditors.
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    Analysis of Form AP filings in 2021 indicates that audits of EGCs 
are less likely to involve other accounting firms (i.e., other auditors 
and referred-to auditors) compared to the broader population of issuer 
audits. For example, as shown in Figure 6, only 14 percent of audits of 
EGCs involved other firms compared to 27 percent of issuer audits 
overall.\338\ Thus, because the use of other firms is less prevalent in 
audits of EGCs than in audits of non-EGCs, audits of EGCs generally are 
less likely than those of non-EGCs to be affected by the amendments.
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    \338\ The analysis of Form AP data presented in Figure 6 is 
limited to issuers other than investment company vehicles and 
employee benefit plans.

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[[Page 39730]]

[GRAPHIC] [TIFF OMITTED] TN01JY22.006

    Audits of EGCs that do involve other accounting firms are also 
likely to involve fewer other firms than those of issuers overall. For 
example, as shown in Figure 6, in audits involving other accounting 
firms, EGC audits involve two or more other firms in about 35 percent 
of audits compared to about 61 percent of audits of issuers overall. 
The difference is more pronounced when considering the use of several 
other firms, where only about five percent of EGC audits involving 
other firms involve five or more other firms in contrast to about 28 
percent of issuer audits overall.
    A comparison of the share of total audit hours performed by other 
accounting firms shows a more modest difference between EGC audits and 
issuer audits overall. Measured by the share of total audit hours 
performed by other accounting firms, the role of other firms on EGC 
audits is less substantial compared to their role on audits of issuers 
overall. For example, as shown in Figure 6, other accounting firms 
perform 10 percent or more of the audit hours in about 40 percent of 
audits of EGCs compared to about 52 percent of audits of issuers 
overall. Other accounting firms perform 30 percent or more of the audit 
hours in about 17 percent of audits of EGCs and about 19 percent of 
audits of issuers overall.
    These statistics suggest that, when compared to issuer audits 
overall, audits of EGCs are less likely to involve the use of other 
firms and, even when they do, they typically involve fewer other firms 
and those other firms account for a smaller share of total audit hours.
    For individual EGC audits involving other firms, the economic 
impacts of the amendments may be more or less significant depending on 
the facts and circumstances of a particular audit. In addition to the 
extent of involvement of other firms, the benefits and costs also 
depend on the level of risk associated with the audit work performed by 
other firms, the current methodologies, and the ability to distribute 
implementation costs across engagements. EGCs are likely to be newer 
companies, which may increase the importance to investors of the 
external audit to enhance the credibility of management 
disclosures.\339\ All else equal, the benefits of the higher audit 
quality resulting from the amendments may be larger for EGCs than for 
non-EGCs. In particular, because investors who face uncertainty about 
the reliability of a company's financial statements may require a 
larger risk premium that increases the cost of capital to companies, 
the improved audit quality resulting from applying the new amendments 
to EGC audits involving other firms could reduce the cost of capital to 
those EGCs.\340\ Moreover, because of the scalability of the risk-based 
requirements, the costs of performing the procedures are unlikely to be 
disproportionate to the benefits of the procedures. Overall, the 
amendments are expected to enhance audit quality and contribute to an 
increase in the credibility of financial reporting by EGCs.
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    \339\ Researchers have developed a number of proxies that are 
thought to be correlated with information asymmetry, including small 
issuer size, lower analyst coverage, larger insider holdings, and 
higher research and development costs. To the extent that EGCs 
exhibit one or more of these properties, there may be a greater 
degree of information asymmetry for EGCs than for the broader 
population of companies, which increases the importance to investors 
of the external audit to enhance the credibility of management 
disclosures. See 2021 SRC at 65 notes 181 and 182.
    \340\ See 2021 SRC at 65 note 183.
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    For the reasons explained above, the Board believes that the 
amendments are in the public interest and, after considering the 
protection of investors and the promotion of efficiency, competition, 
and capital formation, recommends that the amendments should apply to 
audits of EGCs. Accordingly, the Board recommends that the Commission 
determine that it is necessary or appropriate in the public interest, 
after considering the protection

[[Page 39731]]

of investors and whether the action will promote efficiency, 
competition, and capital formation, to apply the amendments to audits 
of EGCs. The Board stated its readiness to assist the Commission in 
considering any comments the Commission receives on these matters 
during the Commission's public comment process.

III. Date of Effectiveness of the Proposed Rules and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Board consents, the Commission will:
    (A) by order approve or disapprove such proposed rules; or
    (B) institute proceedings to determine whether the proposed rules 
should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed 
rules are consistent with the requirements of Title I of the Act. 
Comments may be submitted by any of the following methods:

Electronic Comments

    <bullet> Use the Commission's internet comment form (http://www.sec.gov/regulatory-actions/how-to-submit-comments); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#c2b0b7aea7efa1adafafa7acb6b182b1a7a1eca5adb4"><span class="__cf_email__" data-cfemail="0b797e676e26686466666e657f784b786e68256c647d">[email protected]</span></a>. Please include 
File Number PCAOB-2022-01 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Vanessa Countryman, 
Secretary, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090.

All submissions should refer to File Number PCAOB-2022-01. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's website (http://www.sec.gov/rules/pcaob.shtml). Copies 
of the submission, all subsequent amendments, all written statements 
with respect to the proposed rules that are filed with the Commission, 
and all written communications relating to the proposed rules between 
the Commission and any person, other than those that may be withheld 
from the public in accordance with the provisions of 5 U.S.C. 552, will 
be available for website viewing and printing in the Commission's 
Public Reference Room, 100 F Street NE, Washington, DC 20549-1090, on 
official business days between the hours of 10 a.m. and 3 p.m. Copies 
of such filing will also be available for inspection and copying at the 
principal office of the PCAOB. All comments received will be posted 
without change. Persons submitting comments are cautioned that we do 
not redact or edit personal identifying information from comment 
submissions. All submissions should refer to File Number PCAOB-2022-01 
and should be submitted on or before July 22, 2022.

    For the Commission, by the Office of the Chief Accountant, by 
delegated authority.\341\
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    \341\ 17 CFR 200.30-11(b)(1) and (3).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-13983 Filed 6-30-22; 8:45 am]
BILLING CODE 8011-01-P


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