Document ID: SEC-2009-1564-0001
Agency: sec
Document Type: Notice
Title: Public Company Accounting Oversight Board; Notice of Filing of Proposed Rules on Auditing Standard No. 7, Engagement Quality Review, and Conforming Amendment
Posted Date: 2009-11-05T05:00Z

[Federal Register: November 5, 2009 (Volume 74, Number 213)]
[Notices]               
[Page 57357-57371]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05no09-103]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60903; File No. PCAOB-2009-02]

 
Public Company Accounting Oversight Board; Notice of Filing of 
Proposed Rules on Auditing Standard No. 7, Engagement Quality Review, 
and Conforming Amendment

October 29, 2009.
    Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 (the 
``Act''), notice is hereby given that on August 4, 2009, the Public 
Company Accounting Oversight Board (the ``Board'' or the ``PCAOB'') 
filed with the Securities and Exchange Commission (the ``Commission'') 
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 July 28, 2009, the Board adopted Auditing Standard No. 7, 
Engagement Quality Review, and an amendment to the Board's Interim 
Quality Control Standards (collectively, ``the proposed rules''). The 
text of the proposed rules text is set out below. Language that is 
added by the amendment to the Board's Interim Quality Control Standards 
is italicized.
    Auditing Standard No. 7
    Supersedes SECPS Requirements of Membership Sec.  1000.08(f).
    Engagement Quality Review:
    Applicability of Standard:
    1. An engagement quality review and concurring approval of issuance 
are required for each audit engagement and for each engagement to 
review interim financial information conducted pursuant to the 
standards of the Public Company Accounting Oversight Board (``PCAOB'').
    Objective:
    2. The objective of the engagement quality reviewer is to perform 
an evaluation of 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, if a report 
is to be issued, in order to determine whether to provide concurring 
approval of issuance.\1\
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    \1\ In the context of an audit, ``engagement report'' refers to 
the audit report (or reports if, in an integrated audit, the auditor 
issues separate reports on the financial statements and internal 
control over financial reporting). In the context of an engagement 
to review interim financial information, the term refers to the 
report on interim financial information. An engagement report might 
not be issued in connection with a review of interim financial 
information. See paragraph .03 of AU section (``sec.'') 722, Interim 
Financial Information.
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    Qualifications of an Engagement Quality Reviewer:
    3. The engagement quality reviewer must be an associated person of 
a registered public accounting firm. An engagement quality reviewer 
from the firm that issues the engagement report (or communicates an 
engagement conclusion, if no report is issued) must be a partner or 
another individual in an equivalent position. The engagement quality 
reviewer may also be an individual from outside the firm.\2\
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    \2\ An outside reviewer who is not already associated with a 
registered public accounting firm would become associated with the 
firm issuing the report if he or she (rather than, or in addition 
to, his or her firm or other employer): (1) Receives compensation 
from the firm issuing the report for performing the review or (2) 
performs the review as agent for the firm issuing the report. See 
PCAOB Rule 1001(p)(i) for the definition of an associated person of 
a registered public accounting firm.
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    4. As described below, an engagement quality reviewer must have 
competence, independence, integrity, and objectivity.

    Note:  The firm's quality control policies and procedures should 
include provisions to provide the firm with reasonable assurance 
that the engagement quality reviewer has sufficient competence, 
independence, integrity, and objectivity to perform the engagement 
quality review in accordance with the standards of the PCAOB.

[[Page 57358]]

Competence

    5. The engagement quality reviewer must possess the level of 
knowledge and competence related to accounting, auditing, and financial 
reporting required to serve as the engagement partner on the engagement 
under review.\3\
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    \3\ The term ``engagement partner'' has the same meaning as the 
phrases ``auditor with final responsibility for the audit'' in AU 
sec. 311, Planning and Supervision, and ``practitioner-in-charge of 
an engagement'' in PCAOB interim quality control standard QC sec. 
40, The Personnel Management Element of a Firm's System of Quality 
Control-Competencies Required by a Practitioner-in-Charge of an 
Attest Engagement. QC sec. 40 describes the competencies required of 
a practitioner-in-charge of an attest engagement.
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Independence, Integrity, and Objectivity

    6. The engagement quality reviewer must be independent of the 
company, perform the engagement quality review with integrity, and 
maintain objectivity in performing the review.

    Note: The reviewer may use assistants in performing the 
engagement quality review. Personnel assisting the engagement 
quality reviewer also must be independent, perform the assigned 
procedures with integrity, and maintain objectivity in performing 
the review.

    7. To maintain objectivity, the engagement quality reviewer and 
others who assist the reviewer should not make decisions on behalf of 
the engagement team or assume any of the responsibilities of the 
engagement team. The engagement partner remains responsible for the 
engagement and its performance, notwithstanding the involvement of the 
engagement quality reviewer and others who assist the reviewer.
    8. The person who served as the engagement partner during either of 
the two audits preceding the audit subject to the engagement quality 
review may not be the engagement quality reviewer. Registered firms 
that qualify for the exemption under Rule 2-01(c)(6)(ii) of Regulation 
S-X, 17 CFR 210.2-01(c)(6)(ii), are exempt from the requirement in this 
paragraph.
    Engagement Quality Review for an Audit:

Engagement Quality Review Process

    9. In an audit engagement, the engagement quality reviewer should 
evaluate 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. To evaluate such 
judgments and conclusions, the engagement quality reviewer should, to 
the extent necessary to satisfy the requirements of paragraphs 10 and 
11: (1) Hold discussions with the engagement partner and other members 
of the engagement team, and (2) review documentation.
    10. In an audit, the engagement quality reviewer should:
    a. Evaluate the significant judgments that relate to engagement 
planning, including--

--The consideration of the firm's recent engagement experience with the 
company and risks identified in connection with the firm's client 
acceptance and retention process,
--The consideration of the company's business, recent significant 
activities, and related financial reporting issues and risks, and
--The judgments made about materiality and the effect of those 
judgments on the engagement strategy.

    b. Evaluate the engagement team's assessment of, and audit 
responses to--

--Significant risks identified by the engagement team, including fraud 
risks, and
--Other significant risks identified by the engagement quality reviewer 
through performance of the procedures required by this standard.

    Note: A significant risk is a risk of material misstatement that 
is important enough to require special audit consideration.

    c. Evaluate the significant judgments made about (1) the 
materiality and disposition of corrected and uncorrected identified 
misstatements and (2) the severity and disposition of identified 
control deficiencies.
    d. Review the engagement team's evaluation of the firm's 
independence in relation to the engagement.
    e. Review the engagement completion document \4\ and confirm with 
the engagement partner that there are no significant unresolved 
matters.
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    \4\ Paragraph 13 of PCAOB Auditing Standard No. 3, Audit 
Documentation, requires the auditor to identify all significant 
findings or issues in an engagement completion document.
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    f. Review the financial statements, management's report on internal 
control, and the related engagement report.
    g. Read other information in documents containing the financial 
statements to be filed with the Securities and Exchange Commission 
(``SEC'') \5\ and evaluate whether the engagement team has taken 
appropriate action with respect to any material inconsistencies with 
the financial statements or material misstatements of fact of which the 
engagement quality reviewer is aware.
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    \5\ See paragraphs .04-.06 of AU sec. 550, Other Information in 
Documents Containing Audited Financial Statements; AU sec. 711, 
Filings Under Federal Securities Statutes.
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    h. Based on the procedures required by this standard, evaluate 
whether appropriate consultations have taken place on difficult or 
contentious matters. Review the documentation, including conclusions, 
of such consultations.
    i. Based on the procedures required by this standard, evaluate 
whether appropriate matters have been communicated, or identified for 
communication, to the audit committee, management, and other parties, 
such as regulatory bodies.

Evaluation of Engagement Documentation

    11. In an audit, the engagement quality reviewer should evaluate 
whether the engagement documentation that he or she reviewed when 
performing the procedures required by paragraph 10--
    a. Indicates that the engagement team responded appropriately to 
significant risks, and
    b. Supports the conclusions reached by the engagement team with 
respect to the matters reviewed.

Concurring Approval of Issuance

    12. In an audit, the engagement quality reviewer may provide 
concurring approval of issuance only if, after performing with due 
professional care \6\ the review required by this standard, he or she 
is not aware of a significant engagement deficiency.
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    \6\ See AU sec. 230, Due Professional Care in the Performance of 
Work.

    Note: A significant engagement deficiency in an audit exists 
when (1) the engagement team failed to obtain sufficient appropriate 
evidence in accordance with the standards of the PCAOB, (2) the 
engagement team reached an inappropriate overall conclusion on the 
subject matter of the engagement, (3) the engagement report is not 
appropriate in the circumstances, or (4) the firm is not independent 
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of its client.

    13. In an audit, the firm may grant permission to the client to use 
the engagement report only after the engagement quality reviewer 
provides concurring approval of issuance.\7\
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    \7\ Concurring approval of issuance by the engagement quality 
reviewer also is required when reissuance of an engagement report 
requires the auditor to update his or her procedures for subsequent 
events. In that case, the engagement quality reviewer should update 
the engagement quality review by addressing those matters related to 
the subsequent events procedures.

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[[Page 57359]]

    Engagement Quality Review for a Review of Interim Financial 
Information:

Engagement Quality Review Process

    14. In an engagement to review interim financial information, the 
engagement quality reviewer should evaluate 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, if a report is to be issued. To evaluate such 
judgments and conclusions, the engagement quality reviewer should, to 
the extent necessary to satisfy the requirements of paragraphs 15 and 
16: (1) Hold discussions with the engagement partner and other members 
of the engagement team, and (2) review documentation.
    15. In a review of interim financial information, the engagement 
quality reviewer should:
    a. Evaluate the significant judgments that relate to engagement 
planning, including the consideration of--

--The firm's recent engagement experience with the company and risks 
identified in connection with the firm's client acceptance and 
retention process,
--The company's business, recent significant activities, and related 
financial reporting issues and risks, and
--The nature of identified risks of material misstatement due to fraud.

    b. Evaluate the significant judgments made about (1) the 
materiality and disposition of corrected and uncorrected identified 
misstatements and (2) any material modifications that should be made to 
the disclosures about changes in internal control over financial 
reporting.
    c. Perform the procedures described in paragraphs 10.d and 10.e.
    d. Review the interim financial information for all periods 
presented and for the immediately preceding interim period, 
management's disclosure for the period under review, if any, about 
changes in internal control over financial reporting, and the related 
engagement report, if a report is to be issued.
    e. Read other information in documents containing interim financial 
information to be filed with the SEC \8\ and evaluate whether the 
engagement team has taken appropriate action with respect to material 
inconsistencies with the interim financial information or material 
misstatements of fact of which the engagement quality reviewer is 
aware.
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    \8\ See AU sec. 722.18f; AU sec. 711.
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    f. Perform the procedures in paragraphs 10.h and 10.i.

Evaluation of Engagement Documentation

    16. In a review of interim financial information, the engagement 
quality reviewer should evaluate whether the engagement documentation 
that he or she reviewed when performing the procedures required by 
paragraph 15 supports the conclusions reached by the engagement team 
with respect to the matters reviewed.

Concurring Approval of Issuance

    17. In a review of interim financial information, the engagement 
quality reviewer may provide concurring approval of issuance only if, 
after performing with due professional care the review required by this 
standard, he or she is not aware of a significant engagement 
deficiency.

    Note: A significant engagement deficiency in a review of interim 
financial information exists when (1) the engagement team failed to 
perform interim review procedures necessary in the circumstances of 
the engagement, (2) the engagement team reached an inappropriate 
overall conclusion on the subject matter of the engagement, (3) the 
engagement report is not appropriate in the circumstances, or (4) 
the firm is not independent of its client.

    18. In a review of interim financial information, the firm may 
grant permission to the client to use the engagement report (or 
communicate an engagement conclusion to its client, if no report is 
issued) only after the engagement quality reviewer provides concurring 
approval of issuance.
    Documentation of an Engagement Quality Review:
    19. Documentation of an engagement quality review should contain 
sufficient information to enable an experienced auditor, having no 
previous connection with the engagement, to understand the procedures 
performed by the engagement quality reviewer, and others who assisted 
the reviewer, to comply with the provisions of this standard, including 
information that identifies:
    a. The engagement quality reviewer, and others who assisted the 
reviewer,
    b. The documents reviewed by the engagement quality reviewer, and 
others who assisted the reviewer,
    c. The date the engagement quality reviewer provided concurring 
approval of issuance or, if no concurring approval of issuance was 
provided, the reasons for not providing the approval.
    20. Documentation of an engagement quality review should be 
included in the engagement documentation.
    21. The requirements related to retention of and subsequent changes 
to audit documentation in PCAOB Auditing Standard No. 3, Audit 
Documentation, apply with respect to the documentation of the 
engagement quality review.

Conforming Amendment to PCAOB Interim Quality Control Standards

    QC sec. 20, ``System of Quality Control for a CPA Firm's Accounting 
and Auditing Practice''
    QC section (``sec.'') 20, ``System of Quality Control for a CPA 
Firm's Accounting and Auditing Practice'' of the Board's interim 
quality control standards is amended as follows--
    The third sentence of paragraph .18 of QC sec. 20 is replaced with 
the following sentence:
    These policies and procedures also should address engagement 
quality reviews pursuant to PCAOB Auditing Standard No. 7, Engagement 
Quality Review.

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.

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

(a) Purpose
    Section 103 of the Sarbanes-Oxley Act (the ``Act'') directs the 
Board, among other things, to set standards for public company audits, 
including a requirement for each registered public accounting firm to 
``provide a concurring or second partner review and approval of [each] 
audit report (and other related information), and concurring approval 
in its issuance * * * .''
    As discussed more fully in Exhibit 3, the Board adopted Auditing 
Standard No. 7 because it believed that a well-performed engagement 
quality review (``EQR'') can serve as an important safeguard against 
erroneous or insufficiently supported audit opinions and, accordingly, 
can contribute to audit quality. The proposed rules are intended to 
enhance the quality of the EQR by strengthening the existing

[[Page 57360]]

requirements. Auditing Standard No. 7 provides for a rigorous review 
that will serve as a meaningful check on the work performed by the 
engagement team and, the Board believes, should increase the likelihood 
that a registered public accounting firm will catch any significant 
engagement deficiencies before it issues its audit report. As a result, 
the Board recognizes that more work may be necessary under Auditing 
Standard No. 7 than was performed in some concurring reviews under the 
existing requirements.
    Auditing Standard No. 7 requires the engagement quality reviewer 
(or the ``reviewer'') to evaluate the significant judgments made and 
related conclusions reached by the engagement team in forming the 
overall conclusion on the engagement and in preparing the engagement 
report. Auditing Standard No. 7 also requires the engagement quality 
reviewer to perform certain procedures designed to focus the reviewer 
on those judgments and conclusions. The procedures required of the 
reviewer by Auditing Standard No. 7 are different in nature from the 
procedures required of the engagement team. Unlike the engagement team, 
a reviewer does not perform substantive procedures or obtain sufficient 
evidence to support an opinion on the financial statements or internal 
control over financial reporting. If more audit work is necessary 
before the reviewer may provide concurring approval of issuance, the 
engagement team--not the reviewer--is responsible under PCAOB standards 
for performing the work. In contrast, the reviewer fulfills his or her 
responsibility to perform an effective review of the engagement under 
the EQR standard by holding discussions with the engagement team, 
reviewing documentation, and determining whether he or she can provide 
concurring approval of issuance.
    The proposed rules also amend the Board's interim quality control 
standards by replacing the third sentence of paragraph .18 in QC 
section 20, ``System of Quality Control for a CPA Firm's Accounting and 
Auditing Practice'' with a statement indicating that these policies and 
procedures also should address engagement quality reviews pursuant to 
PCAOB Auditing Standard No. 7.
(b) Statutory Basis
    The statutory basis for the proposed rules is Title I of the Act.

B. Board's Statement on Burden on Competition

    The Board does not believe that the proposed rule changes will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The proposed 
rule changes would apply equally to all registered public accounting 
firms.

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

    The Board released the proposed rules for public comment in PCAOB 
Release No. 2008-002 (February 26, 2008). The Board received 38 written 
comments. The Board considered these comments and made significant 
changes to the initial proposed rules. As a result, the Board again 
sought public comment in PCOAB Release No. 2009-001 (March 4, 2009). 
The Board received 30 written comment letters relating to its 
reproposal of the proposed rules. A copy of PCAOB Release Nos. 2008-002 
and 2009-001 and the comment letters received in response to the 
PCAOB's request for comment in both releases are available on the 
PCAOB's Web site at www.pcaobus.org.
    The Board has carefully considered all comments it has received. In 
response to the written comments received on both the initial and 
reproposal of the proposed rules, the Board has clarified and modified 
certain aspects of the proposed rules, as discussed below.
    Overview of Auditing Standard No. 7:
    Overall, commenters preferred the reproposed standard to the 
original proposal, though some continued to believe that certain 
provisions were unclear and suggested certain changes to the standard. 
After considering commenters' feedback, the Board has made several 
modifications to the EQR standard to provide additional clarity. This 
section describes the comments received, the Board's response, and 
changes made in AS No. 7.\9\
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    \9\ The Board received some comments related to its standard-
setting process in general. The Board continuously endeavors to 
improve its processes, including its standard-setting process, and 
is considering these comments as it does so.
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Applicability of the EQR Requirement

    Paragraph 1 of the reproposed standard required an EQR for audit 
engagements and reviews of interim financial information (``interim 
reviews''), but not for other engagements performed according to the 
standards of the PCAOB. For the most part, commenters believed that 
this provision was appropriate.\10\ One commenter, however, suggested 
including the EQR requirements for interim reviews in AU section 
(``sec.'') 722, Interim Financial Information, instead of including 
them as part of the EQR standard to ``make it clear that the scope of 
the procedures performed remain under the umbrella of the objective of 
a review of interim financial information (which is much different than 
the scope and objective of an audit).'' Because the requirements for 
the EQR of interim reviews in AS No. 7 are closely related to and 
described by reference to the requirements for the EQR of an audit, the 
Board believes it is more appropriate to locate both sets of 
requirements in the same standard. Accordingly, the Board is adopting 
the provisions regarding applicability of the EQR standard as 
reproposed.
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    \10\ One commenter did not believe that an EQR should be 
required for interim reviews because of concerns about the scope of 
the EQR for interim reviews. The section entitled Specifically 
Required Procedures in the EQR of an Interim Review discusses the 
EQR requirements for interim reviews.
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Statement of Objective

    The reproposed standard included a statement of objective intended 
to focus reviewers on the overall purpose of the standard as they carry 
out the more specific EQR requirements. As reproposed, the objective of 
the engagement quality reviewer was ``to perform an evaluation of the 
significant judgments made by the engagement team and the conclusions 
reached in forming the overall conclusion on the engagement and in 
preparing the engagement report, if a report is to be issued, in order 
to determine whether to provide concurring approval of issuance.''
    Most commenters agreed that the EQR standard should include a 
statement of objective. While some believed the objective was 
appropriate as reproposed, several suggested substituting the phrase 
``related conclusions reached'' for ``the conclusions reached'' to 
indicate that the reviewer is required to evaluate conclusions relating 
to significant judgments, rather than all conclusions. In addition, 
some commenters suggested making the objective less vague, while others 
wanted the Board to broaden it or make it less procedural.
    After considering these comments, the Board has, as suggested by 
commenters, revised the objective so that it refers to ``significant 
judgments made by the engagement team \11\ and the related

[[Page 57361]]

conclusions reached * * * .'' (emphasis added). This change should help 
reviewers maintain their focus on areas of the engagement that are most 
likely to contain a significant engagement deficiency. With this 
revision, the Board believes the statement of objective establishes, at 
the appropriate level of detail, a framework for the performance of the 
EQR that is consistent with the specific requirements in AS No. 7. 
Corresponding changes have been made in paragraphs 9 and 14, which 
describe the scope of the EQR for audits and interim reviews, 
respectively. The reviewer achieves his or her objective by complying 
with the specific requirements of the standard.
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    \11\ Because the engagement partner has final responsibility for 
the engagement, he or she has final responsibility for the 
significant judgments made during the engagement, notwithstanding 
any involvement in or responsibility for those judgments by firm 
personnel outside of the engagement team, such as members of the 
firm's national office. Accordingly the ``significant judgments made 
by the engagement team'' include all of the significant judgments 
made during the engagement.
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Qualifications of the Engagement Quality Reviewer

    In order to provide for a high-quality EQR, the reproposed standard 
described the qualifications that any reviewer would be required to 
meet. These provisions were designed to provide assurance that the 
reviewer could effectively perform an EQR of the particular engagement 
under review. At the same time, the provisions recognized that smaller 
firms may have few partners--and, in the case of sole practitioners, no 
additional partners--available in-house to perform the EQR.
    Accordingly, the reproposed standard required an engagement quality 
reviewer from within the firm issuing the engagement report to be a 
partner or another individual in an equivalent position, but also 
allowed a qualified individual from outside the firm to perform the 
EQR. In either event, the reproposed standard required the reviewer to 
be an associated person \12\ of a registered public accounting 
firm.\13\ The reproposed standard also included a general competence 
requirement and requirements related to the reviewer's independence, 
integrity, and objectivity.
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    \12\ For clarity, in paragraph 3 of AS No. 7, the Board added a 
reference to Rule1001(p)(i), which defines the term ``associated 
person of a registered public accounting firm.'' A person not 
already associated with a registered firm can enter into a 
relationship with the firm issuing the report such that the person 
would become associated with that firm by performing the review. 
Specifically, a person not already associated with a firm would 
become associated with the firm issuing the report if he or she 
(rather than, or in addition to, his or her firm or other employer): 
(1) Receives compensation from the firm issuing the report for 
performing the review or (2) performs the review as agent for the 
firm issuing the report. For example, if the firm issuing the report 
contracts directly with an employee of an unregistered accounting 
firm to perform the engagement quality review, that person would 
become associated with the firm issuing the report by virtue of that 
independent contractor relationship.
    \13\ A registered public accounting firm has an obligation to 
secure and enforce consents to cooperate with the Board from each 
associated person of the firm, see Section 102(b)(3) of the Act, 
including those who become associated with the firm by performing 
the review. The Board also may directly sanction any such person who 
fails to cooperate in an investigation or inspection. See Section 
105(b)(3) of the Act and PCAOB Rules 5110 and 4006.
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    In-House Reviewer: Partner or an Individual in an Equivalent 
Position:
    The requirement in the reproposed standard for a reviewer from 
within the firm to be a partner or an individual in an equivalent 
position was intended to address concerns expressed by some commenters 
on the original proposal about the authority of the engagement quality 
reviewer relative to that of the engagement partner. Because the EQR is 
intended to be an objective second look at work performed by the 
engagement team, the reviewer should be able to withstand pressure from 
the engagement partner or other firm personnel, such as members of the 
firm's national office. As described in the reproposing release, the 
Board believed that concerns about authority will most often arise when 
the reviewer and the engagement partner work at the same firm. The 
Board also believed that a standard based on perceptions of relative 
authority within a firm would not be sufficiently clear to be workable. 
Accordingly, the Board attempted to address these concerns with a 
requirement that an in-house reviewer--but not one from outside the 
firm--be a partner or person in an equivalent position.
    While some commenters supported the reproposed requirement, others 
disagreed with it, generally because, in their view, being a partner or 
person in an equivalent position would not necessarily ensure that the 
reviewer possesses the qualities required to perform the EQR. These 
commenters noted that partners as well as non-partners may be subject 
to internal pressure within the firm to provide concurring approval of 
issuance. In addition, in one commenter's view, it would be burdensome 
for one-partner firms to hire an outside reviewer to comply with this 
requirement. Finally, some commenters also asked the Board to define 
the term ``equivalent position.''
    While both partners and non-partners may experience pressure within 
the firm to provide concurring approval of issuance, the Board 
continues to believe that the reproposed requirement is the most 
appropriate way to address this issue. Partnership is not a perfect 
proxy for authority, but a partner is more likely to possess sufficient 
authority to conduct the EQR than a non-partner. The Board continues to 
believe that a requirement based on perceptions of authority would not 
be workable. Accordingly, the Board is adopting this requirement 
substantially as reproposed.\14\ At a firm that is not organized as a 
partnership, ``an individual in an equivalent position'' is someone 
with the degree of authority and responsibility of a partner in a firm 
that is organized as a partnership.
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    \14\ One commenter suggested that the phrasing of the reproposed 
standard did not establish a requirement for the in-house reviewer 
to be a partner because it stated that the reviewer ``may be'' a 
partner, a person in an equivalent position, or an individual 
outside the firm. While the use of ``may'' in that context imposed a 
requirement, to avoid any confusion on this point the Board has 
rephrased the requirement in paragraph 3 of AS No. 7 to use the word 
``must.''
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    Qualified Reviewer from Outside the Firm:
    As noted above, the reproposed standard also allowed a qualified 
reviewer from outside the firm to conduct the review. In the 
reproposing release, the Board expressed the view that allowing a 
sufficiently qualified professor or other individual not employed by an 
accounting firm to perform the EQR should not negatively affect audit 
quality and may mitigate the compliance burden on sole practitioners 
and smaller firms. The Board sought comment on whether a qualified 
accountant who is not employed by an accounting firm should be allowed 
to conduct the EQR.\15\
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    \15\ As noted in the reproposing release, under the existing 
requirement a firm may seek a waiver to engage an outside 
experienced individual to perform the EQR. Because AS No. 7 allows a 
firm to use an outside reviewer, such a waiver is not necessary 
under AS No. 7.
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    The majority of commenters on this topic did not oppose the 
reproposed provision. Some commenters, however, cautioned that 
reviewers from outside an accounting firm may not necessarily have the 
required technical expertise or recent audit experience. One commenter 
believed that allowing the use of such outside reviewers could ``hamper 
the existing independence rules,'' \16\ increase costs, and limit the 
potential growth of partners.
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    \16\ The comment did not explain how the independence rules 
would be hampered.
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    After considering these comments, the Board continues to believe 
that the EQR standard can--and should--allow firms the proposed 
flexibility in choosing a reviewer, provided that reviewer meets the 
competence and other qualification requirements. According to these 
requirements, as discussed below, any reviewer would have to have the 
level of knowledge and competence related to accounting, auditing, and 
financial reporting required to serve as the person

[[Page 57362]]

who has overall responsibility for the engagement under review. 
Accordingly, while some persons from outside a firm might not have the 
required qualifications, those who do can effectively perform the 
EQR.\17\
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    \17\ Similarly, a reviewer does not meet all of the 
qualification requirements in AS No. 7 by virtue of his or her 
status as a partner or employee of an accounting firm.
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    The Board also does not agree that allowing the use of a reviewer 
from outside the firm issuing the report would negatively affect the 
application or enforcement of the independence rules. As the Board 
noted in the reproposing release, it will continue to consider anyone 
who performs the EQR to be an ``audit partner'' and a member of the 
``audit engagement team'' for purposes of independence 
requirements.\18\ In addition, because AS No. 7 would not require a 
firm to use an outside reviewer, allowing a firm to do so should not 
increase costs or limit the potential growth of partners. Any firm that 
is concerned that invoking the flexibility provided by the EQR standard 
would raise its costs or impede the development of its partners could, 
simply, decline to do so and use a reviewer from within the firm if one 
is available.
---------------------------------------------------------------------------

    \18\ See Rule 2-01(f) of Regulation S-X, 17 CFR 210.2-01(f), for 
the definitions of ``audit partner'' and ``audit engagement team.''
---------------------------------------------------------------------------

    When considering an outside individual for the role of the 
engagement quality reviewer, the firm will likely need to make 
additional inquiries to obtain necessary information about the 
individual's qualifications. For example, while information about 
independence of the firm's partners is typically collected and 
evaluated as part of the periodic independence review, information 
about the independence of an outside reviewer will likely need to be 
requested and evaluated as part of the reviewer selection process. 
Firms also likely know more about the competence of their own partners 
than of an outside reviewer.
    General Competence Requirement:
    As noted above, the reproposed standard, like the original 
proposal, included a requirement for the reviewer to ``possess the 
level of knowledge and competence related to accounting, auditing, and 
financial reporting required to serve as the person who has overall 
responsibility for the same type of engagement.'' This provision was 
intended to set a minimum requirement for those who would perform the 
EQR. In response to comments on the original proposal, the reproposing 
release explained that this provision, by its terms, did not require 
the engagement quality reviewer's knowledge and competence to match 
those of the engagement partner, or for the reviewer to be a ``clone'' 
of the engagement partner.\19\
---------------------------------------------------------------------------

    \19\ Specifically, the reproposing release noted:
    The general competence provision merely sets a minimum 
requirement for those who would perform the EQR, but it does not 
require the reviewer's competence to match that of the engagement 
partner. In many cases, both individuals' competence will exceed the 
minimum level prescribed, but there is no requirement that they do 
so in tandem, or even at all.
---------------------------------------------------------------------------

    Some commenters reiterated their concerns that the engagement 
quality reviewer's skills would be expected to match those of the 
engagement partner, and that such a requirement could cause resource 
constraints for smaller firms. Other commenters suggested modifying the 
general competence provision by stating that the reviewer's competence 
should be established based on the facts and circumstances of the 
engagement, or describing the required qualifications from the 
reviewer's perspective, rather than by comparing them to the 
qualifications of the engagement partner. Finally, some commenters 
suggested including in the EQR standard a statement that the reviewer 
may obtain the required level of knowledge and competence through 
utilizing assistants.
    The Board continues to believe that if a minimum level of knowledge 
and competence in accounting, auditing, and financial reporting is 
required to conduct an audit, it is similarly necessary to effectively 
review that audit.\20\ The reviewer is not required to possess other 
competencies, e.g., those related to communication or management 
skills, that the engagement partner may have.
---------------------------------------------------------------------------

    \20\ While a reviewer may use assistants in performing the EQR, 
the reviewer's own skills should meet the requirements of AS No. 7.
---------------------------------------------------------------------------

    Accordingly, the Board is adopting the general competence provision 
substantially as proposed. The Board is, however, modifying the 
requirement to clarify further that the determination of what 
constitutes the appropriate level of knowledge and competence should be 
based on the circumstances of the engagement, including the size and 
complexity of the business under audit or under interim review.\21\ In 
AS No. 7, the Board replaced the phrase ``the same type of engagement'' 
with ``the engagement.'' The new phrasing focuses the reviewer on the 
particular engagement under review, rather than that ``type'' of 
engagement.\22\ Firms that do not have partners that meet this general 
competence requirement available to perform the EQR may engage an 
outside reviewer to perform an EQR.
---------------------------------------------------------------------------

    \21\ Footnote 18 on page 9 of the original release stated, ``The 
determination of what constitutes the appropriate level of knowledge 
and competence should be based on the circumstances of the 
engagement, including the size or complexity of the business.''
    \22\ In addition, to simplify the text of AS No. 7, the Board 
replaced the phrase ``person with overall responsibility for the 
engagement'' with the term ``engagement partner.'' Footnote 3 of AS 
No. 7 explains that the term ``engagement partner'' has the same 
meaning as the phrases the ``auditor with final responsibility for 
the audit,'' as described in AU sec. 311, Planning and Supervision, 
and the ``practitioner-in-charge of an engagement,'' as described in 
PCAOB interim quality control standard QC sec. 40, The Personnel 
Management Element of a Firm's System of Quality Control-
Competencies Required by a Practitioner-in-Charge of an Attest 
Engagement. Because all of these terms refer to the same person, 
this change does not alter the meaning of the EQR standard.
---------------------------------------------------------------------------

    Independence, Integrity, and Objectivity:
    Like the original proposal, the reproposed standard required the 
reviewer to be independent of the company, perform the review with 
integrity, and maintain objectivity. Comments on the reproposal focused 
on two provisions regarding objectivity--the prohibition against the 
reviewer supervising the engagement team and the two-year ``cooling-
off'' period before the engagement partner could perform the EQR.
    Supervision of the Engagement Team:
    The reproposed standard provided that to maintain objectivity the 
engagement quality reviewer should not, among other things, ``supervise 
the engagement team with respect to the engagement subject to the 
engagement quality review.'' The phrase ``subject to the engagement 
quality review'' was intended to clarify that partners with leadership 
responsibilities in a firm, region, service, or industry practice are 
not, solely because of those responsibilities, precluded from reviewing 
any engagement performed by their subordinates in the firm. Some 
commenters believed that the phrase ``subject to the engagement quality 
review'' was not sufficient to clarify this point.
    After considering these comments, the Board has decided that the 
express prohibition against ``supervis[ing] the engagement team with 
respect to the engagement subject to the engagement quality review'' is 
not necessary to effectuate the Board's intent. The remaining two 
criteria for maintaining objectivity in paragraph 7 of AS No. 7--not 
making decisions on behalf of the engagement team and not assuming any 
responsibilities of the engagement team--are sufficient to preclude 
those involved in the engagement from

[[Page 57363]]

serving as the engagement quality reviewer.\23\ For example, partners 
(including the engagement partner and other partners on larger 
engagements), managers, and others who supervise engagement personnel 
on the audit under review would not qualify under the remaining 
criteria because they have assumed responsibilities of the engagement 
team. At the same time, removing the phrase ``supervise the engagement 
team'' from AS No. 7 should further clarify that those in leadership 
positions in the firm who did not make decisions for or assume 
responsibilities of the engagement team may perform the EQR.
---------------------------------------------------------------------------

    \23\ AS No. 7 does not prohibit the engagement team from 
consulting with the reviewer, as long as the reviewer maintains his 
or her objectivity in accordance with paragraph 7. As noted in the 
reproposing release, such consultations may contribute to audit 
quality. In addition, one commenter asked the Board to clarify 
whether a reviewer may consult with the same personnel who 
previously consulted with the engagement team. The EQR standard does 
not prohibit the reviewer from holding discussions with such 
personnel. The reviewer may not, however, use personnel who 
previously consulted with the engagement team as assistants in 
performing the review unless they meet the objectivity and other 
qualification requirements of AS No. 7. To emphasize the requirement 
that assistants maintain objectivity, the Board added to paragraph 7 
of AS No. 7 the phrase ``and others who assist the reviewer.''
---------------------------------------------------------------------------

    The Two-Year ``Cooling-Off'' Period:
    The reproposed standard included a provision prohibiting an 
engagement partner from serving as the engagement quality reviewer for 
at least two years following his or her last year as the engagement 
partner.\24\ The Board included the ``cooling-off'' period because it 
believed that it would be harder for an engagement partner who has had 
overall responsibility for the audit for at least a year to perform the 
review with the necessary level of objectivity. While a number of 
commenters expressed general support for a two-year ``cooling-off'' 
period, some believed that it could impose an undue hardship on smaller 
firms, and suggested a shorter ``cooling-off'' period.
---------------------------------------------------------------------------

    \24\ SEC independence rules allow engagement partners and 
concurring partners to serve for five consecutive years, after which 
they may not serve in either role for another period of five years. 
Within a five-year period, SEC independence rules do not impose a 
``cooling-off'' period before the engagement partner can serve as 
the concurring partner. See Rule 2--01(c)(6)(i)(A) of Regulation S-
X.
---------------------------------------------------------------------------

    After considering these comments, the Board continues to believe 
that a ``cooling-off'' period will be beneficial to audit quality and 
that a two-year period appropriately safeguards objectivity without 
imposing unnecessary hardship on most firms. At the same time, the 
Board recognizes that compliance with this requirement could be 
difficult for smaller firms with fewer personnel. In its independence 
rules, the Securities and Exchange Commission (``SEC'') exempted 
certain smaller firms from the audit partner rotation requirements. 
Specifically, Rule 2-01(c)(6)(ii) of Regulation S-X provides an 
exemption for firms with fewer than five issuer audit clients and fewer 
than ten partners, provided the Board ``conducts a review at least once 
every three years of each of the audit client engagements that would 
result in a lack of auditor independence under'' the SEC partner 
rotation requirements. The Board believes that this exemption--
including the provision regarding Board inspections--also describes an 
appropriate exemption from the ``cooling-off'' requirement in the EQR 
standard. Accordingly, firms that qualify for the exemption from the 
SEC partner rotation requirements will also be exempt from the 
``cooling-off'' period under AS No. 7.

EQR Process

    The Board's goal in proposing an EQR standard was to strengthen the 
existing requirements for concurring reviews in order to promote a more 
meaningful review of the work performed by the engagement team. 
Accordingly, the original proposal described certain procedures that 
the reviewer was required to perform that were more specific than those 
in the existing requirements. In response to comments received on the 
original proposal, the Board clarified some of the specifically 
required procedures and included, in a separate section in the 
reproposed standard, tailored requirements for an EQR of an interim 
review.
    In general, commenters believed that the reproposed standard 
described the requirements of the EQR more clearly than the original 
proposal. However, a number of commenters suggested additional 
modifications that, in their view, would further clarify the Board's 
intent and ensure consistency of the requirements with the statement of 
objective. As described below, after considering these comments, the 
Board has modified certain of these requirements.

Terminology Used To Describe the Required Procedures

    Several commenters noted that the specifically required procedures 
in paragraphs 9, 10, 14, and 15 of the reproposed standard were 
described using different, but in some cases similar, terms such as 
``determine,'' ``evaluate,'' ``identify,'' ``read,'' and ``review,'' 
which some commenters found confusing. In one commenter's view, the 
terms ``determine,'' ``identify,'' and ``evaluate'' may require the 
reviewer to perform procedures that are similar in scope to the 
procedures performed by the engagement partner. The commenters asked 
the Board to clarify the terminology in these sections of the EQR 
standard.
    While the Board does not believe that this terminology required the 
reviewer to perform procedures that are appropriately performed by the 
engagement partner, it does agree that the terminology should not be 
confusing. Accordingly, the Board reduced the number of terms used in 
AS No. 7, so that the required procedures in paragraphs 9, 10, 14, and 
15 are described using two terms, ``evaluate'' and ``review''--with one 
exception. Because AU sec. 550, Other Information in Documents 
Containing Audited Financial Statements, requires the auditor to read 
other information in documents containing the financial statements to 
be filed with the SEC, paragraphs 10.g and 15.e of AS No. 7, like in 
the original and reproposed standards, also require the reviewer to 
read such other information and evaluate whether the engagement team 
has taken appropriate action with respect to any material 
inconsistencies with the financial statements or interim financial 
information, respectively, or material misstatements of fact of which 
the engagement quality reviewer is aware.
    Review of Documentation:
    A number of commenters viewed the statement in paragraphs 9 and 14 
of the reproposed standard that ``the reviewer should perform the 
procedures * * * by reviewing documentation'' as too open-ended.\25\ 
Commenters were concerned that this provision could be interpreted to 
require the review of all of the engagement documentation.
---------------------------------------------------------------------------

    \25\ That statement was intended, along with other changes in 
the reproposed standard, to clarify that the EQR is a review of the 
engagement team's work rather than a second audit. See page 17 of 
the reproposing release.
---------------------------------------------------------------------------

    The Board did not intend to require--and the reproposed provision 
did not require--the reviewer to review all of the engagement 
documentation. Nevertheless, to clarify this point, the Board has added 
the phrase ``to the extent necessary to satisfy the requirements'' of 
paragraphs 10 and 11, in an EQR of an audit, and 15 and 16, in an EQR 
of an interim review. As a practical matter, the reviewer cannot comply 
with the requirements of the EQR standard without holding discussions 
with the engagement partner and reviewing documentation. AS No. 7 
requires the reviewer to hold

[[Page 57364]]

sufficient discussions with the engagement partner and other members of 
the engagement team and review sufficient documentation to perform the 
required procedures with due professional care. What is sufficient will 
necessarily depend on the facts and circumstances of the particular 
engagement under review. Auditors often document their significant 
judgments and conclusions in various summary documents, which could 
serve as a starting point for the reviewer's evaluation of the 
engagement team's work.
    Paragraph 11 of the reproposed standard required the reviewer, in 
an EQR of an audit, to evaluate whether the engagement documentation 
that he or she reviewed when performing the procedures required by 
paragraph 10 indicates that the engagement team responded appropriately 
to significant risks and supports the conclusions reached by the 
engagement team with respect to the matters reviewed. One commenter 
suggested adding a requirement to paragraph 11 to evaluate engagement 
documentation for compliance with the requirements of Auditing Standard 
No. 3, Audit Documentation (``AS No. 3''). The Board originally 
proposed such a requirement but, in response to comments, did not 
include it in the reproposed standard.\26\ The Board continues to 
believe that the documentation review requirements of paragraph 11 of 
the reproposed standard are appropriate and is adopting them as 
reproposed.
---------------------------------------------------------------------------

    \26\ Commenters suggested that such a requirement would 
duplicate the documentation review performed by the engagement 
partner.
---------------------------------------------------------------------------

    In an EQR of an interim review, paragraph 16 of the reproposed 
standard required the reviewer to evaluate whether the engagement 
documentation that he or she reviewed ``[i]ndicates that the engagement 
team responded appropriately to significant risks,'' and ``[s]upports 
the conclusions reached by the engagement team with respect to the 
matters reviewed.'' Some commenters noted that the auditor is not 
required to identify significant risks in a review of interim financial 
information and suggested not including a corresponding requirement in 
the EQR standard. The Board agrees and has not included this 
requirement in AS No. 7.
    Specifically Required Procedures in the EQR of an Audit:
    Like the original proposal, the reproposed standard required 
certain procedures designed to give the reviewer the necessary 
information to evaluate the engagement team's significant judgments and 
conclusions. In response to comments on the original proposal, the 
Board made changes to these provisions in the reproposed standard that 
were intended to clarify that the reviewer performs the EQR by 
reviewing the engagement team's work, rather than by auditing the 
company himself or herself. Some commenters suggested that the 
specifically required procedures in the reproposed standard needed 
additional clarification.
    In the view of several commenters, the reproposed standard did not 
clearly articulate the requirement for the reviewer to focus on the 
significant judgments made and the related conclusions reached by the 
engagement team. These commenters believed that the reproposed standard 
might be interpreted as requiring the review of all of the engagement 
team's judgments and conclusions. In response, AS No. 7 refers to 
``significant judgments'' instead of ``judgments'' in describing 
certain of the required procedures.
    The Board also clarified the wording of paragraph 10.b of the 
reproposed standard, which required the reviewer to ``evaluate the risk 
assessments and audit responses. * * *'' Some commenters expressed 
concern that this formulation required a review of audit responses for 
all areas of the audit. In response, AS No. 7 more specifically 
requires the reviewer to evaluate the engagement team's audit responses 
to significant risks identified by the engagement team and other 
significant risks identified by the engagement quality reviewer through 
performance of the procedures required by the EQR standard.\27\ This 
change should help focus reviewers on areas of the audit that are more 
likely to contain a significant engagement deficiency.
---------------------------------------------------------------------------

    \27\ The term ``significant risk'' is defined in the Board's 
recently proposed auditing standard on identifying and assessing 
risks of material misstatement to mean a ``risk of material 
misstatement that is important enough to require special audit 
consideration.'' PCAOB Release No. 2008-006, Proposed Auditing 
Standards Related to the Auditor's Assessment of and Response to 
Risk and Conforming Amendments to PCAOB Standards (October 21, 
2008). The Board intends that definition to apply to the EQR 
standard as well. The Board included this definition in a note to 
paragraph 10.b of AS No. 7. If, at the conclusion of the above 
mentioned rulemaking, the Board adopts a definition of significant 
risk that is different from that proposed, the Board will make a 
conforming change to the EQR standard.
---------------------------------------------------------------------------

    Some commenters also expressed concern about the requirements in 
paragraphs 10.e and 10.f of the reproposed standard to determine 
whether appropriate matters have been communicated to the audit 
committee, management, and others; and to determine whether appropriate 
consultations have taken place on difficult or contentious matters. 
According to these commenters, a requirement to determine whether all 
of the communications or consultations have taken place rather than to 
evaluate the engagement team's communications and consultations was 
inconsistent with the objective of the EQR. In response, the Board 
replaced the phrase ``determine if'' with ``based on the procedures 
required by this standard, evaluate whether.'' This change should 
tailor the specific requirements more closely to the overall objective. 
The Board also placed these paragraphs after the other required 
procedures in paragraph 10 to emphasize that the reviewer performs the 
evaluation required by these paragraphs based on the information 
obtained through the other procedures required by the EQR standard, and 
made a corresponding change in paragraph 15 for the EQR of an interim 
review.
    Specifically Required Procedures in the EQR of an Interim Review:
    In response to comments on the original proposal, the Board 
included in the reproposed standard separate requirements for reviewing 
audits and interim reviews. The EQR requirements for interim reviews 
were based on the requirements for an EQR of an audit but were tailored 
to the different procedures performed in an interim review. A number of 
commenters were supportive of including separate requirements for the 
EQR of interim reviews in the reproposed standard. Some commenters, as 
discussed below, suggested modifications to those requirements.
    Paragraph 15.a of the reproposed standard required the evaluation 
of engagement planning, including the consideration of the firm's 
recent engagement experience with the company and risks identified in 
connection with the firm's client acceptance and retention process; the 
company's business, recent significant activities, and related 
financial reporting issues and risks; and the nature of identified 
risks of material misstatement due to fraud. In one commenter's view, 
that paragraph might suggest that an interim review should include the 
same type of risk assessment as an audit. After considering this 
comment, the Board disagrees. Paragraph 15.a does not impose a 
requirement on the engagement team to identify risks as part of an 
interim review. Rather, it requires the reviewer to evaluate the 
engagement team's consideration of risks that have already been 
identified, e.g., during the preceding year's audit.

[[Page 57365]]

    Additionally, three commenters recommended not requiring the EQR of 
an interim review to include an evaluation of judgments made about the 
severity and disposition of identified control deficiencies. In one 
commenter's view, such an evaluation would be inconsistent with the 
scope of an interim review. AU sec. 722.07, provides that the auditor:

should perform limited procedures quarterly to provide a basis for 
determining whether he or she has become aware of any material 
modifications that, in the auditor's judgment, should be made to the 
disclosures about changes in internal control over financial 
reporting in order for the certifications to be accurate and to 
comply with the requirements of Section 302 of the Act.

    In response, the Board modified the requirement in paragraph 15.b 
in AS No. 7 to be more consistent with the requirements of AU sec. 722. 
Accordingly, AS No. 7 requires the reviewer, among other things, to 
evaluate significant judgments made about any material modifications 
that should be made to the disclosures about changes in internal 
control over financial reporting.
    Paragraph 15.c of the reproposed standard required the reviewer, in 
the EQR of an interim review, to ``[r]ead the interim financial 
information for all periods presented and for the immediately preceding 
interim period, management's disclosure for the period under review, if 
any, about changes in internal control over financial reporting, and 
the related engagement report, if a report is to be filed with the 
SEC.'' Some commenters suggested that the reviewer should be required 
to read the engagement report even when the issuer is not required to 
include the report in an SEC filing. The Board agrees and, accordingly, 
changed ``to be filed with the SEC'' to ``to be issued.'' \28\
---------------------------------------------------------------------------

    \28\ Additionally, one commenter recommended not requiring the 
reviewer to read interim financial information ``for the immediately 
preceding interim period'' because it was not clear, to this 
commenter, what one would review when performing the EQR for the 
first quarter. AU sec. 722.16 requires the accountant to apply 
analytical procedures to the interim financial information, which 
should include, among other things, comparing the quarterly interim 
financial information with comparable information for the 
immediately preceding interim period (i.e., the fourth quarter of 
the prior year, in a first quarter interim review). Because the 
Board believes the reproposed requirement is appropriately within 
the scope of an EQR for an interim review, it has retained it in AS 
No. 7.
---------------------------------------------------------------------------

Concurring Approval of Issuance

    For an EQR of an audit, paragraph 12 of the reproposed standard 
provided that the reviewer ``may provide concurring approval of 
issuance only if, after performing with due professional care the 
review required by this standard, he or she is not aware of a 
significant engagement deficiency.'' A note to the same paragraph 
describes a ``significant engagement deficiency'' as any of the four 
conditions described in the original proposal.\29\ The reproposed 
requirements for providing concurring approval of issuance in an EQR of 
an interim review were the same, except that the first of these four 
conditions was modified in light of the differences between an interim 
review and an audit. Specifically, in an EQR of an interim review, the 
first condition was ``the engagement team failed to perform interim 
review procedures necessary in the circumstances of the engagement'' 
rather than ``the engagement team failed to obtain sufficient 
appropriate evidence in accordance with the standards of the PCAOB.''
---------------------------------------------------------------------------

    \29\ As included in the reproposed standard, these conditions 
were: (1) The engagement team failed to obtain sufficient 
appropriate evidence in accordance with the standards of the PCAOB; 
(2) the engagement team reached an inappropriate overall conclusion 
on the subject matter of the engagement; (3) the engagement report 
is not appropriate in the circumstances; or (4) the firm is not 
independent of its client.
---------------------------------------------------------------------------

    Commenters generally believed that the concurring approval of 
issuance provision was appropriately described, though one recommended 
excluding the reference to ``due professional care'' from the EQR 
standard because AU sec. 230, Due Professional Care in the Performance 
of Work, already imposes an overall requirement on auditors to exercise 
due professional care. Many commenters, however, were critical of the 
reproposing release's description of the reproposed requirement. A 
significant number of commenters objected to, or stated that they 
disagreed with, the statement in the reproposing release that the 
requirement to exercise due professional care imposes on the engagement 
quality reviewer essentially the same requirement as the ``knows, or 
should know based on the requirements of this standard'' formulation 
that was originally proposed. Some suggested that the Board is 
redefining the meaning of due professional care. One commenter stated 
that ``[a] standard of `knows, or should know' is akin to a strict 
liability requirement for engagement deficiencies,'' while another 
commenter suggested that the Board ``clarify that in this context, `due 
professional care' is not a negligence standard.''
    After considering the comments, the Board is adopting the 
concurring approval of issuance requirement as reproposed. While 
auditors are already required to exercise due professional care in 
discharging their responsibilities, comments, as noted above and in the 
reproposing release, have reflected some confusion about the applicable 
standard of care in an EQR. Accordingly, reference to due professional 
care in the requirement is appropriate.
    The Board is not redefining due professional care in the context of 
the EQR standard. As the Board noted in the reproposing release, AU 
sec. 230 describes due professional care as ``reasonable care and 
diligence'' and makes clear that an auditor who acts negligently, i.e., 
without ``reasonable care and diligence,'' breaches the duty to 
exercise due professional care.\30\ Due professional care, as described 
in AU sec. 230, imposes neither a strict liability nor an actual 
knowledge standard. The Board intends the term to mean ``reasonable 
care and diligence,'' as described in AU sec. 230.
---------------------------------------------------------------------------

    \30\ See AU sec. 230.03.
---------------------------------------------------------------------------

    The application of a negligence standard to the concurring approval 
of issuance provision means, as noted in the reproposing release, that 
``a reviewer cannot evade responsibility because, as a result of an 
inadequate review, he or she did not discover a problem that a 
reasonably careful and diligent review would have revealed.''\31\ For 
that reason, the provision requires the reviewer to perform the 
required review with due professional care as a prerequisite to 
providing concurring approval of issuance. A qualified reviewer who has 
done so will, necessarily, have discovered any significant engagement 
deficiencies that could reasonably have been discovered under the 
circumstances. Accordingly, under AS No. 7, such a reviewer may provide 
concurring approval of issuance if ``he or she is not aware of a 
significant engagement deficiency.'' Because a reviewer who has not 
performed the required review with due professional care might not have 
discovered any significant engagement deficiencies that could 
reasonably have been discovered under the circumstances--i.e., those 
the reviewer reasonably should know about--such a reviewer may not,

[[Page 57366]]

consistent with the standard, provide concurring approval of issuance.
---------------------------------------------------------------------------

    \31\ Of course, to impose the more severe sanctions authorized 
under the Act, such as a permanent bar or permanent revocation of 
registration, the Board must establish ``(A) intentional or knowing 
conduct, including reckless conduct, that results in violation of 
the applicable statutory, regulatory, or professional standard; or 
(B) repeated instances of negligent conduct, each resulting in a 
violation of the applicable statutory, regulatory, or professional 
standard.'' Section 105(c)(5) of the Act; see also Rules on 
Investigations and Adjudications, PCAOB Release No. 2003-015, 
Appendix 2 at A2-76 (September 29, 2003) (discussing Section 
105(c)(5)).
---------------------------------------------------------------------------

Documentation of the EQR

    The reproposed standard required the EQR documentation to contain 
sufficient information to identify: who performed the review, the 
documents reviewed, whether and when concurring approval of issuance 
was provided or the reasons for not providing the approval, and the 
significant discussions held, including the details of such 
discussions. These provisions were intended to respond to comments 
expressing concern that the originally proposed documentation 
requirements were overly detailed and would result in duplication of 
the engagement team's work. Some commenters reiterated their concerns 
that some of the reproposed requirements were duplicative of 
requirements to document the engagement itself or overly burdensome.
    The Board continues to believe that it is necessary to strengthen 
the documentation requirements in the interim standard to provide for 
an informative record of the work performed during the EQR. At the same 
time, the Board has reconsidered its approach to the documentation 
requirement in light of the comments received. As described below, the 
Board has added a general requirement that places the specific 
requirements in the context of the overall purpose of EQR 
documentation--to provide a record of how the reviewer carried out the 
review in accordance with the standard's requirements.
    Specifically, paragraph 19 of AS No. 7 includes a requirement for 
the engagement documentation to contain sufficient information to 
enable an experienced auditor,\32\ having no previous connection with 
the engagement, to understand the procedures performed by the 
engagement quality reviewer, and others who assisted the reviewer, to 
comply with the provisions of the standard.\33\ This provision is 
similar to the audit documentation requirement in paragraph 6 of AS No. 
3, and should clarify how the more specific requirements are meant to 
apply in particular circumstances.
---------------------------------------------------------------------------

    \32\ As described in paragraph 6 of AS No. 3, ``[a]n experienced 
auditor has a reasonable understanding of audit activities and has 
studied the company's industry as well as the accounting and 
auditing issues relevant to the industry.''
    \33\ Additionally, for clarity of presentation, the Board moved 
the requirement to include documentation of an EQR in the engagement 
documentation from paragraph 19 to a new paragraph 20 in AS No. 7.
---------------------------------------------------------------------------

    For example, if a reviewer identified a significant engagement 
deficiency to be addressed by the engagement team, the engagement team 
should document its response to the identified deficiency in accordance 
with AS No. 3. Because AS No. 7 does not require duplication of 
documentation prepared by the engagement team, the engagement quality 
reviewer does not have to separately document the engagement team's 
response. Rather, the EQR documentation should contain sufficient 
information to enable an experienced auditor, having no previous 
connection with the engagement, to understand, e.g., the significant 
deficiency identified, how the reviewer communicated the deficiency to 
the engagement team, why such matter was important, and how the 
reviewer evaluated the engagement team's response. Similarly, if the 
reviewer participated in the discussion of the potential for material 
misstatement due to fraud,\34\ and the engagement team documented the 
discussion in accordance with AS No. 3, AS No. 7 only requires the 
engagement quality reviewer or reviewer's assistants to prepare 
separate documentation if the documentation prepared by the engagement 
team does not contain sufficient information to enable an experienced 
auditor, having no previous connection with the engagement, to 
understand the procedures performed by the engagement quality reviewer, 
and others who assisted the reviewer, to comply with the provisions of 
AS No. 7.
---------------------------------------------------------------------------

    \34\ See paragraph .14 of AU sec. 316, Consideration of Fraud in 
a Financial Statement Audit.
---------------------------------------------------------------------------

    In response to comments, the Board also considered whether 
modifications were necessary to the specific requirements. First, the 
Board received several comments related to the provisions of reproposed 
paragraph 19.b, which required the EQR documentation to contain 
information sufficient to identify the documents reviewed. One 
commenter believed that a reviewer ``may feel compelled to engage in an 
unnecessary review of additional documents in order to compile a more 
`complete' list.'' Conversely, another commenter believed that the 
reviewer would be discouraged ``to inspect one or more documents than 
he or she otherwise might or should, thus reducing the quality of the 
EQR.'' Some commenters suggested clarifying how the documents should be 
identified as ``reviewed'' (i.e., electronically or manually), or 
suggested limiting the scope of paragraph 19.b to ``significant 
documents.''
    After considering these comments, the Board has decided to include 
this requirement in AS No. 7. Identifying a document as reviewed by the 
engagement quality reviewer should not be unduly burdensome, and will 
provide an informative record. Such a record could provide registered 
firms, and the Board, with better information about the EQR, which can 
be used to evaluate and improve the EQR process. The Board believes it 
is unnecessary to require in the standard a particular document 
identification method, such as electronic or manual signature. Rather, 
this should be determined by each firm individually.
    Second, a number of commenters believed that the requirement in 
paragraph 19.c to document details of significant discussions held by 
the reviewer, and others who assisted the reviewer, would not improve 
audit quality and that it would be costly to implement. These 
commenters suggested that the reviewer might not be able to determine 
whether a discussion is significant at the time a discussion is held 
and therefore feel compelled to document every discussion. In order to 
make clear that documentation of every discussion is neither required 
nor a prudent use of resources, the Board has not included an explicit 
requirement to document discussions in AS No. 7. As explained above, 
however, if documentation of a particular discussion is necessary ``to 
enable an experienced auditor, having no previous connection with the 
engagement, to understand the procedures performed * * * to comply with 
the provisions of th[e] standard,'' such documentation is required 
under the general documentation requirement.

Effective Date

    In reproposing the standard, the Board intended to make a final 
standard effective for EQRs of interim reviews for fiscal years 
beginning after December 15, 2009 and for EQRs of audits for fiscal 
years ending on or after December 15, 2009. Several commenters were 
concerned that the proposed effective date would not allow for 
sufficient time to train the auditing firm's personnel and implement 
the new EQR requirements. These commenters recommended that the 
effective date of the EQR standard be linked to the beginning of an 
audit period to provide adequate time for registered firms to prepare 
for adoption. The Board agrees with the concerns expressed by the 
commenters and has decided to make AS No. 7 effective, subject to SEC 
approval, for both the EQR of audits and the EQR of interim reviews for 
fiscal

[[Page 57367]]

years beginning on or after December 15, 2009.

Comparison With Other EQR Standards

    Three commenters suggested that the Board provide a comparison 
between the EQR standard and standards of other standard-setters on 
this subject. One commenter noted that because issuer clients often 
represent a minor part of a smaller firm's audit client base, the audit 
methodology of such a firm may be based on other standards as well as 
PCAOB standards. In response, the Board has described certain 
significant differences between the Board's EQR standard and the 
analogous standards of the International Auditing and Assurance 
Standards Board (``IAASB'') \35\ and the Auditing Standards Board 
(``ASB'') of the AICPA.\36\
---------------------------------------------------------------------------

    \35\ International Standard on Quality Control 1, Quality 
Control for Firms that Perform Audits and Reviews of Financial 
Statements, and Other Assurance and Related Services Engagements, 
and International Standard on Auditing 220, Quality Control for an 
Audit of Financial Statements, issued in December 2008.
    \36\ AICPA, Statement on Quality Control Standards No. 7, A 
Firm's System of Quality Control (October 2007).
---------------------------------------------------------------------------

    This comparison is provided for informational purposes only and may 
not represent the views of the ASB or IAASB regarding the 
interpretation of their standards. It describes only certain provisions 
of AS No. 7, and is not a substitute for the EQR standard itself. 
Compliance with AS No. 7 is required for registered public accounting 
firms. Compliance with the analogous ASB and IAASB standards is not 
sufficient to meet the requirements of AS No. 7.
    The Board has developed AS No. 7 to enhance the quality of the 
engagement quality review (``EQR'') process by strengthening the 
provisions of the Board's interim standard.\37\ Recently, the ASB and 
IAASB also updated their standards related to the EQR, and the Board 
considered information in the standards of the ASB and IAASB when 
developing its new EQR standard. As described in this section, AS No. 7 
includes provisions that are similar in terminology and substance to 
those in the ASB and IAASB standards, and other provisions added as 
necessary by the Board. For example, the Board included certain 
provisions in AS No. 7 that are not included in the standards of the 
ASB or IAASB to: Comply with the requirements of the Act; respond to 
the feedback received on the interim standard from the Board's Standing 
Advisory Group (``SAG'') and information obtained through PCAOB 
oversight of registered firms; and to ensure consistency of the 
provisions of AS No. 7 with the provisions and terminology of other 
relevant standards of the PCAOB.
---------------------------------------------------------------------------

    \37\ The Securities and Exchange Commission Practice Section 
(``SECPS'') of the AICPA Requirements of Membership Sections 
1000.08(f); 1000.39, Appendix E.
---------------------------------------------------------------------------

    Some of the provisions of the IAASB standards described in this 
section are included in the ``Application and Other Explanatory 
Material'' section of these standards. That section ``does not in 
itself impose a requirement,'' but ``is relevant to the proper 
application of the requirements of an ISA.'' \38\ In contrast, the 
comparable provisions of AS No. 7 are included in the standard, and 
establish requirements.
---------------------------------------------------------------------------

    \38\ See paragraph A59 of ISA 200, Overall Objectives of the 
Independent Auditor and the Conduct of an Audit in Accordance with 
International Standards on Auditing.
---------------------------------------------------------------------------

Applicability

PCAOB

    Section 103 of the Act requires the Board to adopt an EQR standard 
for audit engagements.\39\ Because of the importance of interim 
financial information to investors, the Board has decided to include a 
requirement to perform an EQR for reviews of interim financial 
information performed in accordance with AU section (``sec.'') 722, 
Interim Financial Information, (``interim reviews'') in the EQR 
standard. Accordingly, AS No. 7 requires an EQR and concurring approval 
of issuance for each audit engagement and for each interim review 
engagement conducted pursuant to the standards of the PCAOB.\40\
---------------------------------------------------------------------------

    \39\ See Section 103(a)(2)(A)(ii) of the Act.
    \40\ See paragraph 1 of AS No. 7.
---------------------------------------------------------------------------

ASB

    SQCS No. 7 does not require an EQR for any type of engagement. 
Accounting firms should determine whether an EQR is required for any 
engagement.\41\
---------------------------------------------------------------------------

    \41\ See paragraphs 80-81 and 83 of SQCS No. 7.
---------------------------------------------------------------------------

IAASB

    ISQC 1 requires an EQR only for audits of financial statements of 
listed entities. Accounting firms should determine whether an EQR is 
required for any other engagements.\42\
---------------------------------------------------------------------------

    \42\ See paragraphs 35(a)-(b) of ISQC 1.
---------------------------------------------------------------------------

Qualifications of a Reviewer

PCAOB

    Associated Person--In order to obtain cooperation with the Board of 
the individuals that perform an EQR,\43\ the Board included in AS No. 7 
a requirement, according to which the engagement quality reviewer must 
be an associated person of a registered public accounting firm.\44\
---------------------------------------------------------------------------

    \43\ A registered public accounting firm has an obligation to 
secure and enforce consents to cooperate with the Board from each 
associated person of the firm, see Section 102(b)(3) of the Act, 
including those who become associated with the firm by performing 
the review. The Board also may directly sanction any such person who 
fails to cooperate in an investigation or inspection. See Section 
105(b)(3) of the Act and PCAOB Rules 5110 and 4006.
    \44\ See paragraph 3 of AS No. 7.
---------------------------------------------------------------------------

    A Reviewer from Outside the Firm--Similar to the standards of the 
ASB and IAASB, AS No. 7 allows a qualified individual from outside the 
firm to perform an EQR.\45\
---------------------------------------------------------------------------

    \45\ See id.
---------------------------------------------------------------------------

    Partner or Person in an Equivalent Position--Because the EQR is 
intended to be an objective ``second look'' at work performed by the 
engagement team, the reviewer should possess sufficient authority to be 
able to withstand pressure from the engagement partner or other firm 
personnel, such as members of the firm's national office. The Board 
believes that concerns about authority will most often arise when the 
reviewer and the engagement partner are from the same firm. Therefore, 
the Board included in AS No. 7 the requirement that an in-house 
reviewer--but not one from outside the firm--be a partner or another 
individual in an equivalent position.\46\
---------------------------------------------------------------------------

    \46\ See id.
---------------------------------------------------------------------------

    General Competence Requirement--The Board included in AS No. 7 a 
requirement for the reviewer to possess the level of knowledge and 
competence related to accounting, auditing, and financial reporting 
required to serve as the engagement partner on the engagement under 
review.\47\ Without such knowledge and competence, the reviewer would 
not be able to appropriately evaluate the significant judgments made 
and related conclusions reached by the engagement team in an audit or 
an interim review.
---------------------------------------------------------------------------

    \47\ See paragraph 5 of AS No. 7. PCAOB interim quality control 
standards describe the competencies required of a person who has the 
overall responsibility for an engagement (or any practitioner-in-
charge of an attest engagement). See QC sec. 40, The Personnel 
Management Element of a Firm's System of Quality Control-
Competencies Required by a Practitioner-in-Charge of an Attest 
Engagement.
---------------------------------------------------------------------------

    Independence, Integrity, and Objectivity--The reviewer must comply 
with all applicable independence requirements,\48\ and perform the 
review

[[Page 57368]]

with integrity and objectivity.\49\ The engagement quality reviewer 
should be able to take a step back and conduct the review from the 
perspective of an outsider looking in.
---------------------------------------------------------------------------

    \48\ See, e.g., Rule 2-01(c)(6) of Regulation S-X, 17 CFR 210.2-
01(c)(6) (subjecting the engagement quality reviewer to the five-
year partner rotation requirement).
    \49\ See ET sec. 102, Integrity and Objectivity, and ET sec. 
191, Ethics Rulings on Independence, Integrity, and Objectivity.
---------------------------------------------------------------------------

    Accordingly, AS No. 7 requires that the firm's quality control 
policies and procedures should include provisions to provide the firm 
with reasonable assurance that the engagement quality reviewer has 
sufficient competence, independence, integrity, and objectivity to 
perform the engagement quality review in accordance with the standards 
of the PCAOB.\50\ As described later, the ASB and IAASB contain similar 
provisions, except the standards of IAASB do not include the direction 
on independence for the reviewer.
---------------------------------------------------------------------------

    \50\ See paragraph 4 of AS No. 7.
---------------------------------------------------------------------------

    While AS No. 7 does not contain the direction included in the 
standards of ASB and IAASB that the firm's policies and procedures 
should establish the degree to which a reviewer can be consulted on the 
engagement without compromising his or her objectivity,\51\ or provide 
for the replacement of the reviewer when the reviewer's ability to 
perform an objective review has been, or may be, impaired,\52\ such 
direction is implicit in the requirement of AS No. 7 that a reviewer 
must maintain objectivity in performing the EQR.\53\ Importantly, AS 
No. 7 provides direction on maintaining objectivity, according to which 
the engagement quality reviewer and others who assist the reviewer 
should not make decisions on behalf of the engagement team or assume 
any of the responsibilities of the engagement team.\54\
---------------------------------------------------------------------------

    \51\ See paragraph 96 of SQCS No.7; paragraph 39(b) of ISQC 1.
    \52\ See paragraph 97 of SQCS No. 7; paragraph 41 of ISQC 1.
    \53\ See paragraph 6 of AS No. 7.
    \54\ See paragraph 7 of AS No. 7.
---------------------------------------------------------------------------

    ``Cooling-off'' period--An engagement quality reviewer is expected 
to take a fresh, objective look at the engagement. The Board believes 
that it would be harder for an engagement partner, who has had overall 
responsibility for the audit for a year or more, to perform the EQR 
with the necessary level of objectivity. Accordingly, AS No. 7 includes 
a requirement, according to which the reviewer may not be the person 
who served as the engagement partner during either of the two audits 
preceding the audit subject to the EQR. (Registered firms that qualify 
for the exemption under Rule 2-01(c)(6)(ii) of Regulation S-X, 17 CFR 
210.2-01(c)(6)(ii), are exempt from this requirement.) \55\
---------------------------------------------------------------------------

    \55\ See paragraph 8 of AS No. 7.
---------------------------------------------------------------------------

ASB

    SQCS No. 7 requires an auditing firm to establish the engagement 
quality reviewer qualifications, including those related to experience, 
authority, and objectivity.\56\ SQCS No. 7 describes the engagement 
quality reviewer as a partner, other person in the firm, qualified 
external person, or a team made up of such individuals, none of whom is 
part of the engagement team, with sufficient and appropriate experience 
and authority to perform the EQR.\57\ According to SQCS No. 7, what 
constitutes sufficient and appropriate technical experience, and 
authority depends on the circumstances of the engagement.\58\
---------------------------------------------------------------------------

    \56\ See paragraphs 92-94 of SQCS No. 7.
    \57\ See paragraph 5.e of SQCS No. 7.
    \58\ See paragraph 93 of SQCS No. 7.
---------------------------------------------------------------------------

    SQCS No. 7 does not include a ``cooling-off'' period, or a 
requirement for the reviewer to be an associated person of a registered 
public accounting firm.
    Similar to AS No. 7, SQCS No. 7 requires that the firm establish 
policies and procedures designed to maintain the objectivity of the 
reviewer, and that such policies and procedures provide that the 
reviewer should satisfy the independence requirements relating to the 
engagements reviewed.\59\ Unlike AS No. 7, SQCS No. 7 does not provide 
a specific direction on maintaining objectivity. Instead, SQCS No. 7 
provides examples of policies and procedures for maintaining the 
objectivity of the reviewer.\60\
---------------------------------------------------------------------------

    \59\ See paragraph 94 of SQCS No. 7.
    \60\ See paragraph 95 of SQCS No. 7.
---------------------------------------------------------------------------

IAASB

    ISQC 1 requires an auditing firm to establish the engagement 
quality reviewer qualification requirements, including those related to 
experience, authority, and objectivity.\61\ The engagement quality 
reviewer is described as a partner, other person in the firm, suitably 
qualified external person, or a team made up of such individuals, none 
of whom is part of the engagement team, with sufficient and appropriate 
experience and authority to objectively evaluate the significant 
judgments the engagement team made and the conclusions it reached in 
formulating the report.\62\ The application materials in ISQC 1 state 
that what constitutes sufficient and appropriate technical expertise, 
experience and authority depends on the circumstances of the 
engagement.\63\
---------------------------------------------------------------------------

    \61\ See paragraphs 39 and 40 of ISQC 1.
    \62\ See paragraph 12(e) of ISQC 1; paragraph 7(c) of ISA 220.
    \63\ See paragraph A47 of the Application and Other Explanatory 
Materials of ISQC 1.
---------------------------------------------------------------------------

    ISQC 1 and ISA 220 do not include reviewer independence or 
``cooling-off'' requirements, or a requirement for the reviewer to be 
an associated person of a registered public accounting firm.
    Similar to AS No. 7, ISQC 1 requires that the firm establish 
policies and procedures designed to maintain the objectivity of the 
reviewer.\64\ Unlike AS No. 7, the IAASB standards do not provide 
specific direction on maintaining objectivity. Instead, the application 
materials of ISQC 1 discuss policies and procedures for maintaining the 
objectivity of the reviewer.\65\
---------------------------------------------------------------------------

    \64\ See paragraph 40 of ISQC 1.
    \65\ See paragraph A49 of the Application and Other Explanatory 
Materials of ISQC 1.
---------------------------------------------------------------------------

    Engagement Quality Review for an Audit:

Engagement Quality Review Process

PCAOB

    Similar to the standards of the ASB and IAASB, AS No. 7 requires 
the reviewer to evaluate the significant judgments made and the related 
conclusions reached by the engagement team in forming the overall 
conclusion on the engagement and in preparing the engagement report; 
and to carry out the review through discussions with those performing 
the engagement and the review of documentation.\66\
---------------------------------------------------------------------------

    \66\ See paragraph 9 of AS No. 7.
---------------------------------------------------------------------------

    Further, AS No. 7 specifically requires the reviewer, among other 
things, to evaluate:

-- The significant judgments that relate to engagement planning; \67\
---------------------------------------------------------------------------

    \67\ See paragraph 10.a of AS No. 7.
---------------------------------------------------------------------------

-- The engagement team's assessment of and audit responses to 
significant risks, including fraud risks; \68\ and
---------------------------------------------------------------------------

    \68\ See paragraph 10.b of AS No. 7.
---------------------------------------------------------------------------

-- The significant judgments made about identified misstatements and 
control deficiencies.\69\

    \69\ See paragraph 10.c of AS No. 7.
---------------------------------------------------------------------------

    Also, AS No. 7 contains a requirement, similar to a requirement for 
audits of listed entities in ISA 220, according to which the reviewer, 
based on the procedures required by the standard, should evaluate 
whether appropriate consultations have taken place on difficult or 
contentious matters, and review the documentation, including 
conclusions, of such consultations.\70\
---------------------------------------------------------------------------

    \70\ See paragraph 10.h of AS No. 7.
---------------------------------------------------------------------------

    According to PCAOB Rule 3520, Auditor Independence, ``[a] 
registered

[[Page 57369]]

public accounting firm and its associated persons must be independent 
of the firm's audit client throughout the audit and professional 
engagement period.'' Because of the importance of compliance with PCAOB 
and SEC independence requirements, AS No. 7 requires the reviewer to 
review the engagement team's evaluation of the firm's independence in 
relation to the engagement.\71\
---------------------------------------------------------------------------

    \71\ See paragraph 10.d of AS No. 7.
---------------------------------------------------------------------------

    In 2004, the Board adopted Auditing Standard No. 3, Audit 
Documentation (``AS No. 3''). According to paragraph 13 of AS No. 3, 
the auditor must identify all significant findings or issues in an 
engagement completion document. AS No. 7 requires the reviewer to 
review the engagement completion document and confirm with the person 
who has overall responsibility for the engagement that there are no 
significant unresolved matters.\72\
---------------------------------------------------------------------------

    \72\ See paragraph 10.e of AS No. 7.
---------------------------------------------------------------------------

    Similar to the standards of the ASB and IAASB, AS No. 7 requires 
the reviewer to review the financial statements and the related 
engagement report.\73\ Additionally, because an integrated audit 
includes an audit of internal control over financial reporting,\74\ AS 
No. 7 requires the reviewer to review management's report on internal 
control.\75\
---------------------------------------------------------------------------

    \73\ See paragraph 10.f of AS No. 7.
    \74\ PCAOB Auditing Standard No. 5, An Audit of Internal Control 
Over Financial Reporting That Is Integrated with An Audit of 
Financial Statements establishes requirements and provides direction 
that apply when an auditor is engaged to perform an audit of 
management's assessment of the effectiveness of internal control 
over financial reporting.
    \75\ See paragraph 10.f of AS No. 7.
---------------------------------------------------------------------------

    An issuer may publish various documents that contain information in 
addition to audited financial statements and the auditor's report 
thereon. The auditor is required to read the other information and 
consider whether such information, or the manner of its presentation, 
is materially inconsistent with information, or the manner of its 
presentation, appearing in the financial statements.\76\ Accordingly, 
AS No. 7 requires the reviewer to read other information in documents 
containing the financial statements to be filed with the SEC and 
evaluate whether the engagement team has taken appropriate action with 
respect to any material inconsistencies with the financial statements 
or material misstatements of fact of which the engagement quality 
reviewer is aware.\77\
---------------------------------------------------------------------------

    \76\ See AU sec. 550, Other Information in Documents Containing 
Audited Financial Statements.
    \77\ See paragraph 10.g of AS No. 7.
---------------------------------------------------------------------------

    Finally, because of the importance to the audit process of 
effective communication between the auditor and those charged with 
governance, AS No. 7 requires the reviewer, based on the procedures 
required by the standard, to evaluate whether appropriate matters have 
been communicated, or identified for communication, to the audit 
committee, management, and other parties, such as regulatory 
bodies.\78\
---------------------------------------------------------------------------

    \78\ See paragraph 10.i of AS No. 7.
---------------------------------------------------------------------------

ASB

    Similar to AS No. 7, SQCS No. 7 requires that the EQR procedures 
include an objective evaluation of the significant judgments made by 
the engagement team and the conclusions reached in formulating the 
report.\79\ The EQR performed in accordance with SQCS No. 7 should 
include: reading the financial statements or other subject matter 
information and the report and considering whether the report is 
appropriate; review of selected documentation; and a discussion with 
the engagement partner regarding significant findings and issues.\80\
---------------------------------------------------------------------------

    \79\ See paragraph 85 of SQCS No. 7.
    \80\ See paragraphs 86 and 87 of SQCS No. 7.
---------------------------------------------------------------------------

    In addition to the required procedures summarized in the preceding 
paragraph, an EQR performed in accordance with SQCS No. 7 may include 
consideration of certain other matters, examples of which are provided 
in the standard. SQCS No. 7 also provides examples of significant 
judgments that could be made by the engagement team.\81\
---------------------------------------------------------------------------

    \81\ See paragraphs 88 and 89 of SQCS No. 7.
---------------------------------------------------------------------------

IAASB

    The EQR procedures required by the standards of the IAASB are 
similar to those required by the ASB.\82\ Additionally, for audits of 
listed entities, the IAASB standards require the reviewer to consider: 
the engagement team's evaluation of the firm's independence in relation 
to the engagement; and whether appropriate consultation has taken place 
on matters involving differences of opinion or other difficult or 
contentious matters, and the conclusions arising from those 
consultations.\83\
---------------------------------------------------------------------------

    \82\ See paragraph 37 of ISQC 1; paragraph 20 of ISA 220.
    \83\ See paragraphs 38(a) and 38(b) of ISQC 1; paragraphs 21(a) 
and 21(b) of ISA 220.
---------------------------------------------------------------------------

Evaluation of Engagement Documentation

PCAOB

    AS No. 7 includes a documentation review requirement that is 
similar to the requirement for audits of listed entities in the IAASB 
standards. According to AS No. 7, the reviewer should evaluate whether 
the engagement documentation that he or she reviewed when performing 
the required EQR procedures indicates that the engagement team 
responded appropriately to significant risks and supports the 
conclusions reached by the engagement team with respect to the matters 
reviewed.\84\
---------------------------------------------------------------------------

    \84\ See paragraph 11 of AS No. 7.
---------------------------------------------------------------------------

ASB

    Unlike AS No. 7, SQCS No. 7 does not require the reviewer to 
evaluate whether the engagement documentation satisfies certain 
criteria. Instead, SQCS No. 7 states that an EQR may include 
consideration of whether working papers selected for review reflect the 
work performed in relation to the significant judgments and support the 
conclusions reached.\85\
---------------------------------------------------------------------------

    \85\ See paragraph 88 of SQCS No. 7.
---------------------------------------------------------------------------

IAASB

    Similar to AS No. 7, the IAASB standards require, for audits of 
financial statements of listed entities, that the reviewer consider 
whether audit documentation selected for review reflects the work 
performed in relation to the significant judgments and supports the 
conclusions reached.\86\
---------------------------------------------------------------------------

    \86\ See paragraph 38(c) of ISQC 1; paragraph 21(c) of ISA 220.
---------------------------------------------------------------------------

Concurring Approval of Issuance and Resolution of Differences of 
Opinion

PCAOB

    Under the Act,\87\ the Board's standard on EQR must require 
concurring approval of issuance of each audit report. AS No. 7 states 
that the engagement quality reviewer may provide concurring approval of 
issuance only if, after performing with due professional care the 
review required by the standard, he or she is not aware of a 
significant engagement deficiency.\88\ The firm may grant permission to 
the client to use the engagement report only after the engagement 
quality reviewer provides concurring approval of issuance.\89\
---------------------------------------------------------------------------

    \87\ See Section 103(a)(2)(A)(ii) of the Act.
    \88\ According to paragraph 12 of AS No. 7, ``A significant 
engagement deficiency in an audit exists when (1) the engagement 
team failed to obtain sufficient appropriate evidence in accordance 
with the standards of the PCAOB, (2) the engagement team reached an 
inappropriate overall conclusion on the subject matter of the 
engagement, (3) the engagement report is not appropriate in the 
circumstances, or (4) the firm is not independent of its client.''
    \89\ See paragraph 13 of AS No. 7.
---------------------------------------------------------------------------

    Unlike the standards of the ASB and IAASB, AS No. 7 does not 
include an

[[Page 57370]]

explicit provision for addressing differences of opinion. Firms may 
develop their own procedures for resolving such differences. 
Ultimately, however, under the standard, the reviewer may not provide 
concurring approval of issuance if there remains a significant 
engagement deficiency. If no concurring approval is provided, AS No. 7 
requires that the EQR documentation include information that identifies 
the reasons for not providing the approval.

ASB

    SQCS No. 7 does not include a requirement for the engagement 
quality reviewer to provide concurring approval of issuance. Instead, 
SQCS No. 7 requires the EQR be completed before the engagement report 
is released.\90\ According to SQCS No. 7, when the engagement quality 
reviewer makes recommendations that the engagement partner does not 
accept and the matter is not resolved to the reviewer's satisfaction, 
the firm's procedures for dealing with differences of opinion 
apply.\91\ The firm's policies and procedures should require that 
conclusions reached be documented and implemented, and the engagement 
report not be released until the matter, on which the difference of 
opinion has arisen, is resolved.\92\
---------------------------------------------------------------------------

    \90\ See paragraph 81 of SQCS No. 7.
    \91\ See paragraph 91 of SQCS No. 7.
    \92\ See paragraph 78 of SQCS No. 7.
---------------------------------------------------------------------------

IAASB

    The standards of the IAASB do not include a requirement for the 
engagement quality reviewer to provide concurring approval of issuance. 
Instead, the IAASB standards require that the engagement partner should 
not date the auditor's report until the completion of the EQR.\93\ If 
differences of opinion arise between the engagement partner and the 
engagement quality reviewer, ISA 220 requires the engagement team to 
follow the firm's policies and procedures for dealing with and 
resolving differences of opinion.\94\ ISQC 1 requires the firm to 
establish policies and procedures for dealing with and resolving 
differences of opinion between the engagement partner and the 
engagement quality reviewer. Such policies and procedures shall require 
that conclusions reached be documented and implemented, and the report 
not be dated until the matter is resolved.\95\
---------------------------------------------------------------------------

    \93\ See paragraph 36 of ISQC 1; paragraph 19(c) of ISA 220.
    \94\ See paragraph 22 of ISA 220.
    \95\ See paragraphs 43-44 of ISQC 1.
---------------------------------------------------------------------------

Documentation of an EQR

PCAOB

    Because of deficiencies in the documentation of concurring reviews, 
the Board decided to strengthen the existing documentation 
requirements. AS No. 7 requires that documentation of an EQR should 
contain sufficient information to enable an experienced auditor, having 
no previous connection with the engagement, to understand the 
procedures performed by the engagement quality reviewer, and others who 
assisted the reviewer, to comply with the provisions of the standard, 
including information that identifies: The engagement quality reviewer, 
and others who assisted the reviewer; the documents reviewed by the 
engagement quality reviewer and others who assisted the reviewer; and 
the date the engagement quality reviewer provided concurring approval 
of issuance or, if no concurring approval of issuance was provided, the 
reasons for not providing the approval.\96\
---------------------------------------------------------------------------

    \96\ See paragraph 19 of AS No. 7.
---------------------------------------------------------------------------

    Unlike the standards of the ASB or the IAASB, AS No. 7 requires 
that the documentation of an EQR be included in the engagement 
documentation and provides requirements related to retention of and 
subsequent changes to the EQR documentation.\97\
---------------------------------------------------------------------------

    \97\ See paragraphs 20-21 of AS No. 7.
---------------------------------------------------------------------------

ASB

    According to SQCS No. 7, the documentation of an EQR should state 
that the procedures required by the firm's policies on EQR have been 
performed, the EQR has been completed before the report is released, 
and the reviewer is not aware of any unresolved matters that would 
cause the reviewer to believe that the significant judgments the 
engagement team made and the conclusions they reached were not 
appropriate.\98\
---------------------------------------------------------------------------

    \98\ See paragraph 99 of SQCS No. 7.
---------------------------------------------------------------------------

    SQCS No. 7 requires that the firm should: Establish procedures 
designed to maintain the confidentiality, safe custody, integrity, 
accessibility, and retrievability of engagement documentation; and 
establish policies and procedures for the retention of engagement 
documentation for a period sufficient to meet the needs of the firm, 
professional standards, laws, and regulations.\99\
---------------------------------------------------------------------------

    \99\ See paragraphs 63-71 of SQCS No. 7.
---------------------------------------------------------------------------

IAASB

    The engagement quality reviewer is required to document that the 
procedures required by the firm's policies on the EQR have been 
performed, the EQR has been completed on or before the date of the 
auditor's report, and the reviewer is not aware of any unresolved 
matters that would cause the reviewer to believe that the significant 
judgments the engagement team made and the conclusions they reached 
were not appropriate.\100\
---------------------------------------------------------------------------

    \100\ See paragraph 42 of ISQC 1; paragraph 25 of ISA 220.
---------------------------------------------------------------------------

    ISQC 1 requires that the firm should establish policies and 
procedures related to the completion of the assembly of final 
engagement files; confidentiality, safe custody, integrity, 
accessibility and retrievability of engagement documentation; and 
retention of engagement documentation.\101\
---------------------------------------------------------------------------

    \101\ See paragraphs 45-47 of ISQC 1.
---------------------------------------------------------------------------

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

    Within 75 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 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 rule 
is consistent with the requirements of Title I of the Act. Comments may 
be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/pcaob.shtml); or
     Send an e-mail to: rule-comments@sec.gov. Please include 
File Number PCAOB-2009-02 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number PCAOB-2009-02. This file 
number should be included on the

[[Page 57371]]

subject line if e-mail 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 Internet Web site 
(http://www.sec.gov/rules/pcaob/shtml). Copies of the submission, all 
subsequent amendments, all written statements with respect to the 
proposed rule that are filed with the Commission, and all written 
communications relating to the proposed rule 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 
inspection and copying in the Commission's Public Reference Room, 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; we do not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File No. PCAOB-
2009-02 and should be submitted on or before November 27, 2009.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-26659 Filed 11-4-09; 8:45 am]

BILLING CODE 8011-01-P