Friday, July 15, 2011

PCAOB Proposes Two Standards For (1) Broker-Dealers and (2) All Issuers

Earlier this week, the Public Company Accounting Oversight Board proposed two auditing standards, one relating to broker-dealer audits, and another which relates to all auditing supplemental information accompanying financial statements of all issuers (not just broker-dealers). The two proposals are:

BROKER DEALER AUDITS: Proposed Standards for Attestation Engagements Related to Broker and Dealer Compliance or Exemption Reports Required by the U.S. Securities and Exchange Commission and Related Amendments to PCAOB Standards , (see also statements of PCAOB Board Members on this proposal), and

AUDITS OF ALL ISSUERS: Proposed Auditing Standard on Auditing Supplemental Information Accompanying Audited Financial Statements and Related Amendments to PCAOB Standards (see also statements of PCAOB Board Members on this proposal)

Scope and Objective of Proposal on Auditing Supplemental Information
As described in the PCAOB’s press release, the proposal on auditing supplemental information would:


  • supersede the [PCAOB] Board's auditing standard, AU sec. 551, Reporting on Information Accompanying the Basic Financial Statements in Auditor-Submitted Documents, and related amendments, and

  • establish the auditor's responsibilities when the financial statement auditor is engaged to audit and report on supplemental information that accompanies the audited financial statements.
Examples of such supplemental information include the supporting schedules that brokers and dealers are required to file with the SEC.


  • The proposed standard also would apply to certain supplemental information of issuers that is included in SEC filings.
Additionally, Section III of the proposing release states (footnotes omitted; reformatted for emphasis)


The proposed standard would apply when the auditor of the company's financial statements is engaged to audit and report on supplemental information that accompanies the audited financial statements. Such supplemental information
includes:


  • the supporting schedules prepared pursuant to SEC Rule 17a-5,

  • supplemental information required to be prepared pursuant to the rules and
    regulations of a regulatory body other than the SEC and included in an SEC
    filing, and information included in SEC filings that is ancillary to the audited financial statements, derived from the company's accounting books and records, and not otherwise required to be prepared pursuant to the rules and
    regulation of the SEC or another relevant regulatory body.
The auditor's standard report includes an opinion on the financial statements.


  • Historically, when auditors reported on supplemental information, they often
    expressed their opinions on the supplemental information "in relation to" the
    financial statements as a whole. Audit procedures regarding that
    supplemental information generally have been performed in conjunction with the audit of the financial statements.

  • Indeed, the auditor's report on supplemental information currently required
    under AU sec. 551 is rooted in the concept that the supplemental information is
    presented in relation to the financial statements as a whole.

  • The proposed standard retains the existing "in relation to" language in the
    auditor's report.

  • The proposed standard establishes procedural and reporting responsibilities
    for the auditor regarding supplemental information accompanying financial
    statements. The proposed standard enhances existing PCAOB standards by:

  • Requiring the auditor to perform certain audit procedures to test and
    evaluate the supplemental information, and

  • Establishing requirements that promote enhanced coordination between the
    work performed on the supplemental information with work performed on the
    financial statement audit and other engagements, such as a compliance
    attestation engagement for brokers and dealers.

  • The proposed standard would not apply to schedules prepared pursuant to SEC
    Regulation S-X, 17 CFR § 210 because those schedules are deemed to be part of
    the financial statements.

  • Appendix 3 in the proposing release “describes how the proposed standard and
    related amendments would change the requirements in existing PCAOB auditing standards.”
Effective Date
The proposing release states: “The Board expects that the proposed standard would beeffective for fiscal years ending on or after September 15, 2012, subject to approval by the SEC.”

Comment Deadline
The comment deadline on both of the above proposals is September 12.

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