Federal Register, Volume 69 Issue 138 (Tuesday, July 20, 2004)

[Federal Register Volume 69, Number 138 (Tuesday, July 20, 2004)]
[Notices]
[Pages 43468-43482]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16440]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50012; File No. PCAOB-2004-05]

Public Company Accounting Oversight Board; Notice of Filing of
Proposed Rule on Auditing Standard No. 3, Audit Documentation, and an
Amendment to Interim Auditing Standards--AU Sec. 543.12, Part of Audit
Performed by Other Independent Auditors

July 14, 2004.
Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 (the
``Act''), notice is hereby given that on June 18, 2004, the Public
Company Accounting Oversight Board (the ``Board'' or the ``PCAOB'')
filed with the Securities and Exchange Commission (the ``Commission''
or ``SEC'') the proposed rules described in Items I and II below, which
items have been prepared by the Board and are presented here in the
form submitted by the Board. The Commission is publishing this notice
to solicit comments on the proposed rules from interested persons. The
text of the proposed rules consist of (1) proposed Auditing Standard
No. 3, Audit Documentation and Appendix A, Background and Basis for
Conclusions, and (2) proposed Amendment to Interim Auditing Standard--
AU sec. 543.12, Part of Audit Performed by Other Independent Auditors.

[[Page 43469]]

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

On June 9, 2004, the Board adopted Auditing Standard No. 3, Audit
Documentation, and an amendment to interim auditing standards (``the
proposed rules''). The text of the proposed rules is as follows:

Auditing Standard No. 3--Audit Documentation

Introduction
1. This standard establishes general requirements for documentation
the auditor should prepare and retain in connection with engagements
conducted pursuant to the standards of the Public Company Accounting
Oversight Board (``PCAOB''). Such engagements include an audit of
financial statements, an audit of internal control over financial
reporting, and a review of interim financial information. This standard
does not replace specific documentation requirements of other standards
of the PCAOB.
Objectives of Audit Documentation
2. Audit documentation is the written record of the basis for the
auditor's conclusions that provides the support for the auditor's
representations, whether those representations are contained in the
auditor's report or otherwise. Audit documentation also facilitates the
planning, performance, and supervision of the engagement, and is the
basis for the review of the quality of the work because it provides the
reviewer with written documentation of the evidence supporting the
auditor's significant conclusions. Among other things, audit
documentation includes records of the planning and performance of the
work, the procedures performed, evidence obtained, and conclusions
reached by the auditor. Audit documentation also may be referred to as
work papers or working papers.

Note: An auditor's representations to a company's board of
directors or audit committee, stockholders, investors, or other
interested parties are usually included in the auditor's report
accompanying the financial statements of the company. The auditor
also might make oral representations to the company or others,
either on a voluntary basis or if necessary to comply with
professional standards, including in connection with an engagement
for which an auditor's report is not issued. For example, although
an auditor might not issue a report in connection with an engagement
to review interim financial information, he or she ordinarily would
make oral representations about the results of the review.

3. Audit documentation is reviewed by members of the engagement
team performing the work and might be reviewed by others. Reviewers
might include, for example:
a. Auditors who are new to an engagement and review the prior
year's documentation to understand the work performed as an aid in
planning and performing the current engagement.
b. Supervisory personnel who review documentation prepared by
assistants on the engagement.
c. Engagement supervisors and engagement quality reviewers who
review documentation to understand how the engagement team reached
significant conclusions and whether there is adequate evidential
support for those conclusions.
d. A successor auditor who reviews a predecessor auditor's audit
documentation.
e. Internal and external inspection teams that review documentation
to assess audit quality and compliance with auditing and related
professional practice standards; applicable laws, rules, and
regulations; and the auditor's own quality control policies.
f. Others, including advisors engaged by the audit committee or
representatives of a party to an acquisition.
Audit Documentation Requirement
4. The auditor must prepare audit documentation in connection with
each engagement conducted pursuant to the standards of the PCAOB. Audit
documentation should be prepared in sufficient detail to provide a
clear understanding of its purpose, source, and the conclusions
reached. Also, the documentation should be appropriately organized to
provide a clear link to the significant findings or issues.\1\ Examples
of audit documentation include memoranda, confirmations,
correspondence, schedules, audit programs, and letters of
representation. Audit documentation may be in the form of paper,
electronic files, or other media.
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\1\ See paragraph 12 of this standard for a description of
significant findings or issues.
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5. Because audit documentation is the written record that provides
the support for the representations in the auditor's report, it should:
a. Demonstrate that the engagement complied with the standards of
the PCAOB,
b. Support the basis for the auditor's conclusions concerning every
relevant financial statement assertion, and
c. Demonstrate that the underlying accounting records agreed or
reconciled with the financial statements.
6. The auditor must document the procedures performed, evidence
obtained, and conclusions reached with respect to relevant financial
statement assertions.\2\ Audit documentation must clearly demonstrate
that the work was in fact performed. This documentation requirement
applies to the work of all those who participate in the engagement as
well as to the work of specialists the auditor uses as evidential
matter in evaluating relevant financial statement assertions. Audit
documentation must contain sufficient information to enable an
experienced auditor, having no previous connection with the engagement:
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\2\ Relevant financial statement assertions are described in
paragraphs 68-70 of PCAOB Auditing Standard No. 2, An Audit of
Internal Control Over Financial Reporting Performed in Conjunction
with An Audit of Financial Statements.
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a. To understand the nature, timing, extent, and results of the
procedures performed, evidence obtained, and conclusions reached, and
b. To determine who performed the work and the date such work was
completed as well as the person who reviewed the work and the date of
such review.

Note: An 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.

7. In determining the nature and extent of the documentation for a
financial statement assertion, the auditor should consider the
following factors:
Nature of the auditing procedure;
Risk of material misstatement associated with the
assertion;
Extent of judgment required in performing the work and
evaluating the results, for example, accounting estimates require
greater judgment and commensurately more extensive documentation;
Significance of the evidence obtained to the assertion
being tested; and
Responsibility to document a conclusion not readily
determinable from the documentation of the procedures performed or
evidence obtained.
Application of these factors determines whether the nature and
extent of audit documentation is adequate.
8. In addition to the documentation necessary to support the
auditor's final conclusions, audit documentation must include
information the auditor has identified relating to significant findings
or issues that is inconsistent with or contradicts the auditor's final
conclusions. The relevant records to be

[[Page 43470]]

retained include, but are not limited to, procedures performed in
response to the information, and records documenting consultations on,
or resolutions of, differences in professional judgment among members
of the engagement team or between the engagement team and others
consulted.
9. If, after the documentation completion date (defined in
paragraph 15), the auditor becomes aware, as a result of a lack of
documentation or otherwise, that audit procedures may not have been
performed, evidence may not have been obtained, or appropriate
conclusions may not have been reached, the auditor must determine, and
if so demonstrate, that sufficient procedures were performed,
sufficient evidence was obtained, and appropriate conclusions were
reached with respect to the relevant financial statement assertions. To
accomplish this, the auditor must have persuasive other evidence. Oral
explanation alone does not constitute persuasive other evidence, but it
may be used to clarify other written evidence.
If the auditor determines and demonstrates that sufficient
procedures were performed, sufficient evidence was obtained, and
appropriate conclusions were reached, but that documentation thereof is
not adequate, then the auditor should consider what additional
documentation is needed. In preparing additional documentation, the
auditor should refer to paragraph 16.
If the auditor cannot determine or demonstrate that
sufficient procedures were performed, sufficient evidence was obtained,
or appropriate conclusions were reached, the auditor should comply with
the provisions of AU sec. 390, Consideration of Omitted Procedures
After the Report Date.
Documentation of Specific Matters
10. Documentation of auditing procedures that involve the
inspection of documents or confirmation, including tests of details,
tests of operating effectiveness of controls, and walkthroughs, should
include identification of the items inspected. Documentation of
auditing procedures related to the inspection of significant contracts
or agreements should include abstracts or copies of the documents.

Note: The identification of the items inspected may be satisfied
by indicating the source from which the items were selected and the
specific selection criteria, for example:

If an audit sample is selected from a population of
documents, the documentation should include identifying
characteristics (for example, the specific check numbers of the
items included in the sample).
If all items over a specific dollar amount are selected
from a population of documents, the documentation need describe only
the scope and the identification of the population (for example, all
checks over $10,000 from the October disbursements journal).
If a systematic sample is selected from a population of
documents, the documentation need only provide an identification of
the source of the documents and an indication of the starting point
and the sampling interval (for example, a systematic sample of sales
invoices was selected from the sales journal for the period from
October 1 to December 31, starting with invoice number 452 and
selecting every 40th invoice).

11. Certain matters, such as auditor independence, staff training
and proficiency and client acceptance and retention, may be documented
in a central repository for the public accounting firm (``firm'') or in
the particular office participating in the engagement. If such matters
are documented in a central repository, the audit documentation of the
engagement should include a reference to the central repository.
Documentation of matters specific to a particular engagement should be
included in the audit documentation of the pertinent engagement.
12. The auditor must document significant findings or issues,
actions taken to address them (including additional evidence obtained),
and the basis for the conclusions reached in connection with each
engagement. Significant findings or issues are substantive matters that
are important to the procedures performed, evidence obtained, or
conclusions reached, and include, but are not limited to, the
following:
a. Significant matters involving the selection, application, and
consistency of accounting principles, including related disclosures.
Significant matters include, but are not limited to, accounting for
complex or unusual transactions, accounting estimates, and
uncertainties as well as related management assumptions.
b. Results of auditing procedures that indicate a need for
significant modification of planned auditing procedures, the existence
of material misstatements, omissions in the financial statements, the
existence of significant deficiencies, or material weaknesses in
internal control over financial reporting.
c. Audit adjustments. For purposes of this standard, an audit
adjustment is a correction of a misstatement of the financial
statements that was or should have been proposed by the auditor,
whether or not recorded by management, that could, either individually
or when aggregated with other misstatements, have a material effect on
the company's financial statements.
d. Disagreements among members of the engagement team or with
others consulted on the engagement about final conclusions reached on
significant accounting or auditing matters.
e. Circumstances that cause significant difficulty in applying
auditing procedures.
f. Significant changes in the assessed level of audit risk for
particular audit areas and the auditor's response to those changes.
g. Any matters that could result in modification of the auditor's
report.
13. The auditor must identify all significant findings or issues in
an engagement completion document. This document may include either all
information necessary to understand the significant findings, issues or
cross-references, as appropriate, to other available supporting audit
documentation. This document, along with any documents cross-
referenced, should collectively be as specific as necessary in the
circumstances for a reviewer to gain a thorough understanding of the
significant findings or issues.

Note: The engagement completion document prepared in connection
with the annual audit should include documentation of significant
findings or issues identified during the review of interim financial
information.

Retention of and Subsequent Changes to Audit Documentation
14. The auditor must retain audit documentation for seven years
from the date the auditor grants permission to use the auditor's report
in connection with the issuance of the company's financial statements
(report release date), unless a longer period of time is required by
law. If a report is not issued in connection with an engagement, then
the audit documentation must be retained for seven years from the date
that fieldwork was substantially completed. If the auditor was unable
to complete the engagement, then the audit documentation must be
retained for seven years from the date the engagement ceased.
15. Prior to the report release date, the auditor must have
completed all necessary auditing procedures and obtained sufficient
evidence to support the representations in the auditor's report. A
complete and final set of audit documentation should be assembled for
retention as of a date not more than 45 days after the report release
date (documentation completion date). If a

[[Page 43471]]

report is not issued in connection with an engagement, then the
documentation completion date should not be more than 45 days from the
date that fieldwork was substantially completed. If the auditor was
unable to complete the engagement, then the documentation completion
date should not be more than 45 days from the date the engagement
ceased.
16. Circumstances may require additions to audit documentation
after the report release date. Audit documentation must not be deleted
or discarded after the documentation completion date, however,
information may be added. Any documentation added must indicate the
date the information was added, the name of the person who prepared the
additional documentation, and the reason for adding it.
17. Other standards require the auditor to perform procedures
subsequent to the report release date in certain circumstances. For
example, in accordance with AU sec. 711, Filings Under Federal
Securities Statutes, auditors are required to perform certain
procedures up to the effective date of a registration statement.\3\ The
auditor must identify and document any additions to audit documentation
as a result of these procedures consistent with the previous paragraph.
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\3\ Section 11 of the Securities Act of 1933 makes specific
mention of the auditor's responsibility as an expert when the
auditor's report is included in a registration statement under the
1933 Act.
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18. The office of the firm issuing the auditor's report is
responsible for ensuring that all audit documentation sufficient to
meet the requirements of paragraphs 4-13 of this standard is prepared
and retained. Audit documentation supporting the work performed by
other auditors (including auditors associated with other offices of the
firm, affiliated firms, or non-affiliated firms), must be retained by
or be accessible to the office issuing the auditor's report.\4\
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\4\ Section 106(b) of the Sarbanes-Oxley Act of 2002 imposes
certain requirements concerning production of the work papers of a
foreign public accounting firm on whose opinion or services the
auditor relies. Compliance with this standard does not substitute
for compliance with Section 106(b) or any other applicable law.
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19. In addition, the office issuing the auditor's report must
obtain, and review and retain, prior to the report release date, the
following documentation related to the work performed by other auditors
(including auditors associated with other offices of the firm,
affiliated firms, or non-affiliated firms):
a. An engagement completion document consistent with paragraphs 12
and 13.

Note: This engagement completion document should include all
cross-referenced, supporting audit documentation.

b. A list of significant fraud risk factors, the auditor's
response, and the results of the auditor's related procedures.
c. Sufficient information relating to any significant findings or
issues that are inconsistent with or contradict the final conclusions,
as described in paragraph 8.
d. Any findings affecting the consolidating or combining of
accounts in the consolidated financial statements.
e. Sufficient information to enable the office issuing the
auditor's report to agree or to reconcile the financial statement
amounts audited by the other auditor to the information underlying the
consolidated financial statements.
f. A schedule of audit adjustments, including a description of the
nature and cause of each misstatement.
g. All significant deficiencies and material weaknesses in internal
control over financial reporting, including a clear distinction between
those two categories.
h. Letters of representations from management.
i. All matters to be communicated to the audit committee.
If the auditor decides to make reference in his or her report to
the audit of the other auditor, however, the auditor issuing the report
need not perform the procedures in this paragraph and, instead, should
refer to AU sec. 543, Part of Audit Performed by Other Independent
Auditors.
20. The auditor also might be required to maintain documentation in
addition to that required by this standard.\5\
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\5\ For example, the SEC requires auditors to retain, in
addition to documentation required by this standard, memoranda,
correspondence, communications (for example, electronic mail), other
documents, and records (in the form of paper, electronic, or other
media) that are created, sent, or received in connection with an
engagement conducted in accordance with auditing and related
professional practice standards and that contain conclusions,
opinions, analyses, or data related to the engagement. (Retention of
Audit and Review Records, 17 CFR 210.2-06, effective for audits or
reviews completed on or after October 31, 2003.)
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Effective Date
21. This standard is effective for audits of financial statements,
which may include an audit of internal control over financial
reporting, with respect to fiscal years ending on or after [the later
of November 15, 2004, or 30 days after the date of approval of this
standard by the SEC]. For other engagements conducted pursuant to the
standards of the PCAOB, including reviews of interim financial
information, this standard takes effect beginning with the first
quarter ending after the first financial statement audit covered by
this standard.

Appendix A--Background and Basis for Conclusions

Table of Contents Paragraph

Introduction............................................... A1-A2
Background................................................. A3-A7
Objective of This Standard................................. A8-A10
Audit Programs............................................. A11-A12
Reviewability Standard..................................... A13-A19
Audit Documentation Must Demonstrate That the Work was Done A20-A33
Audit Adjustments.......................................... A34-A36
Information That is Inconsistent with or Contradicts the A37-A38
Auditor's Final Conclusions...............................
Retention of Audit Documentation........................... A39-A41
Section 802 of Sarbanes-Oxley and the SEC's Implementing A42-A50
Rule......................................................
Changes to Audit Documentation............................. A51-A59
Multi-Location Audits and Using the Work of Other Auditors. A60-A67
Effective Date............................................. A68-A70
Reference to Audit Documentation As the Property of the A71
Auditor...................................................
Confidential Client Information............................ A72

[[Page 43472]]

Introduction

A1. This appendix summarizes considerations that the Public
Company Accounting Oversight Board (``PCAOB'' or ``Board'') deemed
significant in developing this standard. This appendix includes
reasons for accepting certain views and rejecting others.
A2. Section 103(a)(2)(A)(i) of the Sarbanes-Oxley Act of 2002
(the ``Act'') directs the Board to establish auditing standards that
require registered public accounting firms to prepare and maintain,
for at least seven years, audit documentation ``in sufficient detail
to support the conclusions reached'' in the auditor's report.
Accordingly, the Board has made audit documentation a priority.

Background

A3. Auditors support the conclusions in their reports with a
work product called audit documentation, also referred to as working
papers or work papers. Audit documentation supports the basis for
the conclusions in the auditor's report. Audit documentation also
facilitates the planning, performance, and supervision of the
engagement and provides the basis for the review of the quality of
the work by providing the reviewer with written documentation of the
evidence supporting the auditor's significant conclusions. Examples
of audit documentation include memoranda, confirmations,
correspondence, schedules, audit programs, and letters of
representation. Audit documentation may be in the form of paper,
electronic files, or other media.
A4. The Board's standard on audit documentation is one of the
fundamental building blocks on which both the integrity of audits
and the Board's oversight will rest. The Board believes that the
quality and integrity of an audit depends, in large part, on the
existence of a complete and understandable record of the work the
auditor performed, the conclusions the auditor reached, and the
evidence the auditor obtained that supports those conclusions.
Meaningful reviews, whether by the Board in the context of its
inspections or through other reviews, such as internal quality
control reviews, would be difficult or impossible without adequate
documentation. Clear and comprehensive audit documentation is
essential to enhance the quality of the audit and, at the same time,
to allow the Board to fulfill its mandate to inspect registered
public accounting firms to assess the degree of compliance of those
firms with applicable standards and laws.
A5. The Board began a standards-development project on audit
documentation by convening a public roundtable discussion on
September 29, 2003, to discuss issues and hear views on the subject.
Participants at the roundtable included representatives from public
companies, public accounting firms, investor groups, and regulatory
organizations.
A6. Prior to this roundtable discussion, the Board prepared and
released a briefing paper on audit documentation that posed several
questions to help identify the objectives--and the appropriate scope
and form--of audit documentation. In addition, the Board asked
participants to address specific issues in practice relating to,
among other things, changes in audit documentation after release of
the audit report, essential elements and the appropriate amount of
detail of audit documentation, the effect on audit documentation of
a principal auditor's decision to use the work of other auditors,
and retention of audit documentation. Based on comments made at the
roundtable, advice from the Board's staff, and other input the Board
received, the Board determined that the pre-existing standard on
audit documentation, Statement on Auditing Standards (``SAS'') No.
96, Audit Documentation, was insufficient for the Board to discharge
appropriately its standard-setting obligations under Section 103(a)
of the Act. In response, the Board developed and issued for comment,
on November 17, 2003, a proposed auditing standard titled, Audit
Documentation.
A7. The Board received 38 comment letters from a variety of
interested parties, including auditors, regulators, professional
associations, government agencies, and others. Those comments led to
some changes in the requirements of the standard. Also, other
changes made the requirements easier to understand. The following
sections summarize significant views expressed in those comment
letters and the Board's responses to those comments.

Objective of This Standard

A8. The objective of this standard is to improve audit quality
and enhance public confidence in the quality of auditing. Good audit
documentation improves the quality of the work performed in many
ways, including, for example:
Providing a record of actual work performed, which
provides assurance that the auditor accomplishes the planned
objectives.
Facilitating the reviews performed by supervisors,
managers, engagement partners, engagement quality reviewers,\1\ and
PCAOB inspectors.
Improving effectiveness and efficiency by reducing
time-consuming, and sometimes inaccurate, oral explanations of what
was done (or not done).
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\1\ The engagement quality reviewer is referred to as the
concurring partner reviewer in the membership requirements of the
AICPA SEC Practice Section. The Board adopted certain of these
membership requirements as they existed on April 16, 2003. Some
firms also may refer to this designated reviewer as the second
partner reviewer.
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A9. The documentation requirements in this standard should
result in more effective and efficient oversight of registered
public accounting firms and associated persons, thereby improving
audit quality and enhancing investor confidence.
A10. Inadequate audit documentation diminishes audit quality on
many levels. First, if audit documentation does not exist for a
particular procedure or conclusion related to a significant matter,
it casts doubt as to whether the necessary work was done. If the
work was not documented, then it becomes difficult for the
engagement team, and others, to know what was done, what conclusions
were reached, and how those conclusions were reached. In addition,
good audit documentation is very important in an environment in
which engagement staff changes or rotates. Due to engagement staff
turnover, knowledgeable staff on an engagement may not be available
for the next engagement.

Audit Programs

A11. Several commenters suggested that audit documentation
should include audit programs. Audit programs were specifically
mentioned in SAS No. 96 as a form of audit documentation.
A12. The Board accepted this recommendation, and paragraph 4 in
the final standard includes audit programs as an example of
documentation. Audit programs may provide evidence of audit planning
as well as limited evidence of the execution of audit procedures,
but the Board believes that signed-off audit programs should
generally not be used as the sole documentation that a procedure was
performed, evidence was obtained, or a conclusion was reached. An
audit program aids in the conduct and supervision of an engagement,
but completed and initialed audit program steps should be supported
with proper documentation in the working papers.

Reviewability Standard

A13. The proposed standard would have adapted a standard of
reviewability from the U.S. General Accounting Office's (``GAO'')
documentation standard for government and other audits conducted in
accordance with generally accepted government auditing standards
(``GAGAS''). The GAO standard provides that ``Audit documentation
related to planning, conducting, and reporting on the audit should
contain sufficient information to enable an experienced auditor who
has had no previous connection with the audit to ascertain from the
audit documentation the evidence that supports the auditors'
significant judgments and conclusions.'' \2\ This requirement has
been important in the field of government auditing because
government audits have long been reviewed by GAO auditors who,
although experienced in auditing, do not participate in the actual
audits. Moreover, the Panel on Audit Effectiveness recommended that
sufficient, specific requirements for audit documentation be
established to enable public accounting firms' internal inspection
teams as well as others, including reviewers outside of the firms,
to assess the quality of engagement performance.\3\ Audits and
reviews of issuers' financial statements will now, under the Act, be
subject to review by PCAOB inspectors. Therefore, a documentation
standard that enables an inspector to understand the work that was
performed in an audit or review is appropriate.
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\2\ U.S. General Accounting Office, Government Auditing
Standards, ``Field Work Standards for Financial Audits'' (2003
Revision), paragraph 4.22.
\3\ Panel on Audit Effectiveness, Report and Recommendations
(Stamford, Ct: Public Oversight Board, August 31, 2000).
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A14. Accordingly, the Board's proposed standard would have
required that audit documentation contain sufficient information

[[Page 43473]]

to enable an experienced auditor, having no previous connection with
the engagement, to understand the work that was performed, the name
of the person(s) who performed it, the date it was completed, and
the conclusions reached. This experienced auditor also should have
been able to determine who reviewed the work and the date of such
review.
A15. Some commenters suggested that the final standard more
specifically describe the qualifications of an experienced auditor.
These commenters took the position that only an engagement partner
with significant years of experience would have the experience
necessary to be able to understand all the work that was performed
and the conclusions that were reached. One commenter suggested that
an auditor who is reviewing audit documentation should have
experience and knowledge consistent with the experience and
knowledge that the auditor performing the audit would be required to
possess, including knowledge of the current accounting, auditing,
and financial reporting issues of the company's industry. Another
said that the characteristics defining an experienced auditor should
be consistent with those expected of the auditor with final
responsibility for the engagement.
A16. After considering these comments, the Board has provided
additional specificity about the meaning of the term, experienced
auditor. The standard now describes an experienced auditor as one
who 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.
A17. Some commenters also suggested that the standard, as
proposed, did not allow for the use of professional judgment. These
commenters pointed to the omission of a statement about professional
judgment found in paragraph 4.23 of GAGAS that states, ``The
quantity, type, and content of audit documentation are a matter of
the auditors' professional judgment.'' A nearly identical statement
was found in the interim auditing standard, SAS No. 96, Audit
Documentation.
A18. Auditors exercise professional judgment in nearly every
aspect of planning, performing, and reporting on an audit. Auditors
also exercise professional judgment in the documentation of an audit
and other engagements. An objective of this standard is to ensure
that auditors give proper consideration to the need to document
procedures performed, evidence obtained, and conclusions reached in
light of time and cost considerations in completing an engagement.
A19. Nothing in the standard precludes auditors from exercising
their professional judgment. Moreover, because professional judgment
might relate to any aspect of an audit, the Board does not believe
that an explicit reference to professional judgment is necessary
every time the use of professional judgment may be appropriate.

Audit Documentation Must Demonstrate That the Work Was Done

A20. A guiding principle of the proposed standard was that
auditors must document procedures performed, evidence obtained, and
conclusions reached. This principle is not new and was found in the
interim standard, SAS No. 96, Audit Documentation, which this
standard supersedes. Audit documentation also should demonstrate
compliance with the standards of the PCAOB and include justification
for any departures.
A21. The proposed standard would have adapted a provision in the
California Business and Professions Code which provides that if
documentation does not exist, then there is a rebuttable presumption
that the work had not been done.
A22. The objections to this proposal fell into two general
categories: the effect of the rebuttable presumption on legal
proceedings and the perceived impracticality of documenting every
conversation or conclusion that affected the engagement. Discussion
of these issues follows.

Rebuttable Presumption

A23. Commenters expressed concern about the effects of the
proposed language on regulatory or legal proceedings outside the
context of the PCAOB's oversight. They argued that the rebuttable
presumption might be understood to establish evidentiary rules for
use in judicial and administrative proceedings in other
jurisdictions.
A24. Some commenters also had concerns that oral explanation
alone would not constitute persuasive other evidence that work was
done, absent any documentation. Those commenters argued that not
allowing oral explanations when there was no documentation would
essentially make the presumption ``irrebuttable.'' Moreover, those
commenters argued that it was inappropriate for a professional
standard to predetermine for a court the relative value of evidence.
A25. The Board believes that complete audit documentation is
necessary for a quality audit or other engagement. The Board intends
the standard to require auditors to document procedures performed,
evidence obtained, and conclusions reached to improve the quality of
audits. The Board also intends that a deficiency in documentation is
a departure from the Board's standards. Thus, although the Board
removed the phrase rebuttable presumption, the Board continues to
stress, in paragraph 9 of the standard, that the auditor must have
persuasive other evidence that the procedures were performed,
evidence was obtained, and appropriate conclusions were reached with
respect to relevant financial statement assertions.
A26. The term should (presumptively mandatory responsibility)
was changed to must (unconditional responsibility) in paragraph 6 to
establish a higher threshold for the auditor. Auditors have an
unconditional requirement to document their work. Failure to
discharge an unconditional responsibility is a violation of the
standard and Rule 3100, which requires all registered public
accounting firms to adhere to the Board's auditing and related
professional practice standards in connection with an audit or
review of an issuer's financial statements.
A27. The Board also added two new paragraphs to the final
standard to explain the importance and associated responsibility of
performing the work and adequately documenting all work that was
performed. Paragraph 7 provides a list of factors the auditor should
consider in determining the nature and extent of documentation.
These factors should be considered by both the auditor in preparing
the documentation and the reviewer in evaluating the documentation.
A28. In paragraph 9 of this standard, if, after the
documentation completion date, as a result of a lack of
documentation or otherwise, it appears that audit procedures may not
have been performed, evidence may not have been obtained, or
appropriate conclusions may not have been reached, the auditor must
determine, and if so demonstrate, that sufficient procedures were
performed, sufficient evidence was obtained, and appropriate
conclusions were reached with respect to the relevant financial
statement assertions. In those circumstances, for example, during an
inspection by the Board or during the firm's internal quality
control review, the auditor is required to demonstrate with
persuasive other evidence that the procedures were performed, the
evidence was obtained, and appropriate conclusions were reached. In
this and similar contexts, oral explanation alone does not
constitute persuasive other evidence. However, oral evidence may be
used to clarify other written evidence.
A29. In addition, more reliable, objective evidence may be
required depending on the nature of the test and the objective the
auditor is trying to achieve. For example, if there is a high risk
of a material misstatement with respect to a particular assertion,
then the auditor should obtain and document sufficient procedures
for the auditor to conclude on the fairness of the assertion.

Impracticality

A30. Some commenters expressed concern that the proposed
standard could be construed or interpreted to require the auditor to
document every conversation held with company management or among
the engagement team members. Some commenters also argued that they
should not be required to document every conclusion, including
preliminary conclusions that were part of a thought process that may
have led them to a different conclusion, on the ground that this
would result in needless and costly work performed by the auditor.
Commenters also expressed concern that an unqualified requirement to
document procedures performed, evidence obtained, and conclusions
reached without allowing the use of auditor judgment would increase
the volume of documentation but not the quality. They stated that it
would be unnecessary, time-consuming, and potentially
counterproductive to require the auditor to make a written record of
everything he or she did.
A31. The Board's standard distinguishes between (1) an audit
procedure that must be documented and (2) a conversation with
company management or among the members of the engagement team.
Inquiries with management should be documented when an inquiry is
important to a particular

[[Page 43474]]

procedure. The inquiry could take place during planning,
performance, or reporting. The auditor need not document each
conversation that occurred.
A32. A final conclusion is an integral part of a working paper,
unless the working paper is only for informational purposes, such as
documentation of a discussion or a process. This standard does not
require that the auditor document each interim conclusion reached in
arriving at the risk assessments or final conclusions. Conclusions
reached early on during an audit may be based on incomplete
information or an incorrect understanding. Nevertheless, auditors
should document a final conclusion for every audit procedure
performed, if that conclusion is not readily apparent based on
documented results of the procedures.
A33. The Board also believes the reference to specialists is an
important element of paragraph 6. Specialists play a vital role in
audit engagements. For example, appraisers, actuaries, and
environmental consultants provide valuable data concerning asset
values, calculation assumptions, and loss reserves. When using the
work of a specialist, the auditor must ensure that the specialist's
work, as it relates to the audit objectives, also is adequately
documented. For example, if the auditor relies on the work of an
appraiser in obtaining the fair value of commercial property
available for sale, then the auditor must ensure the appraisal
report is adequately documented. Moreover, the term specialist in
this standard is intended to include any specialist the auditor
relies on in conducting the work, including those employed or
retained by the auditor or by the company.

Audit Adjustments

A34. Several commenters recommended that the definition of audit
adjustments in this proposed standard should be consistent with the
definition contained in AU sec. 380, Communication with Audit
Committees.
A35. Although the Board recognizes potential benefits of having
a uniform definition of the term audit adjustments, the Board does
not believe that the definition in AU sec. 380 is appropriate for
this documentation standard because that definition was intended for
communication with audit committees. The Board believes that the
definition should be broader so that the engagement partner,
engagement quality reviewer, and others can be aware of all proposed
corrections of misstatements, whether or not recorded by the entity,
of which the auditor is aware, that were or should have been
proposed based on the audit evidence.
A36. Adjustments that should have been proposed based on known
audit evidence are material misstatements that the auditor
identified but did not propose to management. Examples include
situations in which (1) the auditor identifies a material error but
does not propose an adjustment and (2) the auditor proposes an
adjustment in the working papers, but fails to note the adjustment
in the summary or schedule of proposed adjustments.

Information That Is Inconsistent With or Contradicts the Auditor's
Final Conclusions

A37. Paragraph .25 of AU sec. 326, Evidential Matter, states:
``In developing his or her opinion, the auditor should consider
relevant evidential matter regardless of whether it appears to
corroborate or to contradict the assertions in the financial
statements.'' Thus, during the conduct of an audit, the auditor
should consider all relevant evidential matter even though it might
contradict or be inconsistent with other conclusions. Audit
documentation must contain information or data relating to
significant findings or issues that are inconsistent with the
auditor's final conclusions on the relevant matter.
A38. Also, information that initially appears to be inconsistent
or contradictory, but is found to be incorrect or based on
incomplete information, need not be included in the final audit
documentation, provided that the apparent inconsistencies or
contradictions were satisfactorily resolved by obtaining complete
and correct information. In addition, with respect to differences in
professional judgment, auditors need not include in audit
documentation preliminary views based on incomplete information or
data.

Retention of Audit Documentation

A39. The proposed standard would have required an auditor to
retain audit documentation for seven years after completion of the
engagement, which is the minimum period permitted under Section
103(a)(2)(A)(i) of the Act. In addition, the proposed standard would
have added a new requirement that the audit documentation must be
assembled for retention within a reasonable period of time after the
auditor's report is released. Such reasonable period of time should
not exceed 45 days.
A40. In general, those commenting on this documentation
retention requirement did not have concerns with the time period of
45 days to assemble the working papers. However, some commenters
suggested the Board tie this 45-day requirement to the filing date
of the company's financial statements with the SEC. One commenter
recommended that the standard refer to the same trigger date for
initiating both the time period during which the auditor should
complete work paper assembly and the beginning of the seven-year
retention period.
A41. For consistency and practical implications, the Board
agreed that the standard should have the same date for the auditor
to start assembling the audit documentation and initiating the
seven-year retention period. The Board decided that the seven-year
retention period begins on the report release date, which is defined
as the date the auditor grants permission to use the auditor's
report in connection with the issuance of the company's financial
statements. In addition, auditors will have 45 days to assemble the
complete and final set of audit documentation, beginning on the
report release date. The Board believes that using the report
release date is preferable to using the filing date of the company's
financial statements, since the auditor has ultimate control over
granting permission to use his or her report. If an auditor's report
is not issued, then the audit documentation is to be retained for
seven years from the date that fieldwork was substantially
completed. If the auditor was unable to complete the engagement,
then the seven-year period begins when the work on the engagement
ceased.

Section 802 of Sarbanes-Oxley and the SEC's Implementing Rule

A42. Many commenters had concerns about the similarity in
language between the proposed standard and the SEC final rule
(issued in January 2003) on record retention, Retention of Records
Relevant to Audits and Reviews.\4\ Some commenters recommended that
the PCAOB undertake a project to identify and resolve all
differences between the proposed standard and the SEC's final rule.
These commenters also suggested that the Board include similar
language from the SEC final rule, Rule 2-06 of Regulation S-X, which
limits the requirement to retain some items.
---------------------------------------------------------------------------

\4\ SEC Regulation S-X, 17 CFR 210.2-06 (SEC Release No. 33-
8180, January 2003). (The final rule was effective in March 2003.)
---------------------------------------------------------------------------

Differences between Section 802 and This Standard

A43. The objective of the Board's standard is different from the
objective of the SEC's rule on record retention. The objective of
the Board's standard is to require auditors to create certain
documentation to enhance the quality of audit documentation, thereby
improving the quality of audits and other related engagements. The
records retention section of this standard, mandated by Section 103
of the Act, requires registered public accounting firms to ``prepare
and maintain for a period of not less than 7 years, audit work
papers, and other information related to any audit report, in
sufficient detail to support the conclusions reached in such
report.'' (emphasis added)
A44. In contrast, the focus of the SEC rule is to require
auditors to retain documents that the auditor does create, in order
that those documents will be available in the event of a regulatory
investigation or other proceeding. As stated in the release
accompanying the SEC's final rule (SEC Release No. 33-8180):
Section 802 of the Sarbanes-Oxley Act is intended to address the
destruction or fabrication of evidence and the preservation of
``financial and audit records.'' We are directed under that section
to promulgate rules related to the retention of records relevant to
the audits and reviews of financial statements that companies file
with the Commission.
A45. The SEC release further states, ``New rule 2-06 * * *
addresses the retention of documents relevant to enforcement of the
securities laws, Commission rules, and criminal laws.''
A46. Despite their different objectives, the proposed standard
and SEC Rule 2-06 use similar language in describing documentation
generated during an audit or review. Paragraph 4 of the proposed
standard stated that, ``Audit documentation ordinarily consists of
memoranda, correspondence,

[[Page 43475]]

schedules, and other documents created or obtained in connection
with the engagement and may be in the form of paper, electronic
files, or other media.'' Paragraph (a) of SEC Rule 2-06 describes
``records relevant to the audit or review'' that must be retained
as, (1) ``workpapers and other documents that form the basis of the
audit or review and (2) memoranda, correspondence, communications,
other documents, and records (including electronic records), which:
[a]re created, sent or received in connection with the audit or
review and [c]ontain conclusions, opinions, analyses, or financial
data related to the audit or review. * * *'' (numbering and emphasis
added).
A47. The SEC makes a distinction between the objectives of
categories (1) and (2). Category (1) includes audit documentation.
Documentation to be retained according to the Board's standard
clearly falls within category (1). Items in category (2) include
``desk files'' which are more than ``what traditionally has been
thought of as auditor's `workpapers'.'' The SEC's rule requiring
auditors to retain items in category (2) have the principal purpose
of facilitating enforcement of securities laws, SEC rules, and
criminal laws. This is not an objective of the Board's standard.
According to SEC Rule 2-06, items in category (2) are limited to
those which: (a) Are created, sent or received in connection with
the audit or review, and (b) contain conclusions, opinions,
analyses, or financial data related to the audit or review. The
limitations, (a) and (b), do not apply to category (1).
A48. Paragraph 4 of the final standard deletes the reference in
the proposed standard to ``other documents created or obtained in
connection with the engagement.'' The Board decided to keep
``correspondence'' in the standard because correspondence can be
valid audit evidence. Paragraph 20 of the standard reminds the
auditor that he or she may be required to maintain documentation in
addition to that required by this standard.

Significant Matters and Significant Findings or Issues

A49. Some commenters asked how the term significant matters, in
Rule 2-06, relates to the term significant findings or issues in the
Board's standard. The SEC's release accompanying its final Rule 2-06
states that ``* * * significant matters is intended to refer to the
documentation of substantive matters that are important to the audit
or review process or to the financial statements of the issuer. * *
*'' This is very similar to the term significant findings or issues
contained in paragraph 12 of the Board's standard which requires
auditors to document significant findings or issues, actions taken
to address them (including additional evidence obtained), and the
basis for the conclusions reached. Examples of significant findings
or issues are provided in the standard.
A50. Based on the explanation in the SEC's final rule and
accompanying release, the Board believes that significant matters
are included in the meaning of significant findings or issues in the
Board's standard. The Board is of the view that significant findings
or issues is more comprehensive and provides more clarity than
significant matters and, therefore, has not changed the wording in
the final standard.

Changes to Audit Documentation

A51. The proposed standard would have required that any changes
to the working papers after completion of the engagement be
documented without deleting or discarding the original documents.
Such documentation must indicate the date the information was added,
by whom it was added, and the reason for adding it.
A52. One commenter recommended that the Board provide examples
of auditing procedures that should be performed before the report
release date and procedures that may be performed after the report
release date. Some commenters also requested clarification about the
treatment of changes to documentation that occurred after the
completion of the engagement but before the report release date.
Many commenters recommended that the Board more specifically
describe post-issuance procedures. The Board generally agreed with
these comments.
A53. The final standard includes two important dates for the
preparation of audit documentation: (1) The report release date and
(2) the documentation completion date.
Prior to the report release date, the auditor must have
completed all necessary auditing procedures, including clearing
review notes and providing support for all final conclusions. In
addition, the auditor must have obtained sufficient evidence to
support the representations in the auditor's reports before the
report release date.
After the report release date and prior to the
documentation completion date, the auditor has 45 calendar days in
which to assemble the documentation.
A54. During the audit, audit documentation may be superseded for
various reasons. Often, during the review process, reviewers
annotate the documentation with clarifications, questions, and
edits. The completion process often involves revising the
documentation electronically and generating a new copy. The SEC's
final rule on record retention, Retention of Records Relevant to
Audits and Reviews,\5\ explains that the SEC rule does not require
that the following documents generally need to be retained:
Superseded drafts of memoranda, financial statements or regulatory
filings; notes on superseded drafts of memoranda, financial
statements or regulatory filings that reflect incomplete or
preliminary thinking; previous copies of workpapers that have been
corrected for typographical errors or errors due to training of new
employees; and duplicates of documents. This standard also does not
require auditors to retain such documents as a general matter.
---------------------------------------------------------------------------

\5\ See footnote 4
---------------------------------------------------------------------------

A55. Any documents, however, that reflect information that is
either inconsistent with or contradictory to the conclusions
contained in the final working papers may not be discarded. Any
documents added must indicate the date they were added, the name of
the person who prepared them, and the reason for adding them.
A56. If the auditor obtains and documents evidence after the
report release date, the auditor should refer to the interim
auditing standards, AU sec. 390, Consideration of Omitted Procedures
After the Report Date and AU sec. 561, Subsequent Discovery of Facts
Existing at the Date of the Auditor's Report. Auditors should not
discard any previously existing documentation in connection with
obtaining and documenting evidence after the report release date.
A57. The auditor may perform certain procedures subsequent to
the report release date. For example, pursuant to AU sec. 711,
Filings Under Federal Securities Statutes, auditors are required to
perform certain procedures up to the effective date of a
registration statement. The auditor should identify and document any
additions to audit documentation as a result of these procedures. No
audit documentation should be discarded after the documentation
completion date, even if it is superseded in connection with any
procedures performed, including those performed pursuant to AU sec.
711.
A58. Additions to the working papers may take the form of
memoranda that explain the work performed, evidence obtained, and
conclusions reached. Documentation added to the working papers must
indicate the date the information was added, the name of the person
adding it, and the reason for adding it. All previous working papers
must remain intact and not be discarded.
A59. Documentation added to the working papers well after
completion of the audit or other engagement is likely to be of a
lesser quality than that produced contemporaneously when the
procedures were performed. It is very difficult to reconstruct
activities months, and perhaps years, after the work was actually
performed. The turnover of both firm and company staff can cause
difficulty in reconstructing conversations, meetings, data, or other
evidence. Also, with the passage of time memories fade. Oral
explanation can help confirm that procedures were performed during
an audit, but oral explanation alone does not constitute persuasive
other evidence. The primary source of evidence should be documented
at the time the procedures are performed, and oral explanation
should not be the primary source of evidence. Furthermore, any oral
explanation should not contradict the documented evidence, and
appropriate consideration should be given to the credibility of the
individual providing the oral explanation.

Multi-Location Audits and Using the Work of Other Auditors

A60. The proposed standard would have required the principal
auditor to maintain specific audit documentation when he or she
decided not to make reference to the work of another auditor.
A61. The Board also proposed an amendment to AU sec. 543
concurrently with the proposed audit documentation standard. The
proposed amendment would have required the principal auditor to
review the

[[Page 43476]]

documentation of the other auditor to the same extent and in the
same manner that the audit work of all those who participated in the
engagement is reviewed.
A62. Commenters expressed concerns that these proposals could
present conflicts with certain non-U.S. laws. Those commenters also
expressed concern about the costs associated with the requirement
for the other auditor to ship their audit documentation to the
principal auditor. In addition, the commenters also objected to the
requirement that principal auditors review the work of other
auditors as if they were the principal auditor's staff.

Audit Documentation Must Be Accessible to the Office Issuing the
Auditor's Report

A63. After considering these comments, the Board decided that it
could achieve one of the objectives of the proposed standard (that
is, to require that the issuing office have access to those working
papers on which it placed reliance) without requiring that the
working papers be shipped to the issuing office. Further, given the
potential difficulties of shipping audit documentation from various
non-U.S. locations, the Board decided to modify the proposed
standard to require that audit documentation either be retained by
or be accessible to the issuing office.
A64. In addition, instead of requiring that all of the working
papers be shipped to the issuing office, the Board decided to
require that the issuing office obtain, review, and retain certain
summary documentation. Thus, the public accounting firm issuing an
audit report on consolidated financial statements of a multinational
company may not release that report without the documentation
described in paragraph 19 of the standard.
A65. The auditor must obtain and review and retain, prior to the
report release date, documentation described in paragraph 19 of the
standard, in connection with work performed by other offices of the
public accounting firm or other auditors, including affiliated or
non-affiliated firms, that participated in the audit. For example,
an auditor that uses the work of another of its offices or other
affiliated or non-affiliated public accounting firms to audit a
subsidiary that is material to a company's consolidated financial
statements must obtain the documentation described in paragraph 19
of the standard, prior to the report release date. On the other
hand, an auditor that uses the work of another of its offices or
other affiliated or non-affiliated firms, to perform selected
procedures, such as observing the physical inventories of a company,
may not be required to obtain the documentation specified in
paragraph 19 of the standard. However, this does not reduce the need
for the auditor to obtain equivalent documentation prepared by the
other auditor when those instances described in paragraph 19 of the
standard are applicable. Amendment to AU Sec. 543, Part of Audit
Performed by Other Independent Auditors
A66. Some commenters also objected to the proposed requirement
in the amendment to AU sec. 543, Part of Audit Performed by Other
Independent Auditors, that the principal auditor review another
auditor's audit documentation. They objected because they were of
the opinion such a review would impose an unnecessary cost and
burden given that the other auditor will have already reviewed the
documentation in accordance with the standards established by the
principal auditor. The commenters also indicated that any review by
the principal auditor would add excessive time to the SEC reporting
process, causing even more difficulties as the SEC Form 10-K
reporting deadlines have become shorter recently and will continue
to shorten next year.
A67. The Board accepted the recommendation to modify the
proposed amendment to AU sec. 543, Part of Audit Performed by Other
Independent Auditors. Thus, in the final amendment, the Board
imposes the same unconditional responsibility on the principal
auditor to obtain certain audit documentation from the other auditor
prior to the report release date. The final amendment also provides
that the principal auditor should consider performing one or more of
the following procedures:
Visit the other auditors and discuss the audit
procedures followed and results thereof.
Review the audit programs of the other auditors. In
some cases, it may be appropriate to issue instructions to the other
auditors as to the scope of the audit work.
Review additional audit documentation of the other
auditors relating to significant findings or issues in the
engagement completion document.

Effective Date

A68. The Board proposed that the standard and related amendment
would be effective for engagements completed on or after June 15,
2004. Many commenters were concerned that the effective date was too
early. They pointed out that some audits, already begun as of the
proposed effective date, would be affected and that it could be
difficult to retroactively apply the standard. Some commenters also
recommended delaying the effective date to give auditors adequate
time to develop and implement processes and provide training with
respect to several aspects of the standard.
A69. After considering the comments, the Board has delayed the
effective date. However, the Board also believes that a delay beyond
2004 is not in the public interest.
A70. The Board concluded that the implementation date of this
standard should coincide with that of PCAOB Auditing Standard No. 2,
An Audit of Internal Control Over Financial Reporting Performed in
Conjunction with an Audit of Financial Statements, because of the
documentation issues prevalent in PCAOB Auditing Standard No. 2.
Therefore, the Board has decided that the standard will be effective
for audits of financial statements with respect to fiscal years
ending on or after [the later of November 15, 2004, or 30 days after
the date of approval of this standard by the SEC]. The effective
date for reviews of interim financial information and other
engagements, conducted pursuant to the standards of the PCAOB, would
occur beginning with the first quarter ending after the first
financial statement audit covered by this standard.

Reference to Audit Documentation as the Property of the Auditor

A71. Several commenters noted that SAS No. 96, Audit
Documentation, the interim auditing standard on audit documentation,
referred to audit documentation as the property of the auditor. This
was not included in the proposed standard because the Board did not
believe ascribing property rights would have furthered this
standard's purpose to enhance the quality of audit documentation.

Confidential Client Information

A72. SAS No. 96, Audit Documentation, also stated that, ``the
auditor has an ethical, and in some situations a legal, obligation
to maintain the confidentiality of client information,'' and
referenced Rule 301, Confidential Client Information, of the AICPA's
Code of Professional Conduct. Again, the Board's proposed standard
on audit documentation did not include this provision. In adopting
certain interim standards and rules as of April 16, 2003, the Board
did not adopt Rule 301 of the AICPA's Code of Professional Conduct.
In this standard on audit documentation, the Board seeks neither to
establish confidentiality standards nor to modify or detract from
any existing applicable confidentiality requirements.

Addendum

This addendum is not a part of PCAOB Auditing Standard No. 3.

Additional Documentation Requirements of SEC Rule 2-06

B1. Auditors should be aware of the additional record retention
requirements in SEC Rule 2-06 of Regulation S-X (``Rule 2-06''). The
Board is providing additional information below to remind auditors
of the SEC requirements. This addendum is not an interpretation of
Rule 2-06. Instead, this addendum provides excerpts from the SEC
release accompanying the final rule which provides the SEC's
interpretation of the rule's requirements, particularly paragraphs
(a) and (c) of Rule 2-06.
B2. Paragraph (a) of Rule 2-06 requires that: * * * the
accountant shall retain * * * memoranda, correspondence,
communications, other documents, and records (including electronic
records) which: (1) Are created, sent or received in connection with
the audit or review, and (2) Contain conclusions, opinions,
analyses, or financial data related to the audit or review.
B3. Paragraph (c) of Rule 2-06 states: Memoranda,
correspondence, communications, other documents, and records
(including electronic records) described in paragraph (a) of this
section shall be retained whether they support the auditor's final
conclusions regarding the audit or review, or contain information or
data relating to a significant matter, that is inconsistent with the
auditor's final conclusions regarding that matter or the audit or
review. Significance of a matter shall be determined based on an
objective analysis of the facts and circumstances. Such documents
and records include, but are not limited to, those documenting a
consultation on or

[[Page 43477]]

resolution of differences in professional judgment.

Other Statements by the SEC

B4. In the excerpt below, from the SEC's release accompanying
its final Rule 2-06, the SEC discusses documents that generally are
not required to be retained under Rule 2-06.
In the Proposing Release, we stated that non-substantive
materials that are not part of the workpapers, such as
administrative records, and other documents that do not contain
relevant financial data or the auditor's conclusions, opinions or
analyses would not meet the second of the criteria in rule 2-06(a)
and would not have to be retained. Commentators questioned whether
the following documents would be considered substantive and have to
be retained:
Superseded drafts of memoranda, financial statements or
regulatory filings,
Notes on superseded drafts of memoranda, financial
statements or regulatory filings that reflect incomplete or
preliminary thinking,
Previous copies of workpapers that have been corrected
for typographical errors or errors due to training of new employees,
Duplicates of documents, or
Voice-mail messages.
These records generally would not fall within the scope of new
rule 2-06 provided they do not contain information or data, relating
to a significant matter that is inconsistent with the auditor's
final conclusions, opinions or analyses on that matter or the audit
or review. For example, rule 2-06 would require the retention of an
item in this list if that item documented a consultation or
resolution of differences of professional judgment.
B5. The excerpt below, from the SEC's release accompanying its
final Rule 2-06, provides further explanation about documents to be
retained under Rule 2-06:
In consideration of the comments received, we have revised
paragraph (c) of the rule. We have removed the phrase ``cast doubt''
to reduce the possibility that the rule mistakenly would be
interpreted to reach typographical errors, trivial or ``fleeting''
matters, or errors due to ``on-the-job'' training. We continue to
believe, however, that records that either support or contain
significant information that is inconsistent with the auditor's
final conclusions would be relevant to an investigation of possible
violations of the securities laws, Commission rules, or criminal
laws and should be retained. Paragraph (c), therefore, now provides
that the materials described in paragraph (a) shall be retained
whether they support the auditor's final conclusions or contain
information or data, relating to a significant matter that is
inconsistent with the final conclusions of the auditor on that
matter or on the audit or review. Paragraph (c) also states that the
documents and records to be retained include, but are not limited
to, those documenting consultations on or resolutions of differences
in professional judgment.
The reference in paragraph (c) to ``significant'' matters is
intended to refer to the documentation of substantive matters that
are important to the audit or review process or to the financial
statements of the issuer or registered investment company. Rule 2-
06(c) requires that the documentation of such matters, once
prepared, must be retained even if it does not ``support'' the
auditor's final conclusions, because it may be relevant to an
investigation. Similarly, the retention of records regarding a
consultation about, and resolution of, differences in professional
judgment would be relevant to such an investigation and must be
retained. We intend for Rule 2-06 to be incremental to, and not to
supersede or otherwise affect, any other legal or procedural
requirement related to the retention of records or potential
evidence in a legal, administrative, disciplinary, or regulatory
proceeding.
Finally, we recognize that audits and reviews of financial
statements are interactive processes and views within an accounting
firm on accounting, auditing or disclosure issues may evolve as new
information or data comes to light during the audit or review. We do
not view ``differences in professional judgment'' within
subparagraph (c) to include such changes in preliminary views when
those preliminary views are based on what is recognized to be
incomplete information or data.

Amendment to Interim Auditing Standards

AU sec. 543.12 is amended as follows: When the principal auditor
decides not to make reference to the audit of the other auditor, in
addition to satisfying himself as to the matters described in AU
sec. 543.10, the principal auditor must obtain, and review and
retain, the following information from the other auditor:
a. An engagement completion document consistent with paragraphs
12 and 13 of PCAOB Auditing Standard No. 3

Note:
This engagement completion document should include all cross-
referenced, supporting audit documentation.

b. A list of significant fraud risk factors, the auditor's
response, and the results of the auditor's related procedures.
c. Sufficient information relating to significant findings or
issues that are inconsistent with or contradict the auditor's final
conclusions, as described in paragraph 8 of PCAOB Auditing Standard
No. 3.
d. Any findings affecting the consolidating or combining of
accounts in the consolidated financial statements.
e. Sufficient information to enable the office issuing the
auditor's report to agree or reconcile the financial statement
amounts audited by the other firm to the information underlying the
consolidated financial statements.
f. A schedule of audit adjustments, including a description of
the nature and cause of each misstatement.
g. All significant deficiencies and material weaknesses in
internal control over financial reporting, including a clear
distinction between those two categories.
h. Letters of representations from management.
i. All matters to be communicated to the audit committee.
The principal auditor must obtain, and review and retain, such
documents prior to the report release date.\1\ In addition, the
principal auditor should consider performing one or more of the
following procedures:
---------------------------------------------------------------------------

\1\ As it relates to the direction in paragraph .19 of AU sec.
324, for the auditor to ``give consideration to the guidance in
section 543.12,'' the auditor need not, in this circumstance, obtain
the previously enumerated documents.
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Visit the other auditor and discuss the audit
procedures followed and results thereof.
Review the audit programs of the other auditor. In some
cases, it may be appropriate to issue instructions to the other
auditor as to the scope of the audit work.
Review additional audit documentation of the other
auditor relating to significant findings or issues in the engagement
completion document.

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(a)(1) of the Act authorizes the PCAOB to establish, by
rule, auditing standards to be used by registered public accounting
firms in the preparation and issuance of audit reports, as required by
the Act. PCAOB Rule 3100, ``Compliance with Auditing and Related
Professional Practice Standards,'' requires auditors to comply with all
applicable auditing and related professional practice standards
established by the PCAOB. The Board has adopted as interim standards,
on an initial, transitional basis, the generally accepted auditing
standards described in the American Institute of Certified Public
Accountants' (``AICPA'') Auditing Standards Board's Statement on
Auditing Standards No. 95, Generally Accepted Auditing Standards, as in
existence on April 16, 2003 (the ``interim standards'').
Section 103(a)(2)(A)(i) of the Act expressly directs the Board to
establish auditing standards that require registered public accounting
firms to prepare, and maintain for at least seven years, audit
documentation ``in sufficient detail to support the conclusions
reached'' in the auditor's report. These proposed rules are the

[[Page 43478]]

standards referred to in Section 103(a)(2)(A)(i) of the Act.
(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 will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. Pursuant to the Act and PCAOB
Rule 3100, auditing and related professional practice standards
established by the PCAOB must be complied with by all registered public
accounting firms.

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

The Board released the proposed rule for public comment in PCAOB
Release No. 2003-023 (November 21, 2003). A copy of PCAOB Release No.
2003-023 and the comment letters received in response to the PCAOB's
request for comment are available on the PCAOB's web site at
www.pcaobus.org. The Board received 38 written comments. The Board has
clarified and modified certain aspects of the proposed rules in
response to comments it received, as discussed below:
Several commenters suggested that audit documentation should
include audit programs. Audit programs were specifically mentioned in
SAS No. 96 as a form of audit documentation. The Board accepted this
recommendation, and paragraph 4 in the final standard includes audit
programs as an example of documentation. Audit programs may provide
evidence of audit planning as well as limited evidence of the execution
of audit procedures, but the Board believes that signed-off audit
programs should generally not be used as the sole documentation that a
procedure was performed, evidence was obtained, or a conclusion was
reached. An audit program aids in the conduct and supervision of an
engagement, but completed and initialed audit program steps should be
supported with proper documentation in the working papers.
Some commenters suggested that the final standard more specifically
describe the qualifications of an experienced auditor. These commenters
took the position that only an engagement partner with significant
years of experience would have the experience necessary to be able to
understand all the work that was performed and the conclusions that
were reached. One commenter suggested that an auditor who is reviewing
audit documentation should have experience and knowledge consistent
with the experience and knowledge that the auditor performing the audit
would be required to possess, including knowledge of the current
accounting, auditing, and financial reporting issues of the company's
industry. Another said that the characteristics defining an experienced
auditor should be consistent with those expected of the auditor with
final responsibility for the engagement.
After considering these comments, the Board has provided additional
specificity about the meaning of the term, experienced auditor. The
standard now describes an experienced auditor as one who 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.
Some commenters also suggested that the standard, as proposed, did
not allow for the use of professional judgment. These commenters
pointed to the omission of a statement about professional judgment
found in paragraph 4.23 of GAGAS that states, ``The quantity, type, and
content of audit documentation are a matter of the auditors'
professional judgment.'' A nearly identical statement was found in the
interim auditing standard, SAS No. 96, Audit Documentation.
Auditors exercise professional judgment in nearly every aspect of
planning, performing, and reporting on an audit. Auditors also exercise
professional judgment in the documentation of an audit and other
engagements. An objective of this standard is to ensure that auditors
give proper consideration to the need to document procedures performed,
evidence obtained, and conclusions reached in light of time and cost
considerations in completing an engagement.
Nothing in the standard precludes auditors from exercising their
professional judgment. Moreover, because professional judgment might
relate to any aspect of an audit, the Board does not believe that an
explicit reference to professional judgment is necessary every time the
use of professional judgment may be appropriate.
A guiding principle of the proposed standard was that auditors must
document procedures performed, evidence obtained, and conclusions
reached. This principle is not new and was found in the interim
standard, SAS No. 96, Audit Documentation, which this standard
supersedes. Audit documentation also should demonstrate compliance with
the standards of the PCAOB and include justification for any
departures.
The proposed standard would have adapted a provision in the
California Business and Professions Code which provides that if
documentation does not exist, then there is a rebuttable presumption
that the work had not been done.
The objections to this proposal fell into two general categories:
The effect of the rebuttable presumption on legal proceedings and the
perceived impracticality of documenting every conversation or
conclusion that affected the engagement. Discussion of these issues
follows.
Commenters expressed concern about the effects of the proposed
language on regulatory or legal proceedings outside the context of the
PCAOB's oversight. They argued that the rebuttable presumption might be
understood to establish evidentiary rules for use in judicial and
administrative proceedings in other jurisdictions.
Some commenters also had concerns that oral explanation alone would
not constitute persuasive other evidence that work was done, absent any
documentation. Those commenters argued that not allowing oral
explanations when there was no documentation would essentially make the
presumption ``irrebuttable.'' Moreover, those commenters argued that it
was inappropriate for a professional standard to predetermine for a
court the relative value of evidence.
The Board believes that complete audit documentation is necessary
for a quality audit or other engagement. The Board intends the standard
to require auditors to document procedures performed, evidence
obtained, and conclusions reached to improve the quality of audits. The
Board also intends that a deficiency in documentation is a departure
from the Board's standards. Thus, although the Board removed the phrase
rebuttable presumption, the Board continues to stress, in paragraph 9
of the standard, that the auditor must have persuasive other evidence
that the procedures were performed, evidence was obtained, and
appropriate conclusions were reached with respect to relevant financial
statement assertions.
The term should (presumptively mandatory responsibility) was
changed to must (unconditional responsibility) in paragraph 6 to
establish a higher threshold for the auditor. Auditors have an
unconditional requirement to document their work. Failure to discharge
an unconditional

[[Page 43479]]

responsibility is a violation of the standard and Rule 3100, which
requires all registered public accounting firms to adhere to the
Board's auditing and related professional practice standards in
connection with an audit or review of an issuer's financial statements.
The Board also added two new paragraphs to the final standard to
explain the importance and associated responsibility of performing the
work and adequately documenting all work that was performed. Paragraph
7 provides a list of factors the auditor should consider in determining
the nature and extent of documentation. These factors should be
considered by both the auditor in preparing the documentation and the
reviewer in evaluating the documentation.
Some commenters expressed concern that the proposed standard could
be construed or interpreted to require the auditor to document every
conversation held with company management or among the engagement team
members. Some commenters also argued that they should not be required
to document every conclusion, including preliminary conclusions that
were part of a thought process that may have led them to a different
conclusion, on the ground that this would result in needless and costly
work performed by the auditor. Commenters also expressed concern that
an unqualified requirement to document procedures performed, evidence
obtained, and conclusions reached without allowing the use of auditor
judgment would increase the volume of documentation but not the
quality. They stated that it would be unnecessary, time-consuming, and
potentially counterproductive to require the auditor to make a written
record of everything he or she did.
The Board's standard distinguishes between (1) an audit procedure
that must be documented and (2) a conversation with company management
or among the members of the engagement team. Inquiries with management
should be documented when an inquiry is important to a particular
procedure. The inquiry could take place during planning, performance,
or reporting. The auditor need not document each conversation that
occurred.
A final conclusion is an integral part of a working paper, unless
the working paper is only for informational purposes, such as
documentation of a discussion or a process. This standard does not
require that the auditor document each interim conclusion reached in
arriving at the risk assessments or final conclusions. Conclusions
reached early on during an audit may be based on incomplete information
or an incorrect understanding. Nevertheless, auditors should document a
final conclusion for every audit procedure performed, if that
conclusion is not readily apparent based on documented results of the
procedures.
The Board also believes the reference to specialists is an
important element of paragraph 6. Specialists play a vital role in
audit engagements. For example, appraisers, actuaries, and
environmental consultants provide valuable data concerning asset
values, calculation assumptions, and loss reserves. When using the work
of a specialist, the auditor must ensure that the specialist's work, as
it relates to the audit objectives, also is adequately documented. For
example, if the auditor relies on the work of an appraiser in obtaining
the fair value of commercial property available for sale, then the
auditor must ensure the appraisal report is adequately documented.
Moreover, the term specialist in this standard is intended to include
any specialist the auditor relies on in conducting the work, including
those employed or retained by the auditor or by the company.
Several commenters recommended that the definition of audit
adjustments in this proposed standard should be consistent with the
definition contained in AU sec. 380, Communication with Audit
Committees.
Although the Board recognizes potential benefits of having a
uniform definition of the term audit adjustments, the Board does not
believe that the definition in AU sec. 380 is appropriate for this
documentation standard because that definition was intended for
communication with audit committees. The Board believes that the
definition should be broader so that the engagement partner, engagement
quality reviewer, and others can be aware of all proposed corrections
of misstatements, whether or not recorded by the entity, of which the
auditor is aware, that were or should have been proposed based on the
audit evidence.
The proposed standard would have required an auditor to retain
audit documentation for seven years after completion of the engagement,
which is the minimum period permitted under Section 103(a)(2)(A)(i) of
the Act. In addition, the proposed standard would have added a new
requirement that the audit documentation must be assembled for
retention within a reasonable period of time after the auditor's report
is released. Such reasonable period of time should not exceed 45 days.
In general, those commenting on this documentation retention
requirement did not have concerns with the time period of 45 days to
assemble the working papers. However, some commenters suggested the
Board tie this 45-day requirement to the filing date of the company's
financial statements with the SEC. One commenter recommended that the
standard refer to the same trigger date for initiating both the time
period during which the auditor should complete work paper assembly and
the beginning of the seven-year retention period.
For consistency and practical implications, the Board agreed that
the standard should have the same date for the auditor to start
assembling the audit documentation and initiating the seven-year
retention period. The Board decided that the seven-year retention
period begins on the report release date, which is defined as the date
the auditor grants permission to use the auditor's report in connection
with the issuance of the company's financial statements. In addition,
auditors will have 45 days to assemble the complete and final set of
audit documentation, beginning on the report release date. The Board
believes that using the report release date is preferable to using the
filing date of the company's financial statements, since the auditor
has ultimate control over granting permission to use his or her report.
If an auditor's report is not issued, then the audit documentation is
to be retained for seven years from the date that fieldwork was
substantially completed. If the auditor was unable to complete the
engagement, then the seven-year period begins when the work on the
engagement ceased.
Many commenters had concerns about the similarity in language
between the proposed standard and the SEC final rule (issued in January
2003) on record retention, Retention of Records Relevant to Audits and
Reviews.\2\ Some commenters recommended that the PCAOB undertake a
project to identify and resolve all differences between the proposed
standard and the SEC's final rule. These commenters also suggested that
the Board include similar language from the SEC final rule, Rule 2-06
of Regulation S-X, which limits the requirement to retain some items.
---------------------------------------------------------------------------

\2\ SEC Regulation S-X, 17 CFR 210.2-06 (SEC Release No. 33-
8180, January 2003). (The final rule was effective in March 2003.)
---------------------------------------------------------------------------

The objective of the Board's standard is different from the
objective of the SEC's rule on record retention. The objective of the
Board's standard is to require auditors to create certain documentation
to enhance the quality of

[[Page 43480]]

audit documentation, thereby improving the quality of audits and other
related engagements. The records retention section of this standard,
mandated by Section 103 of the Act, requires registered public
accounting firms to ``prepare and maintain for a period of not less
than 7 years, audit work papers, and other information related to any
audit report, in sufficient detail to support the conclusions reached
in such report.'' (emphasis added)
In contrast, the focus of the SEC rule is to require auditors to
retain documents that the auditor does create, in order that those
documents will be available in the event of a regulatory investigation
or other proceeding.
Despite their different objectives, the proposed standard and SEC
Rule 2-06 use similar language in describing documentation generated
during an audit or review. Paragraph 4 of the proposed standard stated
that, ``Audit documentation ordinarily consists of memoranda,
correspondence, schedules, and other documents created or obtained in
connection with the engagement and may be in the form of paper,
electronic files, or other media.'' Paragraph (a) of SEC Rule 2-06
describes ``records relevant to the audit or review'' that must be
retained as, (1) ``workpapers and other documents that form the basis
of the audit or review and (2) memoranda, correspondence,
communications, other documents, and records (including electronic
records), which: [a]re created, sent or received in connection with the
audit or review and [c]ontain conclusions, opinions, analyses, or
financial data related to the audit or review. * * *'' (numbering and
emphasis added).
The SEC makes a distinction between the objectives of categories
(1) and (2). Category (1) includes audit documentation. Documentation
to be retained according to the Board's standard clearly falls within
category (1). Items in category (2) include ``desk files'' which are
more than ``what traditionally has been thought of as auditor's
`workpapers'.'' The SEC's rule requiring auditors to retain items in
category (2) have the principal purpose of facilitating enforcement of
securities laws, SEC rules, and criminal laws. This is not an objective
of the Board's standard. According to SEC Rule 2-06, items in category
(2) are limited to those which: (a) Are created, sent or received in
connection with the audit or review, and (b) contain conclusions,
opinions, analyses, or financial data related to the audit or review.
The limitations, (a) and (b), do not apply to category (1).
Paragraph 4 of the final standard deletes the reference in the
proposed standard to ``other documents created or obtained in
connection with the engagement.'' The Board decided to keep
``correspondence'' in the standard because correspondence can be valid
audit evidence. Paragraph 20 of the standard reminds the auditor that
he or she may be required to maintain documentation in addition to that
required by this standard.
Some commenters asked how the term significant matters, in Rule 2-
06, relates to the term significant findings or issues in the Board's
standard. The SEC's release accompanying its final Rule 2-06 states
that ``* * * significant matters is intended to refer to the
documentation of substantive matters that are important to the audit or
review process or to the financial statements of the issuer. * * *''
This is very similar to the term significant findings or issues
contained in paragraph 12 of the Board's standard which requires
auditors to document significant findings or issues, actions taken to
address them (including additional evidence obtained), and the basis
for the conclusions reached. Examples of significant findings or issues
are provided in the standard.
Based on the explanation in the SEC's final rule and accompanying
release, the Board believes that significant matters are included in
the meaning of significant findings or issues in the Board's standard.
The Board is of the view that significant findings or issues is more
comprehensive and provides more clarity than significant matters and,
therefore, has not changed the wording in the final standard.
The proposed standard would have required that any changes to the
working papers after completion of the engagement be documented without
deleting or discarding the original documents. Such documentation must
indicate the date the information was added, by whom it was added, and
the reason for adding it.
One commenter recommended that the Board provide examples of
auditing procedures that should be performed before the report release
date and procedures that may be performed after the report release
date. Some commenters also requested clarification about the treatment
of changes to documentation that occurred after the completion of the
engagement but before the report release date. Many commenters
recommended that the Board more specifically describe post-issuance
procedures. The Board generally agreed with these comments.
The final standard includes two important dates for the preparation
of audit documentation: (1) The report release date and (2) the
documentation completion date.
Prior to the report release date, the auditor must have
completed all necessary auditing procedures, including clearing review
notes and providing support for all final conclusions. In addition, the
auditor must have obtained sufficient evidence to support the
representations in the auditor's reports before the report release
date.
After the report release date and prior to the
documentation completion date, the auditor has 45 calendar days in
which to assemble the documentation.
During the audit, audit documentation may be superseded for various
reasons. Often, during the review process, reviewers annotate the
documentation with clarifications, questions, and edits. The completion
process often involves revising the documentation electronically and
generating a new copy. The SEC's final rule on record retention
explains that the SEC rule does not require that the following
documents generally need to be retained: Superseded drafts of
memoranda, financial statements or regulatory filings; notes on
superseded drafts of memoranda, financial statements or regulatory
filings that reflect incomplete or preliminary thinking; previous
copies of workpapers that have been corrected for typographical errors
or errors due to training of new employees; and duplicates of
documents. This standard also does not require auditors to retain such
documents as a general matter.
Any documents, however, that reflect information that is either
inconsistent with or contradictory to the conclusions contained in the
final working papers may not be discarded. Any documents added must
indicate the date they were added, the name of the person who prepared
them, and the reason for adding them.
If the auditor obtains and documents evidence after the report
release date, the auditor should refer to the interim auditing
standards, AU sec. 390, Consideration of Omitted Procedures After the
Report Date and AU sec. 561, Subsequent Discovery of Facts Existing at
the Date of the Auditor's Report. Auditors should not discard any
previously existing documentation in connection with obtaining and
documenting evidence after the report release date.
The auditor may perform certain procedures subsequent to the report
release date. For example, pursuant to AU sec. 711, Filings Under
Federal Securities Statutes, auditors are required

[[Page 43481]]

to perform certain procedures up to the effective date of a
registration statement. The auditor should identify and document any
additions to audit documentation as a result of these procedures. No
audit documentation should be discarded after the documentation
completion date, even if it is superseded in connection with any
procedures performed, including those performed pursuant to AU sec.
711.
Additions to the working papers may take the form of memoranda that
explain the work performed, evidence obtained, and conclusions reached.
Documentation added to the working papers must indicate the date the
information was added, the name of the person adding it, and the reason
for adding it. All previous working papers must remain intact and not
be discarded.
Documentation added to the working papers well after completion of
the audit or other engagement is likely to be of a lesser quality than
that produced contemporaneously when the procedures were performed. It
is very difficult to reconstruct activities months, and perhaps years,
after the work was actually performed. The turnover of both firm and
company staff can cause difficulty in reconstructing conversations,
meetings, data, or other evidence. Also, with the passage of time
memories fade. Oral explanation can help confirm that procedures were
performed during an audit, but oral explanation alone does not
constitute persuasive other evidence. The primary source of evidence
should be documented at the time the procedures are performed, and oral
explanation should not be the primary source of evidence. Furthermore,
any oral explanation should not contradict the documented evidence, and
appropriate consideration should be given to the credibility of the
individual providing the oral explanation.
The proposed standard would have required the principal auditor to
maintain specific audit documentation when he or she decided not to
make reference to the work of another auditor.
The Board also proposed an amendment to AU sec. 543 concurrently
with the proposed audit documentation standard. The proposed amendment
would have required the principal auditor to review the documentation
of the other auditor to the same extent and in the same manner that the
audit work of all those who participated in the engagement is reviewed.
Commenters expressed concerns that these proposals could present
conflicts with certain non-U.S. laws. Those commenters also expressed
concern about the costs associated with the requirement for the other
auditor to ship their audit documentation to the principal auditor. In
addition, the commenters also objected to the requirement that
principal auditors review the work of other auditors as if they were
the principal auditor's staff.
After considering these comments, the Board decided that it could
achieve one of the objectives of the proposed standard (that is, to
require that the issuing office have access to those working papers on
which it placed reliance) without requiring that the working papers be
shipped to the issuing office. Further, given the potential
difficulties of shipping audit documentation from various non-U.S.
locations, the Board decided to modify the proposed standard to require
that audit documentation either be retained by or be accessible to the
issuing office.
In addition, instead of requiring that all of the working papers be
shipped to the issuing office, the Board decided to require that the
issuing office obtain, review, and retain certain summary
documentation. Thus, the public accounting firm issuing an audit report
on consolidated financial statements of a multinational company may not
release that report without the documentation described in paragraph 19
of the standard.
Some commenters also objected to the proposed requirement in the
amendment to AU sec. 543, Part of Audit Performed by Other Independent
Auditors, that the principal auditor review another auditor's audit
documentation. They objected because they were of the opinion such a
review would impose an unnecessary cost and burden given that the other
auditor will have already reviewed the documentation in accordance with
the standards established by the principal auditor. The commenters also
indicated that any review by the principal auditor would add excessive
time to the SEC reporting process, causing even more difficulties as
the SEC Form 10-K reporting deadlines have become shorter recently and
will continue to shorten next year.
The Board accepted the recommendation to modify the proposed
amendment to AU sec. 543, Part of Audit Performed by Other Independent
Auditors. Thus, in the final amendment, the Board imposes the same
unconditional responsibility on the principal auditor to obtain certain
audit documentation from the other auditor prior to the report release
date. The final amendment also provides that the principal auditor
should consider performing one or more of the following procedures:
Visit the other auditors and discuss the audit procedures
followed and results thereof.
Review the audit programs of the other auditors. In some
cases, it may be appropriate to issue instructions to the other
auditors as to the scope of the audit work.
Review additional audit documentation of the other
auditors relating to significant findings or issues in the engagement
completion document.
The Board proposed that the standard and related amendment would be
effective for engagements completed on or after June 15, 2004. Many
commenters were concerned that the effective date was too early. They
pointed out that some audits, already begun as of the proposed
effective date, would be affected and that it could be difficult to
retroactively apply the standard. Some commenters also recommended
delaying the effective date to give auditors adequate time to develop
and implement processes and provide training with respect to several
aspects of the standard.
After considering the comments, the Board has delayed the effective
date. However, the Board also believes that a delay beyond 2004 is not
in the public interest. The Board concluded that the implementation
date of this standard should coincide with that of PCAOB Auditing
Standard No. 2, An Audit of Internal Control Over Financial Reporting
Performed in Conjunction with an Audit of Financial Statements, because
of the documentation issues prevalent in PCAOB Auditing Standard No. 2.
Therefore, the Board has decided that the standard will be effective
for audits of financial statements with respect to fiscal years ending
on or after [the later of November 15, 2004, or 30 days after the date
of approval of this standard by the SEC]. The effective date for
reviews of interim financial information and other engagements,
conducted pursuant to the standards of the PCAOB, would occur beginning
with the first quarter ending after the first financial statement audit
covered by this standard.
Several commenters noted that SAS No. 96, Audit Documentation, the
interim auditing standard on audit documentation, referred to audit
documentation as the property of the auditor. This was not included in
the proposed standard because the Board did not believe ascribing
property rights would have furthered this standard's purpose to enhance
the quality of audit documentation.

[[Page 43482]]

SAS No. 96, Audit Documentation, also stated that, ``the auditor
has an ethical, and in some situations a legal, obligation to maintain
the confidentiality of client information,'' and referenced Rule 301,
Confidential Client Information, of the AICPA's Code of Professional
Conduct. Again, the Board's proposed standard on audit documentation
did not include this provision. In adopting certain interim standards
and rules as of April 16, 2003, the Board did not adopt Rule 301 of the
AICPA's Code of Professional Conduct. In this standard on audit
documentation, the Board seeks neither to establish confidentiality
standards nor to modify or detract from any existing applicable
confidentiality requirements.

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

Within 35 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 rule; or
(b) Institute proceedings to determine whether the proposed rule
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 [email protected]. Please include
File No. PCAOB-2004-05 on the subject line.

Paper Comments

Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File No. PCAOB-2004-05. This file
number should be included on the 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 change 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 Section, 450 Fifth Street,
NW., Washington, DC 20549. Copies of such filing also will be available
for inspection and copying at the principal office of 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-2004-05 and should be
submitted on or before August 10, 2004.

By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-16440 Filed 7-19-04; 8:45 am]
BILLING CODE 8010-01-P