[Federal Register Volume 69, Number 167 (Monday, August 30, 2004)]
[Notices]
[Pages 52949-52950]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-1970]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50253; File No. PCAOB-2004-05]


Public Company Accounting Oversight Board; Order Approving 
Proposed Auditing Standard No. 3, Audit Documentation, and an Amendment 
to Interim Auditing Standards--AU sec. 543, Part of Audit Performed by 
Other Independent Auditors

August 25, 2004.

I. Introduction

    On June 18, 2004, the Public Company Accounting Oversight Board 
(the ``Board'' or the ``PCAOB'') filed with the Commission proposed 
Auditing Standard No. 3, Audit Documentation (``Auditing Standard No. 
3''), pursuant to the Sarbanes-Oxley Act of 2002 (the ``Act'') \1\ and 
Section 19(b) of the Securities Exchange Act of 1934 (the ``Exchange 
Act''). Auditing Standard No. 3 would establish general requirements 
for documentation the auditors should prepare and retain in connection 
with engagements conducted pursuant to the standards of the PCAOB. 
Also, in connection with proposed Auditing Standard No. 3, the Board 
proposed an amendment to paragraph 12 of AU sec. 543, addressing 
appropriate audit documentation when a principal auditor decides not to 
make reference to the work of other auditors that have performed part 
of the audit work. AU sec. 543 is one of the interim auditing standards 
adopted by the PCAOB in April 2003.\2\ Notice of proposed Auditing 
Standard No. 3 and proposed amendment to AU sec. 543 (collectively 
referred to as the ``Proposed Standard'') was published in the Federal 
Register on July 20, 2004,\3\ and the Commission received eight comment 
letters. For the reasons discussed below, the Commission is granting 
approval of the Proposed Standard.
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    \1\ Sections 101, 103 and 107 of the Act.
    \2\ The Commission approved the PCAOB's adoption of the interim 
standards in Release No. 34-47745, Order Regarding Section 
103(a)(3)(B) of the Sarbanes-Oxley Act of 2002 (April 25, 2003).
    \3\ Release No. 34-50012 (July 14, 2004); 69 FR 43468 (July 20, 
2004).
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II. Description

    The Act establishes the PCAOB to oversee the audits of public 
companies and related matters, to protect investors, and to further the 
public interest in the preparation of informative, accurate and 
independent audit reports.\4\ Section

[[Page 52950]]

103(a) of the Act directs the PCAOB to establish auditing and related 
attestation standards, quality control standards, and ethics standards 
to be used by registered public accounting firms in the preparation and 
issuance of audit reports as required by the Act or the rules of the 
Commission.
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    \4\ Section 101(a) of the Act.
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    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.\5\ The Board's proposed Auditing 
Standard No. 3 establishes general requirements for documentation the 
auditor should prepare and retain in connection with engagements 
conducted pursuant to the standards of the PCAOB. Such engagements 
include an audit of financial statements, an audit of internal control 
over financial reporting, and a review of interim financial 
information. Proposed Auditing Standard No. 3 requires that auditors 
document procedures performed, evidence obtained, and conclusions 
reached. In addition, audit firms 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''). This standard states 
that, if approved by the Commission, it would be effective for audits 
of financial statements with fiscal years ending on or after the later 
of November 15, 2004 or 30 days after the date of approval of the 
standard by the Commission.
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    \5\ Section 802 of the Act also directs the Commission to adopt 
rules requiring auditors to retain for seven years workpapers and 
other documentation related to audits or reviews of issuer financial 
statements. The Commission adopted final rules pursuant to Section 
302 in January 2003. See Rule 2-06 of Regulation S-X; Release No. 
34-47241 (January 24, 2003). The Commission's rules, which are aimed 
at preventing the destruction of audit records and facilitating the 
Commission's enforcement efforts, require retention of a broader set 
of documents than the Board's Proposed Standard, in that the 
Commission's rules require the retention of memoranda, 
correspondence and other documentation that are not traditionally 
considered ``workpapers.''
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    The Board's proposed amendment to AU sec. 543 imposes unconditional 
responsibility on the principal auditor to obtain certain audit 
documentation from another auditor (who, though not named in the audit 
report, has performed part of the audit work used by the principal 
auditor) prior to the audit report release date. In addition, the 
amendment provides that the principal auditor should consider 
performing one or more of the procedures listed in the amendment to 
paragraph 12 of AU sec. 543, such as discussing the audit procedures 
and related results with the other auditor and reviewing the audit 
programs of the other auditor.

III. Discussion

    The Commission's comment period on the Proposed Standard ended on 
August 10, 2004, with the Commission receiving eight comment letters. 
The comment letters came from five registered public accounting firms 
and three professional associations.
    In general, commenters expressed appreciation for changes made by 
the PCAOB to its initially proposed standard. Four commenters expressed 
concern with the proposed effective date and recommend the final 
standard be effective for periods beginning on or after November 15, 
2004. As currently proposed, the effective date of the Proposed 
Standard would apply to audits of financial statements with fiscal 
years ending on or after the later of November 15, 2004 or 30 days 
after the date of approval of the standard by the Commission (emphasis 
added). These commenters noted that most audits of 2004 financial 
statements (as well as audits of internal control over financial 
reporting for accelerated filers) ending on or after November 15, 2004 
will have commenced prior to the proposed effective date. Specifically, 
they believe it is not practical to require retroactive application of 
the Proposed Standard to audits in process at the effective date, 
particularly on audits of large, multi-national corporations.
    One commenter expressed concern with the proposed requirements that 
the office issuing the report must obtain certain audit documentation 
prepared by other auditors. This commenter maintained that certain 
documentation requirements could present conflicts with privacy laws in 
certain foreign jurisdictions. This commenter also expressed concern 
with the potential interpretation regarding the presentation of oral 
evidence and recommended that oral evidence be sufficient to explain 
both other written evidence and, where appropriate, matters for which 
there is no written evidence.
    The PCAOB gave careful consideration to the issues raised by 
commenters in the course of revising the Proposed Standard prior to its 
adoption by the Board. In particular, the PCAOB considered concerns 
regarding the proposed effective date. The PCAOB concluded that the 
implementation date of the Proposed Standard should not be delayed 
beyond the year 2004 and should coincide with the documentation 
requirements set forth in PCAOB Auditing Standard No. 2, An Audit of 
Internal Control Over Financial Reporting Performed in Conjunction With 
an Audit of Financial Statements.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that proposed 
Auditing Standard No. 3 and the proposed amendment to AU sec. 543 are 
consistent with the requirements of the Act and the securities laws and 
are necessary and appropriate in the public interest and for the 
protection of investors.
    It is therefore ordered, pursuant to Section 107 of the Act and 
Section 19(b)(2) of the Exchange Act, that proposed Auditing Standard 
No. 3, Audit Documentation, and proposed Amendment to Interim Auditing 
Standards--AU sec. 543, Part of Audit Performed by Other Independent 
Auditors, (File No. PCAOB-2004-05) be and are hereby approved.

By the Commission.
Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E4-1970 Filed 8-27-04; 8:45 am]
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