[Federal Register Volume 78, Number 221 (Friday, November 15, 2013)]
[Notices]
[Pages 68872-68887]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-27345]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70843; File No. PCAOB-2013-02]


Public Company Accounting Oversight Board; Notice of Filing of 
Proposed Rules on Auditing Standard No. 17, Auditing Supplemental 
Information Accompanying Audited Financial Statements and Related 
Amendments to PCAOB Standards

November 8, 2013.
    Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 (the 
``Sarbanes-Oxley Act''), notice is hereby given that on October 30, 
2013, 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. The Commission 
is publishing this notice to solicit comments on the proposed rules 
from interested persons.

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

    On October 10, 2013, the Board adopted Auditing Standard No. 17, 
Auditing Supplemental Information Accompanying Audited Financial 
Statements and related amendments to its interim auditing standards 
(collectively, the ``proposed rules''). The text of the proposed rules 
is set out below.
Auditing Standard No. 17
Auditing Supplemental Information Accompanying Audited Financial 
Statements
Introduction
    1. This standard sets forth the auditor's responsibilities when the 
auditor of the company's financial statements is engaged to perform 
audit procedures and report on supplemental information \1\ that 
accompanies financial statements \2\ audited pursuant to Public Company 
Accounting Oversight Board (``PCAOB'') standards.
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    \1\ Terms defined in Appendix A, Definitions, are set in 
boldface type the first time they appear.
    \2\ For purposes of this standard, supplemental information 
``accompanies financial statements'' when it is (1) presented in the 
same document as the audited financial statements, (2) presented in 
a document in which the audited financial statements are 
incorporated by reference, or (3) incorporated by reference in a 
document containing the audited financial statements.
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Objective
    2. The objective of the auditor of the financial statements, when 
engaged to perform audit procedures and report on supplemental 
information that accompanies audited financial statements, is to obtain 
sufficient appropriate audit evidence to express an opinion on whether 
the supplemental information is fairly stated, in all material 
respects, in relation to the financial statements as a whole.
Performing Audit Procedures on Supplemental Information Accompanying 
Audited Financial Statements
    3. The auditor should perform audit procedures to obtain 
appropriate audit evidence that is sufficient to support the auditor's 
opinion regarding whether the supplemental information is fairly 
stated, in all material respects, in relation to the financial 
statements as a whole. The nature, timing, and extent of audit 
procedures necessary to obtain sufficient appropriate audit evidence 
and to report on the supplemental information depends on, among other 
things:
    a. The risk of material misstatement of the supplemental 
information;
    b. The materiality considerations relevant to the information 
presented;
    Note: When planning and performing the audit procedures to report 
on supplemental information, the auditor generally should use the same 
materiality considerations as those used in planning and performing the 
audit of the financial statements.\3\ However, if applicable regulatory 
requirements specify a lower materiality level to be applied to certain 
supplemental information, the auditor should use those prescribed 
threshold requirements in planning and performing audit procedures for 
the supplemental information.
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    \3\ Auditing Standard No. 11, Consideration of Materiality in 
Planning and Performing an Audit, establishes requirements regarding 
the auditor's consideration of materiality in planning and 
performing an audit.
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    c. The evidence obtained from the audit of the financial statements 
and, if applicable, other engagements by the auditor or affiliates of 
the firm,\4\ for the period presented; and
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    \4\ The term ``affiliates of the firm'' as used in this standard 
has the same meaning as the term ``affiliates of the accounting 
firm'' as defined in PCAOB Rule 3501.
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    Note: The procedures performed regarding the supplemental 
information should be planned and performed in conjunction with the 
audit of the financial statements. For audits of brokers and dealers, 
the procedures should be coordinated with the attestation engagements 
related to compliance or exemption reports required by the U.S. 
Securities and Exchange Commission (``SEC'').\5\ The auditor should 
take into account relevant evidence from the audit of the financial 
statements and, for audits of brokers or dealers, the attestation 
engagements, in planning and performing audit procedures related to the 
supplemental information and in evaluating the results of the audit 
procedures to form the opinion on the supplemental information.
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    \5\ See Attestation Standard No. 1, Examination Engagements 
Regarding Compliance Reports of Brokers and Dealers, and Attestation 
Standard No. 2, Review Engagements Regarding Exemption Reports of 
Brokers and Dealers.
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    d. Whether a qualified opinion, an adverse opinion, or a disclaimer 
of opinion was issued on the financial statements.
    4. In performing the audit procedures on supplemental information, 
the auditor should:
    a. Obtain an understanding of the purpose of the supplemental 
information and the criteria management used to prepare the 
supplemental information, including relevant regulatory requirements;

[[Page 68873]]

    b. Obtain an understanding of the methods of preparing the 
supplemental information, evaluate the appropriateness of those 
methods, and determine whether those methods have changed from the 
methods used in the prior period and, if the methods have changed, 
determine the reasons for and evaluate the appropriateness of such 
changes;
    c. Inquire of management about any significant assumptions or 
interpretations underlying the measurement or presentation of the 
supplemental information;
    d. Determine that the supplemental information reconciles to the 
underlying accounting and other records or to the financial statements, 
as applicable;
    e. Perform procedures to test the completeness and accuracy of the 
information presented in the supplemental information to the extent 
that it was not tested as part of the audit of financial statements; 
and
    f. Evaluate whether the supplemental information, including its 
form and content, complies with relevant regulatory requirements or 
other applicable criteria, if any.
Management Representations
    5. The auditor should obtain written representations from 
management, including:
    a. A statement that management acknowledges its responsibility for 
the fair presentation of the supplemental information and, if 
applicable, the form and content of that supplemental information, in 
conformity with relevant regulatory requirements or other applicable 
criteria;
    b. A statement that management believes the supplemental 
information, including its form and content, is fairly stated, in all 
material respects;
    c. A statement that the methods of measurement or presentation have 
not changed from those used in the prior period or, if the methods of 
measurement or presentation have changed, the reasons for such changes 
and why those changes are appropriate;
    d. If the form and content of the supplemental information is 
prescribed by regulatory requirements or other applicable criteria, a 
statement that the supplemental information complies, in all material 
respects, with the regulatory requirements or other applicable 
criteria, and identification of those requirements or other applicable 
criteria; and
    e. A description of any significant assumptions or interpretations 
underlying the measurement or presentation of the supplemental 
information, and a statement that management believes that such 
assumptions or interpretations are appropriate.
Evaluation of Audit Results
    6. To form an opinion on the supplemental information, the auditor 
should evaluate whether the supplemental information, including its 
form and content, is fairly stated, in all material respects, in 
relation to the financial statements as a whole, including whether the 
supplemental information is presented in conformity, in all material 
respects, with the relevant regulatory requirements or other applicable 
criteria.
    7. The auditor should accumulate misstatements regarding the 
supplemental information identified during performance of audit 
procedures on the supplemental information and in the audit of the 
financial statements.\6\ The auditor should communicate accumulated 
misstatements regarding the supplemental information to management on a 
timely basis to provide management with an opportunity to correct them.
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    \6\ See paragraph 10 of Auditing Standard No. 14, Evaluating 
Audit Results, which discusses the auditor's responsibilities 
regarding the accumulation of misstatements in an audit of financial 
statements.
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    8. The auditor should evaluate whether uncorrected misstatements 
related to the supplemental information are material, either 
individually or in combination with other misstatements, taking into 
account relevant quantitative and qualitative factors.
    Note: The auditor should evaluate the effect of uncorrected 
misstatements related to the supplemental information in evaluating the 
results of the financial statement audit.\7\
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    \7\ See paragraph 17 of Auditing Standard No. 14, which 
discusses evaluation of uncorrected misstatements in the financial 
statement audit.
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    9. The auditor should evaluate the effect of any modifications to 
the audit report on the financial statements when forming an opinion on 
the supplemental information:
    a. When the auditor expresses a qualified opinion on the financial 
statements and the basis for the qualification also applies to the 
supplemental information, the auditor should describe the effects of 
the qualification on the supplemental information in the report on 
supplemental information and should express a qualified opinion on the 
supplemental information.
    b. When the auditor expresses an adverse opinion, or disclaims an 
opinion on the financial statements, the auditor should express an 
adverse opinion, or disclaim an opinion, on the supplemental 
information, whichever is appropriate.
Reporting
    10. The auditor's report on supplemental information accompanying 
audited financial statements should include the following:
    a. Identification of the supplemental information.
    Note: Identification may be by descriptive title of the 
supplemental information or reference to the page number and document 
where the supplemental information is located.
    b. A statement that the supplemental information is the 
responsibility of management.
    c. A statement that the supplemental information has been subjected 
to audit procedures performed in conjunction with the audit of the 
financial statements.
    Note: If the financial statements are presented in a separate 
document from the supplemental information or otherwise are not readily 
identifiable to the user of the supplemental information, the auditor's 
report on supplemental information should identify the document 
containing the company's financial statements.
    d. A statement that the audit procedures performed included 
determining whether the supplemental information reconciles to the 
financial statements or the underlying accounting and other records, as 
applicable, and performing procedures to test the completeness and 
accuracy of the information presented in the supplemental information.
    e. A statement that in forming the auditor's opinion, the auditor 
evaluated whether supplemental information, including its form and 
content, complies, in all material respects, with the specified 
regulatory requirements or other criteria, if applicable.
    f. A statement, if applicable, that the supplemental information is 
presented on a basis that differs from the financial statements and is 
not prescribed by regulatory requirements. When such a statement is 
made, the report should describe the basis for the supplemental 
information presentation.
    g. An opinion on whether the supplemental information is fairly 
stated, in all material respects, in relation to the financial 
statements as a whole, or a disclaimer of opinion.
    11. Unless prescribed by regulatory requirements, the auditor may 
either include the auditor's report on the supplemental information in 
the auditor's report on the financial

[[Page 68874]]

statements or issue a separate report on the supplemental information. 
If the auditor issues a separate report on the supplemental 
information, that report should identify the auditor's report on the 
financial statements.
    12. The date of the auditor's report on the supplemental 
information in relation to the financial statements as a whole should 
not be earlier than:
    a. The date of the auditor's report on the financial statements 
from which the supplemental information was derived, and
    b. The date on which the auditor obtained sufficient appropriate 
audit evidence to support the auditor's opinion on the supplemental 
information in relation to the financial statements as a whole.\8\
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    \8\ AU sec. 561, Subsequent Discovery of Facts Existing at the 
Date of the Auditor's Report, sets forth procedures to be followed 
by the auditor who, subsequent to the date of the report upon 
audited financial statements becomes aware that facts may have 
existed at that date that might have affected the report had he or 
she then been aware of such facts. AU sec. 561 applies to situations 
in which the auditor identifies a material misstatement of the 
financial statements while performing audit procedures on 
supplemental information after the date of the auditor's report on 
the financial statements.
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    13. The following is an example of an auditor's report on 
supplemental information when included in the auditor's report on the 
financial statements:
    The [identify supplemental information] has been subjected to audit 
procedures performed in conjunction with the audit of [Company's] 
financial statements. The [supplemental information] is the 
responsibility of the Company's management. Our audit procedures 
included determining whether the [supplemental information] reconciles 
to the financial statements or the underlying accounting and other 
records, as applicable, and performing procedures to test the 
completeness and accuracy of the information presented in the 
[supplemental information]. In forming our opinion on the [supplemental 
information], we evaluated whether the [supplemental information], 
including its form and content, is presented in conformity with 
[specify the relevant regulatory requirement or other criteria, if 
any]. In our opinion, the [identify supplemental information] is fairly 
stated, in all material respects, in relation to the financial 
statements as a whole.
    14. If the auditor determines that the supplemental information is 
materially misstated in relation to the financial statements as a 
whole, the auditor should describe the material misstatement in the 
auditor's report on the supplemental information and express a 
qualified or adverse opinion on the supplemental information.
    15. If the auditor is unable to obtain sufficient appropriate audit 
evidence to support an opinion on the supplemental information, the 
auditor should disclaim an opinion on the supplemental information. In 
those situations, the auditor's report on the supplemental information 
should describe the reason for the disclaimer and state that the 
auditor is unable to and does not express an opinion on the 
supplemental information.
    Note: If the supplemental information consists of two or more 
schedules, and the auditor is able to obtain sufficient appropriate 
audit evidence to support an opinion on some but not all schedules, the 
auditor may express an opinion on only those schedules for which he or 
she obtained sufficient appropriate evidence but should disclaim an 
opinion on the other schedules.
APPENDIX A--Definitions
    A1. For purposes of this standard, the term listed below is defined 
as follows:
    A2. Supplemental Information--Refers to the following information 
when it accompanies audited financial statements:
    a. Supporting schedules that brokers and dealers are required to 
file pursuant to Rule 17a-5 under the Securities Exchange Act of 1934; 
\9\
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    \9\ See 17 CFR Sec.  240.17a-5(d)(2).
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    b. Supplemental information (i) required to be presented pursuant 
to the rules and regulations of a regulatory authority and (ii) covered 
by an independent public accountant's report on that information in 
relation to financial statements that are audited in accordance with 
PCAOB standards; or
    c. Information that is (i) ancillary to the audited financial 
statements, (ii) derived from the company's accounting books and 
records, and (iii) covered by an independent public accountant's report 
on that information in relation to the financial statements that are 
audited in accordance with PCAOB standards.
Amendments to PCAOB Standards
Auditing Standard No. 16, ``Communications With Audit Committees''
    Auditing Standard No. 16, Communications with Audit Committees, is 
amended as follows:
    a. The second sentence of footnote 27 to paragraph 14 is replaced 
with:
    In addition to AU sec. 550, discussion of the auditor's 
consideration of other information is included in Auditing Standard No. 
17, Auditing Supplemental Information Accompanying Audited Financial 
Statements, AU sec. 558, Required Supplementary Information, and AU 
sec. 711, Filings Under Federal Securities Statutes.
AU sec. 9342, ``Auditing Accounting Estimates: Auditing Interpretations 
of Section 342''
    AU sec. 9342, ``Auditing Accounting Estimates: Auditing 
Interpretations of Section 342,'' as amended, is amended as follows:
    a. The second sentence of paragraph .07 is replaced with:
    When the audited disclosures do not constitute a complete balance 
sheet presentation and are included in a supplemental schedule or 
exhibit, the auditor should look to the requirements in Auditing 
Standard No. 17, Auditing Supplemental Information Accompanying Audited 
Financial Statements.
    b. The second sentence of paragraph .08 is replaced with:
    If the unaudited voluntary disclosures are located on the face of 
the financial statements or in the footnotes, the voluntary disclosures 
should be labeled ``unaudited.'' If the unaudited information is 
presented in a supplemental schedule, the voluntary disclosures should 
be labeled ``unaudited'' and the auditor should disclaim an opinion on 
the unaudited information.
    c. In the second flowchart in paragraph .10, ``Auditing Guidance 
for Fair Value Information, Required and Voluntary Information,'' the 
box text that states:
    The voluntary disclosures should be labeled ``unaudited'' and the 
auditor should disclaim an opinion on the unaudited information as 
discussed in section 551.13.

is replaced with:

    The voluntary disclosures should be labeled ``unaudited'' and the 
auditor should disclaim an opinion on the unaudited information.
    d. In the second flowchart in paragraph .10, ``Auditing Guidance 
for Fair Value Information, Required and Voluntary Information,'' the 
box text that states:
    The auditor should add an additional paragraph to the report as 
discussed in section 551.12

is replaced with:

    The auditor should add an additional paragraph to the report. See 
paragraph 10 of Auditing Standard No. 17, Auditing Supplemental 
Information Accompanying Audited Financial Statements.

[[Page 68875]]

AU Sec. 530, ``Dating of the Independent Auditor's Report''
    SAS No. 1, ``Codification of Auditing Standards and Procedures,'' 
section 530, ``Dating of the Independent Auditor's Report'' (AU sec. 
530, ``Dating of the Independent Auditor's Report''), as amended, is 
amended as follows:
    Within paragraph .06 at the end of the paragraph, the sentence, 
``(See Section 551.)'' is deleted.
AU Sec. 550, ``Other Information in Documents Containing Audited 
Financial Statements''
    SAS No. 8, ``Other Information in Documents Containing Audited 
Financial Statements'' (AU sec. 550, ``Other Information in Documents 
Containing Audited Financial Statements''), as amended, is amended as 
follows:
    a. Within paragraph .03
     At the end of the paragraph, the sentence ``(see sections 
551* and 623**)'' is replaced with:
    (See Auditing Standard No. 17, Auditing Supplemental Information 
Accompanying Audited Financial Statements, and AU sec. 623**).
     Footnote * to paragraph .03 is deleted.
    b. Paragraph .07 is deleted.
AU Sec. 551, ``Reporting on Information Accompanying the Basic 
Financial Statements in Auditor-Submitted Documents''
    SAS No. 29, ``Reporting on Information Accompanying the Basic 
Financial Statements in Auditor-Submitted Documents'' (AU sec. 551, 
``Reporting on Information Accompanying the Basic Financial Statements 
in Auditor-Submitted Documents'') as amended, is superseded.
AU Sec. 552, ``Reporting on Condensed Financial Statements and Selected 
Financial Data''
    SAS No. 42, ``Reporting on Condensed Financial Statements and 
Selected Financial Data'' (AU sec. 552, ``Reporting on Condensed 
Financial Statements and Selected Financial Data''), as amended, is 
amended as follows:
    The second sentence in paragraph .01 is replaced with:
    Auditing Standard No. 17, Auditing Supplemental Information 
Accompanying Audited Financial Statements, sets forth the auditor's 
responsibilities when the auditor of the company's financial statements 
is engaged to perform audit procedures and report on supplemental 
information that accompanies financial statements audited pursuant to 
Public Company Accounting Oversight Board standards.
AU Sec. 558, ``Required Supplementary Information''
    SAS No. 52, ``Required Supplementary Information'' (AU sec. 558, 
``Required Supplementary Information''), as amended, is amended as 
follows:
    a. Footnote 3 to paragraph .03 is deleted.
    b. The second sentence of paragraph .05 is replaced with:
    Auditing Standard No. 17, Auditing Supplemental Information 
Accompanying Audited Financial Statements, sets forth the auditor's 
responsibilities when the auditor of the company's financial statements 
is engaged to perform audit procedures and report on supplemental 
information that accompanies financial statements audited pursuant to 
Public Company Accounting Oversight Board standards.
    c. Footnote 7 to paragraph .08 is replaced with:
    Auditing Standard No. 17, Auditing Supplemental Information 
Accompanying Audited Financial Statements, sets forth the auditor's 
responsibilities when the auditor of the company's financial statements 
is engaged to perform audit procedures and report on supplemental 
information that accompanies financial statements audited pursuant to 
Public Company Accounting Oversight Board standards.

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

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

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

(a) Purpose
    Section 103 of the Sarbanes-Oxley Act directs the Board, by rule, 
to establish, among other things, ``auditing and related attestation 
standards . . . to be used by registered public accounting firm in the 
preparation and issuance of audit reports, as required by th[e] 
[Sarbanes-Oxley] Act or the rules of the Commission, or as may be 
necessary or appropriate in the public interest or for the protection 
of investors.'' Auditing Standard No. 17 requires auditors to perform 
certain audit procedures when engaged to audit and report on 
supplemental information accompanying financial statements. 
Supplemental information is required by regulators, including the 
SEC,\10\ who have determined the information is important in carrying 
out their regulatory oversight. The standard includes auditor 
performance requirements to (1) determine that the supplemental 
information reconciles to the underlying accounting and other records 
or to the financial statements, as applicable; (2) test the 
completeness and accuracy of the supplemental information, to the 
extent that it was not tested as part of the audit of the financial 
statements; and (3) evaluate whether the supplemental information, 
including its form and content, complies with relevant regulatory 
requirements or other applicable criteria, if any. The standard has 
been designed to promote coordination between the work performed on the 
supplemental information and the work performed on the financial 
statement audit. This approach should enhance audit effectiveness as 
well as avoid duplication of audit procedures.
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    \10\ Rule 17a-5 under the Securities Exchange Act of 1934 
(``Exchange Act'') requires brokers and dealers registered with the 
SEC to submit financial reports to the SEC that include audited 
financial statements as well as certain required supporting 
schedules (``SEC Rule 17a-5''). See 17 CFR 240.17a-5. On July 30, 
2013, the SEC adopted amendments to SEC Rule 17a-5 to strengthen and 
clarify broker and dealer financial reporting requirements and also 
require that broker and dealer audits be conducted in accordance 
with PCAOB standards. See SEC Exchange Act Release No. 34-70073, 
Broker-Dealer Reports (July 30, 2013), 78 Federal Register 51910 
(August 21, 2013) (``SEC Release'').
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    In the Board's view, Auditing Standard No. 17 should provide 
regulators with greater confidence in the quality and consistency of 
supplemental information accompanying audited

[[Page 68876]]

financial statements of brokers,\11\ dealers \12\, and others.\13\ 
Supplemental information is often required by regulators for their 
oversight purposes. For example, the supplemental information brokers 
and dealers are required to include in their annual reports relates to 
their compliance with certain SEC rules regarding maintaining minimum 
net capital and reserves,\14\ specifically those governing the 
safeguarding of customer securities and funds in their filings with the 
Commission. Also, supplemental information includes schedules included 
in annual reports filed by employee stock purchase, savings, and 
similar plans on Form 11-K (``11-K filers''), For Annual Reports Of 
Employee Stock Purchase, Savings and Similar Plans Pursuant To Section 
15(D) Of The Securities Exchange Act Of 1934,\15\ when those entities 
elect to file plan financial statements and schedules prepared in 
accordance with the financial reporting requirements of ERISA.\16\
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    \11\ According to PCAOB Rule 1001(b)(iii), the term ``broker'' 
means a broker (as defined in Section 3(a)(4) of the Exchange Act) 
that is required to file a balance sheet, income statement, or other 
financial statement under Section 17(e)(1)(A) of that Act, where 
such balance sheet, income statement, or financial statement is 
required to be certified by a registered public accounting firm.
    \12\ According to PCAOB Rule 1001(d)(iii), the term ``dealer'' 
means a dealer (as defined in Section 3(a)(5) of the Exchange Act) 
that is required to file a balance sheet, income statement, or other 
financial statement under Section 17(e)(1)(A) of that Act, where 
such balance sheet, income statement, or financial statement is 
required to be certified by a registered public accounting firm.
    \13\ For example, certain employee benefit plans that are 
subject to the Employee Retirement Income Security Act of 1974 
(``ERISA'') file an annual report with the Commission on Form 11-K, 
which includes the plan's financial statements and schedules 
prepared in accordance with the financial reporting requirements of 
ERISA. See 17 CFR Sec.  240.15d-21, 17 CFR Sec.  249.311 and item 4 
of the ``Required Information'' section of SEC Form 11-K ``For 
Annual Reports Of Employee Stock Purchase, Savings And Similar Plans 
Pursuant To Section 15(D) Of The Securities Exchange Act Of 1934.''
    \14\ See paragraph (d)(2) of SEC Rule 17a-5.
    \15\ See 29 CFR 2520.103-1.
    \16\ See 17 CFR 240.15d-21, 17 CFR Sec.  249.311, and item 4 of 
the ``Required Information'' section of SEC Form 11-K ``For Annual 
Reports Of Employee Stock Purchase, Savings And Similar Plans 
Pursuant To Section 15(D) Of The Securities Exchange Act Of 1934.''
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    As discussed more fully in Exhibit 3, a number of developments led 
the Board to re-examine its requirements regarding supplemental 
information. Primarily, Section 982 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act \17\ (the ``Dodd-Frank Act'') gave 
the Board oversight of audits of brokers and dealers registered with 
the SEC. Under SEC Rule 17a-5, brokers and dealers are required to 
submit to the SEC financial reports containing certain schedules, 
including supporting schedules regarding (i) the computation of net 
capital; (ii) the computation for determination of reserve 
requirements; and (iii) information related to the broker's or dealer's 
possession or control of its clients' assets.\18\ These schedules 
provide important information that can support and assist the 
Commission and other broker or dealer ``designated examining 
authorities'' \19\ in their oversight of financial responsibility 
practices of brokers and dealers. In addition, as described in the 
SEC's release, one of the SEC's motivations for its amendments to SEC 
Rule 17a-5 to require that audits of brokers and dealers--including the 
examination of the financial statements and supplemental schedules in 
the financial report--be conducted in accordance with PCAOB standards 
was to ``better ensure alignment between broker-dealer audits and the 
regulatory policy objectives reflected in the Commission's financial 
responsibility rules.'' \20\
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    \17\ Public Law 111-203, 124 Stat. 1376 (July 21, 2010).
    \18\ See paragraph (d)(2) of SEC Rule 17a-5.
    \19\ Under SEC Rule 17d-1, Examination for Compliance with 
Applicable Financial Responsibility Rules, a registered broker or 
dealer that is a member of more than one securities self-regulatory 
organization may be assigned a ``designated examining authority'' or 
``DEA'' that is responsible for examining the broker or dealer for 
compliance with SEC financial responsibility rules. An example of a 
securities self-regulatory organization that is a DEA is the 
Financial Industry Regulatory Authority.
    \20\ See the SEC Release at 208.
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    On July 30, 2013, the Commission adopted amendments to SEC Rule 
17a-5 to require, among other things, that an auditor engaged by the 
broker or dealer provide an audit report based on an auditor's 
examination of the broker's or dealer's financial report, which 
consists of the financial statements and supporting schedules, in 
accordance with the standards of the PCAOB.\21\ However, the PCAOB's 
existing audit standards do not contemplate the SEC's requirements for 
an auditor's report on the examination of the financial statements and 
supporting schedules of a broker or dealer. As noted earlier, the 
Board's existing standard, AU sec. 551, describes the auditor's 
reporting responsibilities regarding supplemental information 
accompanying audited financial statements in terms of auditor-submitted 
documents and, additionally, does not specify audit procedures to be 
applied to test the supplemental information that is provided to the 
regulator. Accordingly, the Board decided to adopt Auditing Standard 
No. 17 and align its standard for performing auditing procedures and 
reporting on supplemental information with the SEC's requirements. Due 
to the importance of the required supplemental information for 
regulatory purposes, the Board also determined to include audit 
procedures designed to support the auditor's reporting requirements, 
including procedures for testing the supplemental information 
accompanying the financial statements.
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    \21\ See paragraphs (f)(1) and (g)(1) of SEC Rule 17a-5. See 
also paragraph (d)(1)(i)(C) of SEC Rule 17a-5, which requires that 
the auditor's report on the examination of the financial report of 
the broker or dealer be filed with the Commission.
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    Additionally, the amendments to SEC Rule 17a-5 also require certain 
brokers and dealers to include in their annual reports a compliance 
report that addresses, among other things, the broker's or dealer's 
compliance with the SEC rules requiring a broker or dealer to maintain 
a minimum level of net capital and a reserve of funds or qualified 
securities in an amount at least equal to the value of the amount of 
net funds owed to customers of the respective broker or dealer.\22\ In 
conjunction with these recent amendments, the Board also is adopting 
new standards for attestation engagements (the ``attestation 
standards'') that relate to brokers' and dealers' compliance reports 
required in SEC Rule 17a-5.\23\ The requirements in the attestation 
standards are closely related to the audit requirements in this 
standard regarding supporting schedules for brokers and dealers. Among 
other things, the attestation standards emphasize the importance of 
coordinating the work in the compliance attestation engagement with the 
audit of the financial statements and audit procedures performed on the 
schedules required under SEC Rule 17a-5.\24\
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    \22\ See paragraphs (f)(1), (g)(2)(i) and (ii) of SEC Rule 17a-
5. The net capital rule is 17 CFR 240.15c3-1, and the reserve 
requirements rule is paragraph (e) of 17 CFR 240.15c3-3.
    \23\ See Standards for Attestation Engagements Related to Broker 
and Dealer Compliance or Exemption Reports Required by the U.S. 
Securities and Exchange Commission and Related Amendments to PCAOB 
Standards, PCAOB Release No. 2013-007 (October 10, 2013).
    \24\ Id.
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    In addition to the schedules required by SEC Rule 17a-5, Auditing 
Standard No. 17 covers supplemental information required to be 
presented pursuant to the rules and regulations of a regulatory 
authority when that information is reported on in relation to financial 
statements that are audited in accordance with PCAOB standards. For 
example, Auditing Standard No. 17 covers the schedules in Form 11-K of 
an 11-K filer that elects to file plan

[[Page 68877]]

financial statements and schedules prepared in accordance with the 
financial reporting requirements of ERISA (``covered 11-K filer'').\25\
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    \25\ The new standard would not apply to 11-K filers that do not 
make that election because the SEC-required schedules for those 11-K 
filers are part of the audited financial statements.
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    In the Board's view, Auditing Standard No. 17 promotes investor 
protection because of the importance of supplemental information in 
meeting regulatory objectives regarding audits of financial statements 
of brokers, dealers, and others. Because such information is often 
critical to the effectiveness of regulatory oversight, Auditing 
Standard No. 17 requires the performance of audit procedures to test 
the supplemental information to support the auditor's report on the 
supplemental information. The standard also requires the auditor to 
evaluate whether the supplemental information complies with applicable 
regulatory requirements, which should help facilitate consistent 
compliance with regulatory requirements and give regulators greater 
confidence about the reliability of the supplemental information 
provided for regulatory oversight activities that are important to 
investor protection.
    For example, in the context of oversight of brokers and dealers, 
the requirements in the standard for testing and evaluating 
supplemental information could improve the quality of the supporting 
schedules that regulators rely on when considering whether the broker 
or dealer maintains adequate safeguards over customer funds and 
securities. Also, strengthening and clarifying the auditing 
requirements for applying procedures and reporting on supplemental 
information could facilitate consistent compliance with SEC Rule 17a-5.
    For 11-K filers, the requirements in the standard for testing and 
evaluating supplemental information may increase the quality of 
information available to investors, especially the plans' participants.
    Auditing Standard No. 17 also requires the auditor to coordinate 
the auditor's work with the financial statement audit. To the extent 
that the supplemental information relates to information in the 
financial statements, the enhanced audit attention to the supplemental 
information could enhance the confidence of regulators and other users 
in the reliability of the financial statements and supplemental 
information.
(b) Statutory Basis
    The statutory basis for the proposed rules is Title I of the 
Sarbanes-Oxley Act.

B. Board's Statement on Burden on Competition

    Not Applicable.

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

    The Board released the proposed rules for public comment in PCAOB 
Release No. 2013-008 (October 10, 2013). The Board received eleven 
written comment letters. The Board has carefully considered all 
comments received. The Board's response to the comments it received and 
the changes made to the rules in response to the comments received are 
discussed below.
Applicability of the Standard and Definition of Supplemental 
Information (Appendix A--Definitions)
    Auditing Standard No. 17 applies when the auditor of the company's 
financial statements is engaged to perform audit procedures and report 
on supplemental information that accompanies financial statements 
audited pursuant to PCAOB standards.
    The SEC and other regulators may require regulated entities, such 
as brokers and dealers, to file supplemental information with their 
annual financial reports for regulatory purposes.\26\ In other cases, 
companies may voluntarily provide supplemental information that is 
derived from, or ancillary to, the company's financial statements 
audited pursuant to PCAOB standards.
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    \26\ Rule 17a-5 under the Securities Exchange Act of 1934 
(``Exchange Act'') requires brokers and dealers registered with the 
SEC to submit financial reports to the SEC that include audited 
financial statements as well as certain required supporting 
schedules (``SEC Rule 17a-5''). See 17 CFR 240.17a-5. Paragraph 
(d)(2) of SEC Rule 17a-5 specifically addresses the supporting 
schedules. See also SEC Exchange Act Release No. 34-70073, Broker-
Dealer Reports (July 30, 2013), 78 Federal Register 51910 (August 
21, 2013) (``SEC Release'').
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    The proposed standard included a definition of the types of 
supplemental information to which this standard would apply. In 
response to questions in the proposing release, several commenters 
stated that the proposed definition was appropriate, while other 
commenters expressed concern that, as the proposed definition was 
expressly tailored to supplemental information included in certain SEC 
filings by brokers and dealers, the definition did not describe all 
types of supplemental information that auditors of issuers, brokers, 
and dealers might be engaged to report on.
    In particular, several commenters expressed concern that the 
proposed definition would exclude certain types of supplemental 
information because that information is not included in SEC filings. 
One commenter noted that information that is ancillary to financial 
statements and not otherwise required to be presented pursuant to the 
rules and regulations of the SEC or another relevant regulatory body, 
may also be reported on, but not included in an SEC filing. Another 
commenter gave examples of situations when issuers engage auditors to 
report on supplemental information that would be excluded under the 
proposed standard's definition of supplemental information, including 
subsidiary-specific data or information used to calculate financial 
ratios related to a loan covenant or other contractual provision.
    After consideration of these comments, the definition of 
supplemental information has been revised to remove the references to 
SEC filings. Auditing Standard No. 17 covers the following types of 
supplemental information:
    a. Supporting schedules that brokers and dealers are required to 
file pursuant to SEC Rule 17a-5; \27\
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    \27\ See paragraph (d)(2) of SEC Rule 17a-5.
---------------------------------------------------------------------------

    b. Supplemental information (i) required to be presented pursuant 
to the rules and regulations of a regulatory authority and (ii) covered 
by an independent public accountant's report on that information in 
relation to financial statements that are audited in accordance with 
PCAOB standards; or
    c. Information that is (i) ancillary to the audited financial 
statements, (ii) derived from the company's accounting books and 
records, and (iii) covered by an independent public accountant's report 
on that information in relation to the financial statements that are 
audited in accordance with PCAOB standards.
    As mentioned previously, the standard covers supplemental 
information required by regulatory authorities and supplemental 
information that is voluntarily provided, when the auditor is engaged 
to report on that information in relation to the financial statements 
as a whole and the financial statements are audited in accordance with 
PCAOB standards. However, the standard itself does not impose an 
obligation to audit such supplemental information.
    By its terms, the standard would not apply to unaudited 
supplemental information. For example, the standard would not apply to 
the information

[[Page 68878]]

required by the accounting standards or Item 302 of SEC Regulation S-K, 
17 CFR 229.302. Similarly, auditors should continue to look to the 
requirements of AU sec. 558, Required Supplementary Information, 
regarding unaudited information about oil and gas producing activities 
required by Item 302(b) of Regulation S-K 17 CFR 229.302(b) and 
Financial Accounting Standards Board's Accounting Standards 
Codification, Topic 932, Extractive Industries--Oil and Gas, section 
932-50-2. Likewise, auditors should continue to look to the 
requirements of AU sec. 722, Interim Financial Information, regarding 
selected quarterly financial data required by Item 302(a) of Regulation 
S-K. Additionally, auditors should continue to look to AU sec. 550, 
Other Information in Documents Containing Audited Financial Statements, 
including Management's Discussion and Analysis of Financial Condition 
and Results of Operations, unless the auditor is engaged to examine and 
report on that information.
    Further, the standard does not apply if the auditor who is engaged 
to audit and report on supplemental information did not audit the 
financial statements. In those situations, the auditor would not have 
the knowledge of the company's financial statements or the evidence 
regarding the accounts and disclosures in the financial statements 
necessary to express an opinion regarding whether the supplemental 
information is fairly stated, in all material respects, in relation to 
the financial statements as a whole. Accordingly, in those instances, 
the auditor of the supplemental information should look to the 
requirements in AU sec. 623, Special Reports.
    Some commenters suggested that the standard would not apply to 
supplemental information prepared after the financial statement audit 
because of the requirement in the proposed standard, and related 
statement in the auditor's report, that the audit procedures on the 
supplemental information be performed in conjunction with the audit of 
the financial statements. Auditing Standard No. 17 applies when the 
auditor of the company's financial statements is engaged to perform 
audit procedures and report on supplemental information that 
accompanies audited financial statements, regardless of the timing of 
the preparation of the supplemental information.
    To address issues regarding timing, a footnote was added to 
paragraph 1 of the standard to clarify that supplemental information 
``accompanies financial statements'' when it is (1) presented in the 
same document as the audited financial statements, (2) presented in a 
document in which the audited financial statements are incorporated by 
reference, or (3) incorporated by reference in a document containing 
the audited financial statements.
    Additionally, the note to paragraph 3.c. of the standard includes 
the phrase ``in conjunction with.'' That phrase is meant to indicate 
that the auditor of the financial statements is in a position to take 
into account other information available as a result of the financial 
statement audit, but Auditing Standard No. 17 does not require that the 
two engagements be performed simultaneously. The note to paragraph 3.c. 
explains the auditor's responsibilities for performing audit procedures 
on the supplemental information ``in conjunction with'' the audit of 
the financial statements. That note states that the auditor should take 
into account relevant evidence from the audit of the financial 
statements and the attestation engagements \28\ in planning and 
performing audit procedures related to the supplemental information and 
in evaluating the results of the audit procedures to form the opinion 
on the supplemental information. As such, the language in the standard 
was retained largely as proposed.
---------------------------------------------------------------------------

    \28\ See Standards for Attestation Engagements Related to Broker 
and Dealer Compliance or Exemption Reports Required by the U.S. 
Securities and Exchange Commission and Related Amendments to PCAOB 
Standards, PCAOB Release No. 2013-007 (October 10, 2013).
---------------------------------------------------------------------------

Exclusion of Schedules Required by SEC Regulation S-X
    Some commenters expressed concern with the definition of 
supplemental information because of the discussion in the proposing 
release,\29\ which stated that the standard would not apply to 
schedules prepared pursuant to SEC Regulation S-X.\30\ One commenter 
noted that diversity in practice suggests that these schedules may be 
considered supplementary and not part of the basic financial statements 
covered by the standard auditor's opinion. The views of these 
commenters are not consistent with SEC requirements. Section 1-01(b) of 
SEC Regulation S-X \31\ states ``the term financial statements as used 
. . . shall be deemed to include all notes to the statements and all 
related schedules''. Thus, it is clear that the schedules required by 
SEC Regulation S-X are part of the financial statements. As such, no 
changes were made to the standard.\32\
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    \29\ See Section I.A.1 of Proposed Auditing Standard, Auditing 
Supplemental Information Accompanying Audited Financial Statements 
and Related Amendments to PCAOB Standards, PCAOB Release No. 2011-
005 (July 12, 2011).
    \30\ See Section 1-01(b) of SEC Regulation S-X, 17 CFR 210.1-
01(b).
    \31\ See e.g., Rules 5-04, 6-10, 6A-05, 7-05, and Article 12 of 
Regulation S-X, 17 CFR 210.5-04, 6-10, 6A-05, 7-05, and 12.
    \32\ The schedules required by SEC Regulation S-X should be 
referred to in the introductory paragraph and in the opinion of the 
standard auditor's report set forth in AU sec. 508, Reports on 
Audited Financial Statements.
---------------------------------------------------------------------------

``In Relation to'' the Financial Statements as a Whole (Paragraphs 1 
and 2)
    As stated in the proposing release, the auditor's report on 
supplemental information in the standard includes an expression of an 
opinion on whether the supplemental information is fairly stated, in 
all material respects, in relation to the financial statements as a 
whole. In order to express an opinion on the supplemental information 
the auditor performs the procedures set forth in the standard, to the 
extent not performed in the course of the audit. The concept of 
expressing an opinion on the supplemental information ``in relation 
to'' the financial statements as a whole carries over from the Board's 
existing standard for supplemental information, AU sec. 551.
    The proposing release requested comment regarding whether to change 
from the AU sec. 551 ``in relation to'' approach to reporting on 
supplemental information to a stand-alone reporting approach. Overall, 
commenters supported the decision to retain the ``in relation to'' 
approach. One commenter stated that it was an appropriate degree of 
responsibility for supplemental information. Another commenter stated 
that the level of assurance provided by this type of engagement meets 
the needs of users in a cost-effective manner.
    After consideration of the comments received, the Board determined 
that the ``in relation to'' approach remains appropriate for reporting 
on supplemental information accompanying audited financial statements. 
Nothing in the comments received indicates that an ``in relation to'' 
opinion on supplemental information is inadequate for financial 
statement users or that the additional cost for stand-alone assurance 
is warranted for all engagements involving supplemental information. 
The Board also considered that existing standards, specifically AU sec. 
623, establish requirements in those limited situations in which 
auditors are engaged to audit supplemental information on a stand-alone 
basis.
    Some commenters expressed concern that use of the word ``audit'' in 
the

[[Page 68879]]

introduction and objective paragraphs of the proposed standard implied 
that the standard requires the auditor to issue a stand-alone audit 
opinion on supplemental information and that the reference to audit 
goes beyond the meaning of ``in relation to.''
    The standard does not require the auditor to issue a stand-alone 
audit opinion on the supplemental information. However, the standard 
emphasizes that the auditor should perform procedures to obtain 
sufficient appropriate audit evidence to support his or her opinion 
that the supplemental information is fairly stated, in all material 
respects, ``in relation to'' the financial statements as a whole. To 
avoid misperceptions, the wording in paragraphs 1 and 2 of the standard 
has been revised to state, ``. . . when the auditor of the company's 
financial statements is engaged to perform audit procedures and report 
on supplemental information. . . .'' Further, several of the amendments 
to PCAOB standards were revised to reflect this wording.
Materiality (Paragraph 3)
    The proposed standard included a requirement for the auditor, in 
the performance of audit procedures on supplemental information, to use 
the same materiality considerations as those used in planning and 
performing the audit of the financial statements. Auditing Standard No. 
11, Consideration of Materiality in Planning and Performing an Audit, 
describes the auditor's responsibilities for considering materiality in 
planning and performing an audit of the financial statements. 
Commenters generally supported using the same materiality 
considerations for supplemental information as those used in the 
financial statement audit. In general, auditors that are engaged to 
express an opinion on supplemental information ``in relation to'' the 
financial statements as a whole use the same materiality considerations 
for the audit of the supplemental information as those used in planning 
and performing the audit of the financial statements.
    One commenter recommended that the standard acknowledge instances 
in which regulatory requirements may prescribe a materiality level for 
audit procedures over supplemental information that differs from the 
materiality level used in the audit of the financial statements. As 
auditors might encounter instances in which this occurs, a note has 
been added to paragraph 3.b. of the standard stating that ``if 
applicable regulatory requirements specify a lower materiality level to 
be applied to certain supplemental information, the auditor should use 
those prescribed threshold requirements in planning and performing 
audit procedures for the supplemental information.'' For example, if 
the supplemental information consisted of a list of transactions over a 
threshold specified by a regulatory agency, the auditor should use that 
prescribed threshold in planning and performing the audit procedures to 
be applied to the supplemental information. This is consistent with the 
requirement in Auditing Standard No. 11 to use a lower materiality 
level for accounts and disclosures for which there is a substantial 
likelihood that misstatements of lesser amounts than the materiality 
level established for the financial statements as a whole would 
influence the judgment of a reasonable investor.\33\
---------------------------------------------------------------------------

    \33\ See paragraph 7 of Auditing Standard No. 11.
---------------------------------------------------------------------------

    Another commenter expressed concern that paragraph 3 of the 
proposed standard, which requires the auditor to base the nature, 
timing, and extent of audit procedures on, among other things, the 
materiality of the information presented, implied that the auditor will 
undertake a second audit, separate from the audit of the financial 
statements. Paragraph 3 of the standard does not require the auditor to 
perform a second audit. The note to paragraph 3.b. specifically 
provides that the auditor should use the same materiality 
considerations for the supplemental information as that for the audit 
of the financial statements. In general, the objective of using the 
same materiality considerations from the financial statement audit is 
consistent with the principle of reporting on the supplemental 
information in relation to the financial statements as a whole. As 
such, paragraph 3 was retained substantially as proposed. If the 
auditor is engaged to audit and report on a stand-alone basis (i.e., 
not ``in relation to''), separate and apart from the audit of the 
financial statement, the auditor should look to the requirements in AU 
sec. 623. A stand-alone audit of supplemental information under AU sec. 
623 is usually more extensive than applying audit procedures and 
reporting on supplemental information in relation to the financial 
statements taken as a whole.\34\
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    \34\ See AU sec. 623.13.
---------------------------------------------------------------------------

Performing Audit Procedures on Supplemental Information Accompanying 
Audited Financial Statements (Paragraphs 3 and 4)
    Similar to AU sec. 551, the standard auditor's report on 
supplemental information pursuant to Auditing Standard No. 17 includes 
an opinion on whether the supplemental information is fairly stated, in 
all material respects, in relation to the financial statements as a 
whole. As with any audit opinion, it is necessary for the auditor to 
obtain reasonable assurance so the auditor has a reasonable basis for 
that opinion.\35\ Accordingly, Auditing Standard No. 17 includes a 
requirement for the auditor to perform audit procedures to obtain 
appropriate audit evidence that is sufficient to support the auditor's 
opinion on the supplemental information in relation to the financial 
statements as a whole.
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    \35\ This also is consistent with the requirements of SEC Rule 
17a-5, which requires the auditor to perform an examination of the 
broker's or dealer's financial report, which consists of the 
financial statements and supplemental schedules. See paragraph (g) 
of SEC Rule 17a-5. See also the SEC Release at 74, which discusses 
the SEC's intention that the auditor obtain reasonable assurance 
regarding the financial statements and supporting schedules of 
brokers and dealers.
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    At the same time, Auditing Standard No. 17 recognizes that the 
circumstances in which the auditor expresses an opinion on supplemental 
information differ from those of a stand-alone audit. That is, the 
opinion under Auditing Standard No. 17 is expressed in relation to the 
financial statements as a whole, and the auditor's procedures on the 
financial statements ordinarily provide substantial evidence that is 
relevant to the supplemental information. Thus, the standard provides 
that the nature, timing, and extent of audit procedures necessary to 
obtain sufficient appropriate audit evidence and to report on the 
supplemental information depend on, among other things:
     The risk of material misstatement of the supplemental 
information;
     The materiality considerations relevant to the information 
presented;
     The evidence obtained from the audit of the financial 
statements and, if applicable, other engagements by the auditor or 
affiliates of the accounting firm for the period presented; and
     Whether a qualified opinion, an adverse opinion, or a 
disclaimer of opinion was issued on the financial statements.
    Further, the standard states that the procedures performed 
regarding the supplemental information should be planned and performed 
in conjunction

[[Page 68880]]

with the audit of the financial statements and, for audits of brokers 
and dealers, the procedures should be coordinated with the attestation 
engagements related to compliance or exemption reports required by the 
SEC.\36\ One commenter stated that this requirement implies that the 
auditor would be required to separately consider and document audit 
planning considerations relative to supplemental information.
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    \36\ For example, a compliance examination performed pursuant to 
Attestation Standard No. 1, Examination Engagements Regarding 
Compliance Reports of Brokers and Dealers, includes compliance tests 
relating to the schedules the broker or dealer used to determine 
compliance with the SEC's net capital rule, 17 CFR 240.15c3-1, and 
the reserve requirements rule, paragraph (e) of 17 CFR 240.15c3-3.
---------------------------------------------------------------------------

    While the standard requires the auditor to assess the risk of 
material misstatement of the supplemental information as part of 
determining the nature, timing, and extent of audit procedures, the 
standard allows this assessment to be performed with, and informed by, 
the planning and performance of procedures relating to the financial 
statement audit. The auditor's knowledge obtained from the audit of 
financial statements and any related engagements (such as an 
attestation engagement) should generally provide necessary knowledge 
for the auditor to assess the risk of material misstatement regarding 
the supplemental information.
    For example, evidence regarding the completeness and accuracy of 
the supplemental information that brokers and dealers are required to 
file pursuant to SEC Rule 17a-5 may be obtained from procedures 
performed during an attestation engagement regarding compliance for a 
broker or dealer and include procedures regarding safeguarding 
securities or compliance with certain SEC rules.
    In addition, paragraph 4 of the standard includes requirements for 
the auditor to perform the following procedures on supplemental 
information:
    a. Obtain an understanding of the purpose of the supplemental 
information and the criteria management used to prepare the 
supplemental information, including relevant regulatory requirements;
    b. Obtain an understanding of the methods of preparing the 
supplemental information, evaluate the appropriateness of those 
methods, and determine whether those methods have changed from the 
methods used in the prior period and, if the methods have changed, 
determine the reasons for and evaluate the appropriateness of such 
changes;
    c. Inquire of management about any significant assumptions or 
interpretations underlying the measurement or presentation of the 
supplemental information;
    d. Determine that the supplemental information reconciles to the 
underlying accounting and other records or to the financial statements, 
as applicable;
    e. Perform procedures to test the completeness and accuracy of 
information presented in the supplemental information to the extent 
that it was not tested as part of the audit of financial statements; 
and
    f. Evaluate whether the supplemental information, including its 
form and content, complies with relevant regulatory requirements or 
other applicable criteria, if any.
    Some commenters stated that certain of the required procedures in 
the proposed standard exceeded those procedures necessary to support an 
auditor's ``in relation to'' opinion on supplemental information. 
Commenters stated that the required procedures in paragraph 4.d. and 
4.e. expand the scope of the auditor's responsibility as compared to 
the existing requirements in AU sec. 551 with respect to information 
that was not derived from the underlying accounting records. One 
commenter further stated that information not derived from the 
underlying accounting records, by its nature, is not subject to 
internal control over financial reporting and likely would not have 
been subjected to the auditor's procedures in the audit of the 
financial statements.
    In many instances, supplemental information reported on under PCAOB 
standards is required by regulators that have determined that the 
information required is important to carrying out their regulatory 
authority, and users of that information can reasonably expect that an 
auditor's report on supplemental information means that the 
supplemental information has been subjected to audit procedures. This 
is consistent with AU sec. 551.07, which states that the auditor may 
``choose to modify or redirect certain of the procedures to be applied 
in the audit of the basic financial statements so that [the auditor] 
may express an opinion on the accompanying information'' under that 
standard. If, as some commenters suggested, the auditor's procedures 
are limited to solely those procedures performed in the financial 
statement audit, it is possible that few or no audit procedures might 
be applied directly to the supplemental information in some 
engagements, and the auditor would have little or no basis for his or 
her opinion.
    One commenter suggested a revision to the proposed requirement 
regarding the auditor's responsibility for understanding and evaluating 
the methods used by management to prepare the supplemental information. 
The commenter recommended that the auditor should evaluate the 
appropriateness of the methods used by management to prepare the 
supplemental information, as well as any changes to those methods. Such 
a suggestion can be viewed as a necessary step in evaluating whether 
the supplemental information is fairly stated, so the standard has been 
revised to specifically include that procedure.
    One commenter suggested that consultation with legal counsel or 
other experts may be necessary. The standard does not prohibit such 
consultations. Other commenters suggested that additional procedures be 
included in the standard, such as a requirement for the auditor to 
consider the complexity of the methodology used to prepare supplemental 
information, particularly in those situations in which complex 
analytical or sampling techniques have been employed in the preparation 
of underlying data. These suggestions did not warrant changes to the 
standard because the suggested examples are factors that affect the 
risk of material misstatement of the supplemental information, which 
the standard already addresses in paragraph 3.
Management Representations (Paragraph 5)
    The proposed standard included a requirement for the auditor to 
obtain written representations from management. Commenters generally 
supported the language as proposed. One commenter recommended that the 
standard include an additional requirement for auditors to obtain a 
representation that management acknowledge its responsibility for the 
fair presentation of the supplemental information, including its form 
and content, in accordance with regulatory requirements or other 
applicable criteria. This additional requirement has been incorporated 
into the standard.
    One commenter suggested that the standard specifically address 
management representations with respect to supplemental information 
arising after the auditor has been engaged to perform the financial 
statement audit. As discussed previously, the auditor's and 
management's responsibilities relating to supplemental information are 
not affected by timing considerations, such

[[Page 68881]]

as whether or not the audit procedures required for the supplemental 
information were considered when the auditor was first engaged to audit 
the financial statements; therefore, no changes were made to the 
standard to address such circumstances. Further, the standard does not 
prohibit auditors from obtaining additional representations from 
management in the case in which the auditor believes additional 
management representations would be appropriate under the 
circumstances.
Evaluation of Audit Results (Paragraphs 6-9)
    The proposed standard included a requirement for the auditor to 
evaluate whether the supplemental information, including its form and 
content, is fairly stated, in all material respects, in relation to the 
financial statements as a whole, including whether the supplemental 
information is presented in conformity, in all material respects, with 
the relevant regulatory requirements or other applicable criteria. The 
evaluation should encompass, among other things, whether the 
information: is complete and accurate, is consistent with the audited 
financial statements, and complies with relevant regulatory 
requirements, if applicable.
    Commenters generally agreed that the auditor's evaluation of form 
and content is important to the auditor's evaluation as to whether the 
supplemental information is fairly stated. One commenter suggested that 
modification be made to paragraph 6 so that the evaluation of audit 
results is in the context of the auditor's responsibility to form an 
opinion on the supplemental information. This recommendation has been 
reflected in the standard because it provides additional context that 
helps to clarify the auditor's responsibilities in this area.
    Paragraph 9 of the proposed standard included a requirement for the 
auditor to consider the effect of any modifications to the audit report 
on the financial statements when evaluating whether the supplemental 
information is fairly stated, in all material respects, in relation to 
the financial statements as a whole. One commenter stated that the 
auditor should be prohibited from expressing an ``in relation to'' 
opinion on the supplemental information when an adverse or disclaimer 
of opinion has been issued. Other commenters suggested that additional 
guidance would be necessary regarding the effect of modification of the 
auditor's report on the financial statements on the auditor's report on 
supplemental information. Some commenters suggested that the standard 
be revised to follow the requirements in the existing standard more 
closely regarding when the auditor has issued an adverse opinion or 
disclaims an opinion on the financial statements.
    After consideration of the comments received, the standard was 
revised to include updated and expanded direction on reporting in these 
situations. Specifically, paragraph 9 of the standard has been revised 
to state that the auditor should evaluate the effect of any 
modifications to the audit report on the financial statements when 
forming an opinion on supplemental information. The standard provides 
that:
    a. When the auditor expresses a qualified opinion on the financial 
statements and the basis for the qualification also applies to the 
supplemental information, the auditor should describe the effects of 
the qualification on the supplemental information in the report on 
supplemental information and should express a qualified opinion on the 
supplemental information.
    b. When the auditor expresses an adverse opinion, or disclaims an 
opinion on the financial statements, the auditor should express an 
adverse opinion, or disclaim an opinion, on the supplemental 
information, whichever is appropriate.
Reporting (Paragraphs 10-15)
    The proposed standard included requirements regarding reporting on 
supplemental information that described the auditor's responsibilities 
when reporting on the types of supplemental information covered by the 
proposed standard.
    The standard does not retain from AU sec. 551 the statement that 
the supplemental information ``is presented for purposes of additional 
analysis and is not a required part of the basic financial 
statements.'' One commenter supported retaining this wording in the 
standard. However, such a statement could be misunderstood by users as 
indicating that the supplemental information is supplied on a voluntary 
basis even when governed by rules regarding content or presentation. In 
fact, supplemental information presented by brokers, dealers, and 
others often is presented in conjunction with audited financial 
statements to comply with rules of regulatory agencies that generally 
specify the form and content of the information to be provided.
    Further, the standard does not retain from AU sec. 551 the 
statement that ``the audit has been performed for the purpose of 
forming an opinion on the basic financial statements taken as a 
whole.'' One commenter supported including this wording in the 
standard. However, such a statement could confuse users regarding the 
relationship between the audit of financial statements and the 
auditor's ``in relation to'' opinion on supplemental information given 
that audit procedures have been performed on the supplemental 
information that serve to support the auditor's ``in relation to'' 
opinion.
    The reporting language in the standard is intended to clearly 
communicate the auditor's responsibilities regarding evaluating the 
supplemental information. For example, the standard requires the 
auditor's report to state that the supplemental information has been 
subjected to audit procedures performed in conjunction with the audit 
of the financial statements. Also, the standard includes a requirement 
for the auditor to describe the audit procedures on the supplemental 
information. This approach differs from the report language provided in 
AU sec. 551, which provides that the auditor's report should state that 
the supplemental information has been subjected to the auditing 
procedures that were applied in the audit of the basic financial 
statements.
    Consistent with AU sec. 551, paragraph 11 of the standard states 
that, unless prescribed by regulatory requirements,\37\ the auditor may 
either include the auditor's report on the supplemental information in 
the auditor's report on the financial statements or issue a separate 
report on the supplemental information. If the auditor issues a 
separate report on the supplemental information, the standard provides 
that the auditor's report on the supplemental information should 
identify the auditor's report on the financial statements.
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    \37\ For example, paragraph (g)(1) of SEC Rule 17a-5 requires 
the auditor to prepare an auditor's report on the broker's or 
dealer's financial report, which covers both the financial 
statements and supporting schedules.
---------------------------------------------------------------------------

    The standard also includes an example of the auditor's report on 
supplemental information when included with the auditor's report on the 
financial statements.
    One commenter suggested that the reporting elements include a 
statement that the supplemental information is the responsibility of 
management and that such a revision would serve to clarify the 
auditor's responsibility in this area. This recommendation has been 
incorporated into the list of required

[[Page 68882]]

elements in the auditor's report on supplemental information. Some 
commenters expressed concern that report language in paragraph 13 of 
the proposed standard, `` . . . and accordingly, its form and content 
comply, in all material respects, with the relevant regulatory 
requirements,'' could be viewed as a separate opinion regarding 
compliance or as conveying more responsibility for form and content 
than appropriate.
    Because the intention of the proposed standard was not to require a 
stand-alone opinion on the supplemental information or on compliance, 
the standard includes revised report elements intended to emphasize 
that the auditor's evaluation of form and content is part of 
determining whether the supplemental information is fairly stated, in 
all material respects, in relation to the audited financial statements 
rather than a separate opinion on compliance. The revisions are also 
responsive to commenters who were generally supportive that evaluating 
form and content is important to the auditor's determination of whether 
supplemental information is fairly stated in relation to the audited 
financial statements.
    The standard states that if the auditor is unable to obtain 
sufficient appropriate audit evidence to support an opinion on the 
supplemental information, the auditor should disclaim an opinion on the 
supplemental information. In those situations, the auditor's report on 
the supplemental information should describe the reason for the 
disclaimer and state that the auditor is unable to and does not express 
an opinion on the supplemental information.
    If the supplemental information consists of two or more schedules 
and the auditor is able to obtain sufficient appropriate audit evidence 
to support an opinion on some but not all schedules, the auditor may 
express an opinion on only those schedules for which he or she obtained 
sufficient appropriate evidence but should disclaim an opinion on the 
other schedules. The standard provides the elements that should be 
included in the auditor's report on supplemental information, many of 
which are the same as those included in the proposed standard.
    Other commenters expressed concern that the reporting requirements 
in the proposed standard would require a registered public accounting 
firm to make a legal determination regarding a company's compliance 
with relevant regulatory rules. The auditor's report issued pursuant to 
the standard does not provide, or purport to provide, a legal 
determination of a broker's or dealer's compliance with the net capital 
rule or the reserve requirements rule or any other legal determination. 
However, such a report may be useful to legal counsel or others in 
making such determinations.
    One commenter suggested including a reference to AU sec. 561, 
Subsequent Discovery of Facts Existing at the Date of the Auditor's 
Report, in the proposed standard. The commenter suggested that this 
standard might be applicable in situations in which the date of the 
auditor's report on supplemental information is subsequent to the date 
of the auditor's report on the financial statements. Such a revision 
would serve to remind auditors of their responsibilities under AU sec. 
561. A footnote to paragraph 12.b. was added to address this topic.
Comparison of the Requirements of Auditing Standard No. 17 with the 
Analogous Standard of the Auditing Standards Board of the American 
Institute of Certified Public Accountants
    The release accompanying the proposed standard discussed certain 
noteworthy differences between requirements of Auditing Standard No. 
17, Auditing Supplemental Information Accompanying Audited Financial 
Statements, and the analogous standard of the Auditing Standards Board 
(``ASB'') of the American Institute of Certified Public Accountants 
(``AICPA''). The analogous standard of the AICPA is Statement on 
Auditing Standards, Supplementary Information in Relation to the 
Financial Statements as a Whole (``AU-C Section 725'').\38\ This 
comparison does not cover the application and explanatory material in 
the ASB standard.\39\ The International Auditing and Assurance 
Standards Board does not have an analogous standard.
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    \38\ These AU-C Sections are contained in Statement on Auditing 
Standards No. 122, Statement on Auditing Standards: Clarification 
and Recodification (``SAS No. 122''). In October 2011, the ASB 
adopted SAS No. 122, which contains 39 clarified SASs with ``AU-C'' 
section numbers for each clarified SAS. The ``AU-C'' is a temporary 
identifier to avoid confusion with references to existing ``AU'' 
sections in AICPA Professional Standards.
    \39\ Paragraph A64 of the AU-C 200, Overall Objectives of the 
Independent Auditor and the Conduct of an Audit in Accordance with 
Generally Accepted Auditing Standards, states that although such 
guidance ``does not in itself impose a requirement, it is relevant 
to the proper application of the requirements of an AU-C section.''
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    This discussion is provided for informational purposes only. It is 
not a summary of or substitute for Auditing Standard No. 17 itself. 
This comparison may not represent the views of the ASB regarding its 
standard.
Conditions in Order to Opine on Supplemental Information
PCAOB
    Auditing Standard No. 17 does not include conditions in order to 
opine on supplemental information. Such conditions are not considered 
necessary in the standard because the supplemental information covered 
by Auditing Standard No. 17 is generally required by the SEC or other 
regulatory bodies.
ASB
    AU-C Section 725 states that, in order to opine on whether the 
supplementary information is fairly stated, in all material respects, 
in relation to the financial statements as a whole, the auditor should 
determine that: (a) The supplementary information was derived from, and 
relates directly to, the underlying accounting and other records used 
to prepare the financial statements; (b) the supplementary information 
relates to the same period as the financial statements; and (c) the 
auditor issued an audit report on the financial statements that 
contained neither an adverse opinion nor a disclaimer of opinion. 
Although Auditing Standard No. 17 does not contain such explicit 
conditions, the scope of Auditing Standard No. 17 is similar to AU-C 
Section 725 in that both standards apply only when the auditor of the 
financial statements is engaged to perform audit procedures and report 
on supplemental information accompanying audited financial statements.
    AU-C Section 725 also states that the auditor should determine that 
the supplementary information will accompany the entity's audited 
financial statements or that such audited financial statements will be 
made readily available by the entity. Auditing Standard No. 17 does not 
require that the supplementary information accompany the entity's 
audited financial statements, or that such audited financial statements 
will be made readily available by the entity. Rather, rules of the SEC 
and other regulatory agencies specify the requirements for filing or 
furnishing supplemental information, and whether that supplemental 
information is to be made publically available.

[[Page 68883]]

Performing Audit Procedures on Supplemental Information Accompanying 
Audited Financial Statements
PCAOB
    Paragraph 4 of Auditing Standard No. 17 requires that the auditor 
perform the following procedures:
     Obtain an understanding of the purpose of the supplemental 
information and the criteria management used to prepare the 
supplemental information, including relevant regulatory requirements;
     Obtain an understanding of the methods of preparing the 
supplemental information, evaluate the appropriateness of those 
methods, and determine whether those methods have changed from the 
methods used in the prior period and, if the methods have changed, 
determine the reasons for and evaluate the appropriateness of such 
changes;
     Inquire of management about any significant assumptions or 
interpretations underlying the measurement or presentation of the 
supplemental information;
     Determine that the supplemental information reconciles to 
the underlying accounting and other records or to the financial 
statements, as applicable;
     Perform procedures to test the completeness and accuracy 
of the information presented in the supplemental information to the 
extent that it was not tested as part of the audit of financial 
statements; and
     Evaluate whether the supplemental information, including 
its form and content, complies with relevant regulatory requirements or 
other applicable criteria, if any.
    Additionally, a note to paragraph 3.b. of Auditing Standard No. 17 
includes a requirement that when planning and performing the audit 
procedures to report on supplemental information, the auditor generally 
should use the same materiality considerations as those used in 
planning and performing the audit of the financial statements. 
Additionally, that note further states that if applicable regulatory 
requirements specify a lower materiality level to be applied to certain 
supplemental information, the auditor should use those prescribed 
threshold requirements in planning and performing audit procedures for 
the supplemental information.
ASB
    AU-C Section 725 requires that, in addition to the procedures 
performed during the audit of the financial statements, in order to 
opine on whether supplementary information is fairly stated, in all 
material respects, in relation to the financial statements as a whole, 
the auditor should perform certain procedures using the same 
materiality level used in the audit of the financial statements.
    AU-C Section 725 specifically requires the auditor to inquire of 
management about the purpose of the supplementary information and the 
criteria used by management to prepare the supplementary information, 
such as an applicable financial reporting framework, criteria 
established by a regulator, a contractual agreement, or other 
requirements, and to determine whether the form and content of the 
supplementary information complies with the applicable criteria.
    Paragraph 4.a. of Auditing Standard No. 17 includes a requirement 
for the auditor to obtain an understanding of the purpose of the 
supplemental information and the criteria management used to prepare 
the supplemental information, including relevant regulatory 
requirements.
    AU-C Section 725 requires the auditor to obtain an understanding 
about the methods of preparing the supplementary information and to 
determine whether the methods of preparing the supplementary 
information have changed from those used in the prior period and, if 
the methods have changed, the reasons for such changes.
    Paragraph 4.b. of Auditing Standard No. 17 includes requirements 
that the auditor obtain an understanding of the methods of preparing 
the supplemental information, evaluate the appropriateness of those 
methods, and determine whether those methods have changed from the 
methods used in the prior period, and, if the methods have changed, 
determine the reasons for and evaluate the appropriateness of such 
changes. This last requirement can be important in determining whether 
the form and content of the information complies with relevant 
regulatory requirements.
    AU-C Section 725 requires the auditor to compare and reconcile the 
supplementary information to the underlying accounting and other 
records used in preparing the financial statements or to the financial 
statements themselves. Paragraph 4.d. of Auditing Standard No. 17 
includes a requirement for the auditor to determine that the 
supplemental information reconciles to the underlying accounting and 
other records or to the financial statements rather than only to those 
records used in preparing the financial statements. Certain schedules 
may be required by the SEC or other regulators that are prepared from 
information not directly used to prepare financial statements.
Management's Representations
PCAOB
    Paragraph 5 of Auditing Standard No. 17 includes a requirement for 
the auditor to obtain from management certain written representations 
regarding the supplemental information.
ASB
    AU-C Section 725 requires the auditor to obtain similar 
rHD3presentations from management.
    AU-C Section 725 states that the auditor should obtain from 
management representations that when the supplementary information is 
not presented with the audited financial statements, management will 
make the audited financial statements readily available to the intended 
users of the supplementary information no later than the date of 
issuance by the entity of the supplementary information and the 
auditor's report thereon. Auditing Standard No. 17 does not require the 
auditor to obtain that representation because rules of the SEC and 
other regulatory agencies specify the requirements for furnishing 
supplemental information. Further, Auditing Standard No. 17 does not 
include a requirement that the auditor's report on the supplemental 
information be included in any document that contains supplemental 
information for the same reason, so a similar requirement in Auditing 
Standard No. 17 is not appropriate.
Evaluation of Audit Results
PCAOB
    Paragraph 6 of Auditing Standard No. 17 includes a requirement that 
to form an opinion on the supplemental information, the auditor should 
evaluate whether the supplemental information, including its form and 
content, is fairly stated, in all material respects, in relation to the 
financial statements as a whole, including whether the supplemental 
information is presented in conformity, in all material respects with 
the relevant regulatory requirements or other applicable criteria.
    Paragraph 7 of Auditing Standard No. 17 includes a requirement for 
the auditor to accumulate misstatements regarding supplemental 
information identified during performance of audit procedures on the 
supplemental information and in the audit of the financial statements 
and to communicate the accumulated misstatements regarding the

[[Page 68884]]

supplemental information to management on a timely basis to provide 
management with an opportunity to correct them.
    Paragraph 8 of Auditing Standard No. 17 includes a requirement for 
the auditor to evaluate whether uncorrected misstatements related to 
the supplemental information are material, either individually or in 
combination with other misstatements, taking into account relevant 
quantitative and qualitative factors.
ASB
    AU-C Section 725 requires the auditor to evaluate the 
appropriateness and completeness of the supplementary information, 
considering the results of the procedures performed and other knowledge 
obtained during the audit of the financial statements.
Reporting
PCAOB
    Paragraph 10 of Auditing Standard No. 17 includes a requirement for 
the auditor to include certain elements in the auditor's report, 
including identification of the supplemental information, a statement 
that the supplemental information is the responsibility of management, 
a statement that the supplemental information has been subjected to 
audit procedures performed in conjunction with the audit of the 
financial statements, and a description of certain audit procedures 
performed.
    Paragraph 10 of Auditing Standard No. 17 also includes a 
requirement that, if the form and content of the supplemental 
information are prescribed by regulatory requirements or other 
applicable criteria, the auditor's report should include a statement 
that, in forming the auditor's opinion on whether the supplemental 
information was fairly stated, the auditor evaluated whether 
supplemental information, including its form and content, complies, in 
all material respects, with the specified regulatory requirements or 
other criteria.
    Additionally, paragraph 10 of Auditing Standard No. 17 includes a 
requirement that if the supplemental information is presented on a 
basis that differs from the financial statements and that basis is not 
prescribed by regulatory requirements, the report should state that and 
describe the basis for the presentation.
ASB
    AU-C Section 725 requires the auditor to include in an explanatory 
paragraph or separate report on supplementary information a statement 
that the audit was conducted for the purpose of forming an opinion on 
the financial statements as a whole.
    Auditing Standard No. 17 does not include similar language.

D. Request to Apply Auditing Standard No. 17 to Audits of Emerging 
Growth Companies

    In developing Auditing Standard No. 17, the Board sought to develop 
a new auditing standard that takes into account the SEC's requirements 
for supplemental information in SEC Rule 17a-5. As part of its process, 
the Board also considered the SEC's economic analysis for its 
amendments to SEC Rule 17a-5, which included considerations relating to 
efficiency, competition, and capital formation. Notably, the SEC's 
analysis considers the economic effects, including the costs and 
benefits, of the required use of PCAOB standards, and discusses the 
impact of such change on audits of financial statements and supporting 
schedules that are required by the SEC to be filed by registered 
brokers and dealers pursuant to SEC Rule 17a-5.\40\
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    \40\ See the SEC Release at 220-226. Notably, after analysis of 
the views of commenters on the costs of the SEC's proposal to 
replace GAAS with PCAOB standards with respect to audits of brokers 
and dealers, the SEC concluded that the Commission ``does not expect 
that a requirement that an audit of financial statements and 
supporting schedules be conducted in accordance with the standards 
of the PCAOB instead of with GAAS will result in substantial changes 
for broker-dealer audit programs and therefore the Commission does 
not anticipate that this change will result in significant costs to 
broker-dealers in the form of increased audit fees.''
---------------------------------------------------------------------------

    In addition to considering the SEC's requirements and economic 
analysis, the Board also took into account other related economic 
considerations, including comments received on the proposed standard, 
as discussed further below.\41\
---------------------------------------------------------------------------

    \41\ The Board did not specifically request comments that 
attempted to quantify costs related to the auditing standard, but 
the Board did request comment on the appropriateness of the standard 
and received comments that pertained to audit effort and related 
costs that it considered. The discussion in this section reflects 
the Board's qualitative assessment of the standard.
---------------------------------------------------------------------------

Economic Baseline
    Regulators such as the SEC make the determination regarding whether 
an entity must file supplemental information and whether auditors are 
required to report on that information.
    To the Board's knowledge, the only entities that are required to 
file supplemental information to which the standard would apply are (1) 
brokers and dealers pursuant to SEC Rule 17a-5\42\ and (2) covered 11-K 
filers.
---------------------------------------------------------------------------

    \42\ See paragraphs (d)(1)(i)(A) and (d)(2) of SEC Rule 17a-5.
---------------------------------------------------------------------------

    Accordingly, the Board's consideration of the economic consequences 
of Auditing Standard No. 17 takes into account how the new standard 
differs from the pre-existing auditing standards applicable to 
supplemental information required in audits of brokers and dealers and 
covered 11-K filers.
    For brokers and dealers, as discussed previously, the SEC's 
amendments to Rule 17a-5 require audits of brokers and dealers to be 
conducted in accordance with PCAOB standards. This includes the 
examination of the financial report, which consists of the financial 
statements and supporting schedules. Before the SEC's amendments to 
Rule 17a-5, audits of brokers and dealers were performed under 
generally accepted auditing standards (``GAAS''), established by the 
American Institute of Certified Public Accountants (``AICPA''). 
Specifically, AU-C Section 725-C, Supplementary Information in Relation 
to the Financial Statements as a Whole, addressed the auditor's 
responsibilities when auditors were engaged to report on supplemental 
information in relation to audited financial statements.
    For covered 11-K filers, auditors generally use the reporting 
language in AU sec. 551 in preparing their auditor's reports on the 
supplemental information under PCAOB standards.
    Both GAAS and AU sec. 551 use an ``in relation to'' approach to 
reporting. That is, the auditor's report on the supplemental 
information generally presents an opinion on whether the supplemental 
information is fairly stated in all material respects ``in relation 
to'' the audited financial statements taken as a whole. When reporting 
using the ``in relation to'' approach, the materiality considerations 
generally are the same as those used in forming an opinion on the basic 
financial statements taken as a whole.\43\ However, GAAS includes 
requirements for audit procedures to be applied to the supplemental 
information, whereas AU sec. 551 generally does not specify audit 
procedures.
---------------------------------------------------------------------------

    \43\ See e.g., AU sec. 551.08, which provides that the 
``measurement of materiality'' under that standard is the same as 
that used in forming an opinion on the financial statements.
---------------------------------------------------------------------------

Consideration of Alternatives of Audit Approach
    In developing Auditing Standard No. 17, the PCAOB sought to adopt a 
standard that is tailored to the circumstances under which supplemental 
information is required in SEC filings of brokers and dealers and 
covered 11-K filers.

[[Page 68885]]

    Two principal alternatives were considered in developing the new 
standard\44\--
---------------------------------------------------------------------------

    \44\ The preceding section discusses the Board's decision to 
adopt a new standard rather than retain AU sec. 551.
---------------------------------------------------------------------------

     A stand-alone audit of the supplemental information
     An ``in relation to'' approach
    As adopted, Auditing Standard No. 17 builds on existing auditing 
standards by retaining the ``in relation to'' approach for reporting on 
supplemental information ``in relation to'' the financial statements as 
a whole. The PCAOB assessed the alternative, which would have required 
the supplemental information to be audited on a stand-alone basis. In 
the Board's view, the stand-alone alternative could require substantial 
additional audit effort because the materiality considerations would be 
substantially lower than in an ``in relation to'' approach.\45\ The 
Board does not believe that this additional audit effort would enhance 
the quality of supplemental information significantly over properly 
performed testing and evaluation under the ``in relation to'' approach. 
In the Board's view, the use of the ``in relation to'' approach--
together with the required coordination with the work on the financial 
statement audit--can accomplish the objectives of the financial 
statement audit and audit procedures on the supplemental information 
with more efficient use of resources than the alternative stand-alone 
approach.
---------------------------------------------------------------------------

    \45\ In a stand-alone audit, the auditor would apply materiality 
considerations for the supplemental information by itself, which 
typically would be substantially lower than the materiality level 
for the financial statements as a whole. See e.g., paragraph .13 of 
AU sec 623.
---------------------------------------------------------------------------

    Commenters on the proposed standard generally supported the use of 
the ``in relation to'' approach and generally observed that the ``in 
relation to'' audit opinion meets the needs of users in a cost-
effective manner. Nothing in the comments received indicates that an 
``in relation to'' opinion on supplemental information is inadequate 
for users of that information.
Additional Considerations
    Auditing Standard No. 17 differs from AU sec. 551 in the following 
key respects:
     Auditing Standard No. 17 specifies audit procedures to be 
applied to test supplemental information, while AU sec. 551 generally 
does not specify audit procedures. Furthermore, those audit procedures 
include consideration of the regulatory requirements for supplemental 
information, for example, requirements to evaluate whether the 
supplemental information complies with the applicable regulatory 
requirements.
     The new audit procedures are risk-based so that the 
required level of testing of the supplemental information is 
commensurate with the risks of material misstatement.
     Auditing Standard No. 17 requires that the audit 
procedures on the supplemental information be ``planned and performed'' 
``in conjunction with'' the auditor's work on the financial statement 
audit and, if applicable, other engagements.
    In developing Auditing Standard No. 17, the Board has taken note of 
observations from its oversight activities regarding the 
inconsistencies and deficiencies in auditing practices regarding the 
application of auditing procedures to supplemental information. For 
example, a 2013 PCAOB inspection report on audits of brokers and 
dealers, which were performed under GAAS, indicated that PCAOB 
inspections staff in their inspections of broker and dealer audits 
identified auditing deficiencies in 57 of 60 audits and that 
deficiencies in auditing procedures regarding supporting schedules were 
among the most frequently noted deficiencies in compliance with audit 
requirements.\46\
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    \46\ See Second Report on the Progress of the Interim Inspection 
Program Related to Audits of Brokers and Dealers, PCAOB Release No. 
2013-006 (August 19, 2013), which reports that PCAOB inspection 
staff identified auditing deficiencies in 57 of the 60 audits of 
brokers and dealers selected for inspection and that deficiencies in 
compliance with audit requirements for brokers and dealers under the 
Exchange Act that were among the most frequently noted by PCAOB 
inspection staff included deficiencies in audit procedures related 
to net capital and customer reserve supporting schedules, compliance 
with the conditions of the exemption claimed by the broker or 
dealer, and the accountant's supplemental report on material 
inadequacies. See PCAOB Release 2013-006, Executive Summary, at ii.
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    The Board believes that strengthening and clarifying the 
requirements for supplemental information--and tailoring the required 
procedures for the supplemental information required by regulatory 
authorities--will promote consistent auditor performance to support 
audit reports on supplemental information. Similarly, the risk-based 
approach set forth in the standard should direct auditors to devote 
more audit attention to the areas of greatest risk to material 
misstatement of the supplemental information. The auditor's enhanced 
focus on the supplemental information should help give regulators 
greater confidence about the reliability of the supplemental 
information used in their regulatory oversight, which is important to 
investor protection. For example, as noted previously, in the context 
of oversight of brokers and dealers, the audit performance requirements 
in the standard could improve the quality of supplemental information 
that regulators rely on when considering whether the broker or dealer 
maintains adequate safeguards over customer funds and securities.
    The Board also has taken into account cost considerations in 
developing Auditing Standard No. 17. As discussed previously, the use 
of the ``in relation to'' approach can accomplish the objectives of the 
financial statement audit and audit procedures on the supplemental 
information with more efficient use of resources than the alternative 
stand-alone approach. Also, the risk-based approach helps avoid 
unnecessary procedures by focusing audit attention on areas of higher 
risk. Furthermore, the required coordination of the audit procedures on 
the supplemental information with the audit of the financial 
statements--and other engagements, when applicable--helps avoid 
unnecessary duplication of audit procedures. These measures can 
facilitate the transition to the new standard and help lessen the 
effects of the associated costs.
    Auditing Standard No. 17 has some commonalities with GAAS, for 
example, the ``in relation to'' approach and the requirement to apply 
audit procedures to the supplemental information. This should help 
facilitate the transition from GAAS to Auditing Standard No. 17 
generally and lessen the associated costs for 11-K filers that are 
audited under both GAAS and PCAOB standards.
    The PCAOB acknowledges that the new standard will create some 
additional compliance costs for affected market participants. These 
costs include the one-time implementation costs for registered firms to 
update their audit methodologies to reflect the new standard and train 
their personnel. However, because, as mentioned above, the new standard 
builds on concepts in existing standards and has commonalities with 
GAAS, the PCAOB does not anticipate that changes associated with 
initial implementation will result in significant costs to auditors (or 
to brokers and dealers or covered 11-K filers in the form of increased 
audit fees).
    Further compliance costs, which are associated with audit effort, 
may depend on auditors' existing auditing practices under pre-existing 
auditing standards and the size and complexity of the entity being 
audited.
    The Board has taken note of the views of commenters on the proposed

[[Page 68886]]

standard in assessing economic considerations. Some auditors who 
commented on the Board's proposal indicated that the procedures 
required by the proposed auditing standard were similar to their 
current practices. Comments from other auditors suggested that they did 
not perform specific procedures to test supplemental information. To 
the extent that auditors already are testing supplemental information, 
the PCAOB does not anticipate significant incremental costs associated 
with compliance with Auditing Standard No. 17. Those incremental costs 
might be somewhat higher for auditors that have not been performing 
specific tests of supplemental information.\47\
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    \47\ The auditors whose comments suggested that they did not 
perform specific procedures on supplemental information did not 
address in their letters their current practices for complying with 
GAAS, which requires audit procedures for supplemental information. 
To the extent that those auditors apply audit procedures to 
supplemental information in audits under GAAS, the Board anticipates 
that the costs of transitioning to Auditing Standard No. 17 would 
not be significant.
---------------------------------------------------------------------------

    Auditing Standard No. 17 is designed to be scalable based on an 
entity's size and complexity. Specifically, the audit effort under the 
standard likely will be greater for entities that have more 
supplemental information or more complex supplemental information. For 
example, audit effort generally would be greater for larger, more 
complex brokers or dealers that carry securities for customers than for 
smaller, less complex brokers that neither carry nor clear securities. 
Similarly, audit effort generally would be greater for larger, more 
complex covered 11-K filers that have more investments and reportable 
transactions subject to regulatory reporting requirements.
Applicability to Audits of Emerging Growth Companies
    The Board is adopting Auditing Standard No. 17 pursuant to its 
authority under the Sarbanes-Oxley Act.\48\
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    \48\ Public Law 107-204, 116 Stat. 745 (2002). Under Section 101 
of the Sarbanes-Oxley Act, the mission of the PCAOB is to oversee 
the audit of companies that are subject to the securities laws, and 
related matters, in order to protect the interests of investors and 
further the public interest in the preparation of informative, 
accurate, and independent audit reports. Section 103 of the 
Sarbanes-Oxley Act authorizes the Board to adopt auditing standards 
for use by registered public accounting firms in the preparation and 
issuance of audit reports ``as required by [the] Act or the rules of 
the Commission, or as may be necessary or appropriate in the public 
interest or for the protection of investors.''
---------------------------------------------------------------------------

    Before rules adopted by the Board can take effect, they must be 
approved by the SEC. Pursuant to Section 107(b)(3) of the Sarbanes-
Oxley Act, the SEC shall approve a proposed rule if it finds that the 
rule is ``consistent with the requirements of [the Sarbanes-Oxley] Act 
and the securities laws, or is necessary or appropriate in the public 
interest or for the protection of investors.''
    Additionally, Section 104 of the Jumpstart Our Business Startups 
Act (``JOBS Act'') \49\ amended the Sarbanes-Oxley Act to provide that 
any additional rules adopted by the PCAOB after April 5, 2012 do not 
apply to audits of emerging growth companies (``EGCs'') \50\ unless the 
SEC ``determines that the application of such additional requirements 
is necessary or appropriate in the public interest, after considering 
the protection of investors, and whether the action will promote 
efficiency, competition, and capital formation.'' \51\
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    \49\ Public Law 112-106, 126 Stat. 306 (2012).
    \50\ Section 3(a)(80) of the Exchange Act defines the term 
``emerging growth company.'' An issuer generally qualifies as an EGC 
if it has total annual gross revenue of less than $1 billion during 
its most recently completed fiscal year (and its first sale of 
common equity securities pursuant to an effective Securities Act 
registration statement did not occur on or before December 8, 2011.) 
See JOBS Act Section 101(a), (b), and (d). Once an issuer is an EGC, 
it retains its EGC status until the earliest of: (i) The first year 
after it has total annual gross revenue of $1 billion or more (as 
indexed for inflation every five years by the SEC); (ii) the end of 
the fiscal year after the fifth anniversary of its first sale of 
common equity securities under an effective Securities Act 
registration statement; (iii) the date on which the company issues 
more than $1 billion in non-convertible debt during the prior three-
year period; or (iv) the date on which it is deemed to be a ``large 
accelerated filer'' under the Exchange Act (generally, an entity 
that has been public for at least one year and has an equity float 
of at least $700 million).
    \51\ See Section 103(a)(3)(C) of Sarbanes-Oxley (15 U.S.C. 
7213(a)(3)), as added by Section 104 of the JOBS Act, Public Law 
112-106 (April 5, 2012).
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    The following discussion is intended to provide information that 
may assist the SEC in any determination it may make regarding whether 
to apply the new standard to audits of EGCs.
    As noted above, Auditing Standard No. 17:
     Strengthens and clarifies the audit requirements regarding 
supplemental information to promote consistent audit performance and 
compliance with regulatory requirements, which can enhance the quality 
of information that is used in regulatory oversight for investor 
protection and, with respect to covered 11-K filers, increase the 
quality of information available to investors;
     Helps lessen the effects of the costs associated with the 
new auditing standard by retaining the ``in relation to'' approach, 
setting forth a risk-based approach for the required audit procedures, 
and requiring coordination with the financial statement audit to avoid 
redundancy in testing; and
     Is designed to be scalable based on the size and 
complexity of the entity.
    The PCAOB has begun monitoring implementation of the JOBS Act to 
better understand the characteristics of EGCs and inform the Board's 
considerations regarding whether it should recommend to the SEC that it 
apply the new standard and related amendments to audits of EGCs. Based 
on the PCAOB's research of self-identified EGCs, a substantial majority 
of EGCs are smaller reporting companies that began reporting under the 
Exchange Act in 2012 or later.\52\
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    \52\ See Appendix 7 of The Auditor's Report on an Audit of 
Financial Statements When the Auditor Expresses an Unqualified 
Opinion, Reports on Audited Financial Statements, and The Auditor's 
Responsibilities Regarding Other Information in Certain Documents 
Containing Audited Financial Statements and the Related Auditor's 
Report, and Related Amendments to PCAOB Standards, PCAOB Release No. 
2013-005 (August 13, 2013).
---------------------------------------------------------------------------

    Currently, the PCAOB is not aware of EGCs for which auditors would 
be required to apply this standard. PCAOB staff has performed research 
on filings of self-identified EGCs. Text searches were used to identify 
any issuers with audit reports that opine on supplemental information 
required by Rule 17a-5, and PCAOB staff read the most recent filings of 
those companies. For those companies for which audited financial 
statements were available and based on information included in the most 
recent audited financial statements filed as of May 15, 2013, PCAOB 
staff has observed that none of the EGCs is a broker or dealer or an 
11-K filer. The staff observed one SEC filing containing supplemental 
information for which an auditor expressed an opinion. Based on the 
nature of the supplemental information filed, it appears that the 
issuer included the supplemental information voluntarily rather than 
pursuant to a requirement specified by rule.
    As noted previously, to the Board's knowledge, the only entities 
that are required to file supplemental information to which Auditing 
Standard No. 17 will apply are (1) brokers and dealers pursuant to SEC 
Rule 17a-5 and (2) covered 11-K filers. PCAOB staff has discussed the 
applicability of the JOBS Act to this rulemaking with the SEC staff. 
The reporting regimes for registered brokers and dealers under SEC Rule 
17a-5 and the reporting regime for employee benefit plans that must 
comply with financial reporting requirements under both ERISA and the 
SEC are separate and distinct from those for companies subject to 
reporting requirements pursuant to Section 13 and 15 of the Exchange 
Act or for a

[[Page 68887]]

Securities Act registration statement. The Board defers to the SEC on 
the applicability of the JOBS Act to this rulemaking for these entities 
and stands ready to assist the SEC with any additional analysis that 
may become necessary.
    In the event that the standard would be applied to an EGC, the 
Board has no reason to believe that the economic effects on those EGCs 
would be different from those described previously for brokers, 
dealers, and covered 11-K filers. Accordingly, and pursuant to the 
foregoing discussions, the PCAOB requests that the Commission, to the 
extent necessary, determine that it is necessary or appropriate in the 
public interest, after considering the protection of investors and 
whether the action will promote efficiency, competition, and capital 
formation, to apply these amendments to audits of EGCs.

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

    Pursuant to Section 19(b)(2)(A)(ii) of the Exchange Act, and based 
on its determination that an extension of the period set forth in 
Section 19(b)(2)(A)(i) of the Exchange Act is appropriate in light of 
the PCAOB's request that the Commission, pursuant to Section 
103(a)(3)(C) of the Sarbanes-Oxley Act, determine that the proposed 
rules apply to audits of emerging growth companies, as defined in 
Section 3(a)(80) of the Exchange Act, the Commission has determined to 
extend to February 13, 2014 the date by which the Commission should 
take action on the proposed rules.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed 
rules are consistent with the requirements of Title I of the Sarbanes-
Oxley 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 email to [email protected]. Please include 
File Number PCAOB-2013-02 on the subject line.

Paper Comments

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

All submissions should refer to File Number PCAOB-2013-02. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's 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 rules that are filed 
with the Commission, and all written communications relating to the 
proposed rules between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Room, on official business days 
between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing 
will also be available for inspection and copying at the principal 
office of the PCAOB. All comments received will be posted without 
charge; 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-
2013-02 and should be submitted on or before December 6, 2013.

By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-27345 Filed 11-14-13; 8:45 am]
BILLING CODE 8011-01-P