[Federal Register Volume 89, Number 113 (Tuesday, June 11, 2024)]
[Notices]
[Pages 49730-49767]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-12691]



[[Page 49729]]

Vol. 89

Tuesday,

No. 113

June 11, 2024

Part IV





Securities and Exchange Commission





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Public Company Accounting Oversight Board; Notice of Filing of Proposed 
Rules on General Responsibilities of the Auditor in Conducting an Audit 
and Amendments to PCAOB Standards; Notice

  Federal Register / Vol. 89 , No. 113 / Tuesday, June 11, 2024 / 
Notices  

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100276; File No. PCAOB-2024-01]


Public Company Accounting Oversight Board; Notice of Filing of 
Proposed Rules on General Responsibilities of the Auditor in Conducting 
an Audit and Amendments to PCAOB Standards

June 5, 2024
    Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 
(``Sarbanes-Oxley,'' or the ``Act''), notice is hereby given that on 
May 24, 2024, the Public Company Accounting Oversight Board (the 
``Board'' or the ``PCAOB'') filed with the Securities and Exchange 
Commission (the ``Commission'' or the ``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 May 13, 2024, the Board adopted General Responsibilities of the 
Auditor in Conducting an Audit and Amendments to PCAOB Standards 
(``proposed rules''). The text of the proposed rules appears in Exhibit 
A to the SEC Filing Form 19b-4 and is available on the Board's website 
at https://pcaobus.org/about/rules-rulemaking/rulemaking-dockets/docket-049-responsibilities-auditor-conducting-audit, and at the 
Commission's Public Reference Room.

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 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
    The Board adopted a new auditing standard, AS 1000, General 
Responsibilities of the Auditor in Conducting an Audit (``new 
standard,'' ``final standard,'' or ``AS 1000''). The new standard 
replaces a group of standards originally developed by the American 
Institute of Certified Public Accountants (``AICPA'') and adopted on an 
interim basis by the PCAOB in 2003. That group of standards established 
the general principles and responsibilities of the auditor when 
conducting an audit (``foundational standards''). The general 
principles and responsibilities addressed by the foundational standards 
include reasonable assurance, due professional care, professional 
skepticism, independence, competence, and professional judgment. These 
principles and related responsibilities provide a foundation for the 
proper performance of the audit.
    Through this standard-setting project, the Board has reaffirmed the 
general principles and responsibilities of the auditor so that the 
foundation underlying the standards continues to be sound and 
appropriate for performing high-quality audits. These principles and 
responsibilities, enhanced and consolidated into a single auditing 
standard, together with related amendments, will modernize the auditing 
standards to better address fundamental aspects of the audit and 
provide auditors with better direction to protect investors and further 
the public interest in the preparation of informative, accurate, and 
independent auditor's reports.
    AS 1000 will replace four standards that set forth the general 
principles and responsibilities of the auditor: AS 1001, 
Responsibilities and Functions of the Independent Auditor; AS 1005, 
Independence; AS 1010, Training and Proficiency of the Independent 
Auditor; and AS 1015, Due Professional Care in the Performance of Work. 
AS 1000 combines and updates the general principles and 
responsibilities of these standards to reflect developments in the 
auditing environment.
    The Board also amended certain other standards that address 
responsibilities fundamental to the conduct of an audit. These 
amendments clarify the engagement partner's responsibility to exercise 
due professional care related to supervision and review of the audit, 
accelerate the documentation completion date by reducing the maximum 
period for the auditor to assemble a complete and final set of audit 
documentation from 45 days to 14 days, and clarify the auditor's 
responsibility to evaluate whether the financial statements are 
``presented fairly.'' Finally, the Board adopted additional amendments 
to conform to these changes.
    After carefully considering the comments the Board received, the 
Board adopted the amendments substantially as proposed, with revisions 
that reflect the input of commenters.
    Since the PCAOB's adoption of the foundational standards in 2003, 
the auditing environment has evolved, including:
     Changes to auditing requirements through Board-issued 
standards;
     New or revised independence requirements issued by the 
Board; and
     Advancements in technology that are increasing the 
availability of electronic audit tools and use of audit software.
    The new standard and related amendments the Board adopted will 
modernize PCAOB standards to:
     Reflect changes in the auditing environment;
     Eliminate outdated and inconsistent language; and
     Achieve consistency with Board-issued standards.
    AS 1000 and the related amendments modernize, clarify, and 
streamline the general principles and responsibilities of the auditor 
and provide a more logical presentation, which should enhance the 
useability of the standards by making them easier to read, understand, 
and apply.
    The Board clarified the auditor's responsibility to evaluate 
whether the financial statements are ``presented fairly.'' The Board 
also clarified the engagement partner's due professional care 
responsibilities by adding specificity to certain audit performance 
principles set out in the standards. Finally, the accelerated 
documentation completion date reflects changes in the auditing 
environment, including advancements in technology that have enabled 
auditors to assemble a complete and final set of audit documentation in 
less time than in a paper-based environment. The new documentation 
completion date reduces the window of opportunity for improper 
alteration of audit documentation and also enables the Board to 
potentially begin the inspection process sooner after completion of an 
audit, which the Board believes can enhance the Board's efforts to 
improve audit quality and promote investor protection, ultimately 
enhancing investor confidence.

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    The new standard and related amendments will apply to all audits 
conducted under PCAOB standards.
    See Exhibit 3 for additional discussion of the purpose of this 
project.
(b) Statutory Basis
    The statutory basis for the proposed rules is Title I of the Act.

B. Board's Statement on Burden on Competition

    Not applicable. The Board's consideration of the economic impacts 
of the proposed rules is discussed in section D below.

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

    The Board initially released the proposed rules for public comment 
in PCAOB Release No. 2023-001 (Mar. 28, 2023). The Board received 28 
written comment letters that were specifically submitted in response to 
its initial proposed rules in PCAOB Release No. 2023-001. In addition, 
the Board received six comment letters relating to its consideration of 
proposed amendments on quality control, which were released for public 
comment on November 19, 2022, and that are relevant to the definition 
of ``applicable professional and legal requirements'' in these proposed 
rules. See Exhibits 2(a)(B) and 2(a)(C). 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.

Background

    In April 2003, the Board adopted, on an interim basis, the 
generally accepted auditing standards of the AICPA's Auditing Standards 
Board (``interim standards'') and the related auditing interpretations 
as they existed then.\1\ At that time, the Board stated that it would 
determine whether the interim standards ``should become permanent 
standards of the Board, should be repealed, or should be modified.'' 
\2\ Since then, the Board has adopted a number of new auditing 
standards that supersede or amend portions of the interim standards and 
related auditing interpretations.\3\ However, certain remaining interim 
standards, including those that address the general principles and 
responsibilities of the auditor, have continued to be in effect 
substantially in the form adopted.
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    \1\ See Establishment of Interim Professional Auditing 
Standards, PCAOB Rel. No. 2003-006 (Apr. 18, 2003). The auditing 
interpretations were the publications entitled ``Auditing 
Interpretations'' issued by the AICPA Auditing Standards Board, as 
they existed and were effective as of April 2003.
    \2\ See PCAOB Rel. No. 2003-006.
    \3\ See, e.g., AS 1201, Supervision of the Audit Engagement; AS 
1215, Audit Documentation; AS 2101, Audit Planning; AS 2810, 
Evaluating Audit Results, and AS 3101, The Auditor's Report on an 
Audit of Financial Statements When the Auditor Expresses an 
Unqualified Opinion.
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    Since the adoption of the interim standards, the auditing 
environment has evolved in many ways, including (i) changes to auditing 
requirements through Board-issued standards; (ii) new or revised 
independence requirements issued by the Board; \4\ and (iii) 
advancements in technology that are increasing the availability of 
electronic audit tools and the use of audit software. While these 
developments have generally been reflected through amendments to some 
interim standards and related interpretations in connection with the 
Board's standard-setting initiatives, the 2022-2026 Strategic Plan 
reinforced the Board's intent ``to modernize and streamline [the 
Board's] existing standards and to issue new standards where necessary 
to meet today's needs'' as part of the PCAOB's investor protection 
mission.\5\
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    \4\ See generally Section 3 of PCAOB rules, Auditing and Related 
Professional Practice Standards, Part 5, Ethics and Independence.
    \5\ See PCAOB, Strategic Plan 2022-2026, at 10, available at 
https://assets.pcaobus.org/pcaob-dev/docs/default-source/about/administration/documents/strategic_plans/strategic-plan-2022-2026.pdf?sfvrsn=b2ec4b6a_4/.
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    In connection with these initiatives,\6\ the Board analyzed the 
interim foundational standards that address the general principles and 
responsibilities of the auditor in conducting an audit. These 
foundational standards are:
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    \6\ See PCAOB's interim standards project, available at https://pcaobus.org/oversight/standards/standard-setting-research-projects/interim-standards.
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     AS 1001, Responsibilities and Functions of the Independent 
Auditor;
     AS 1005, Independence;
     AS 1010, Training and Proficiency of the Independent 
Auditor; and
     AS 1015, Due Professional Care in the Performance of 
Work.\7\
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    \7\ When adopted by the Board in 2003, this group of interim 
standards was designated as AU sec. 110, AU sec. 220, AU sec. 210, 
and AU sec. 230. In 2015, the PCAOB reorganized its auditing 
standards using a topical structure and a single, integrated number 
system, and these interim standards were designated as AS 1001, AS 
1005, AS 1010, and AS 1015, respectively. See Reorganization of 
PCAOB Auditing Standards and Related Amendments to PCAOB Standards 
and Rules, PCAOB Rel. No. 2015-002 (Mar. 31, 2015). The 
reorganization did not impose additional requirements on auditors or 
change substantively the requirements of PCAOB standards.
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    The general principles and responsibilities addressed by the 
foundational standards include reasonable assurance, due professional 
care, professional skepticism, independence, competence, and 
professional judgment. Through this rulemaking, the Board is 
reaffirming and modernizing the general principles and responsibilities 
of the auditor to ensure that the foundation continues to be sound and 
appropriate for performing high-quality audits.

Rulemaking History

    In March 2023, the Board proposed a new, single standard to replace 
the foundational standards that address the general principles and 
responsibilities of the auditor in conducting an audit (``proposed 
standard'').\8\ The proposal also included key amendments to other 
PCAOB standards that address matters that are fundamental to the 
conduct of an audit. These proposed amendments clarified the engagement 
partner's responsibility to exercise due professional care related to 
supervision and review of the audit, accelerated the documentation 
completion date by reducing the maximum period for the auditor to 
assemble a complete and final set of audit documentation from 45 days 
to 14 days, and clarified the auditor's responsibility to evaluate 
whether the financial statements are ``presented fairly.''
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    \8\ Proposed Auditing Standard--General Responsibilities of the 
Auditor in Conducting an Audit and Proposed Amendments to PCAOB 
Standards, PCAOB Rel. No. 2023-001 (Mar. 28, 2023) (``proposal'' or 
``proposing release'').
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    The Board received 28 comment letters on the proposal.\9\ 
Commenters included investor-related groups, firms, firm-related 
groups, academics, and others. The Board considered all comments in 
developing the final standard and amendments, and specific comments are 
discussed in the analysis that follows.
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    \9\ The comment letters received on the proposal are available 
in the docket for this rulemaking on the PCAOB's website (https://pcaobus.org/about/rules-rulemaking/rulemaking-dockets/docket-049-responsibilities-auditor-conducting-audit/comment-letters).
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Overview of Existing Requirements

    This section discusses key provisions of the existing standards.
    Key provisions of AS 1001, Responsibilities and Functions of the 
Independent Auditor, include:
     The objective of an audit of financial statements is to 
express an opinion on the fairness of the financial statements in 
presenting, in all material respects, the financial position, results 
of operations, and cash flows in accordance with generally accepted 
accounting principles (``GAAP''). The

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auditor also disclaims an opinion if circumstances require. (AS 
1001.01)
     The responsibilities of the auditor and management are 
that (i) the auditor plans and performs the audit to obtain reasonable 
assurance about whether the financial statements are free of material 
misstatement, whether caused by error or fraud; and (ii) management is 
responsible for the financial statements, including adopting accounting 
policies and establishing and maintaining internal control to initiate, 
record, process, and report transactions (as well as events and 
conditions) consistent with management's assertions in the financial 
statements. (AS 1001.02-.03)
     The auditor is to possess professional qualifications and 
exercise professional judgment in determining which auditing procedures 
are necessary in the circumstances to gain a reasonable basis for the 
opinion. (AS 1001.04-.05)
     The auditor should be aware of and consider auditing 
interpretations applicable to the audit and, if the guidance in the 
interpretations is not followed, be prepared to explain how the auditor 
complied with the provisions of the auditing standard addressed by the 
guidance. (AS 1001.11)
    Key provisions of AS 1005, Independence, require that the auditor:
     Maintain independence in mental attitude and be 
intellectually honest, impartial, and without bias with respect to the 
client (i.e., be independent in fact). (AS 1005.01-.03)
     Be free from any obligation to or interest in the client, 
its management, or its owners, so that the general public maintains 
confidence in the independence of auditors. (AS 1005.03)
     Not only be independent in fact, but also avoid situations 
that may lead outsiders to doubt the auditor's independence. (AS 
1005.03)
    Key provisions of AS 1010, Training and Proficiency of the 
Independent Auditor, require that:
     The audit be performed by persons having adequate 
technical training, proficiency, and experience as an auditor. (AS 
1010.01-.02)
     The training of the auditor be adequate to meet the 
requirements of the profession, be adequate in technical scope, and 
include general education. (AS 1010.01-.03)
     New audit professionals obtain professional experience 
through proper supervision and review of their work by those who are 
more experienced, with the nature and extent of supervision reflecting 
variances in practice. (AS 1010.03)
     The engagement partner exercise seasoned judgment in the 
varying degrees of supervision and review of work performed and 
judgments exercised by subordinates, and subordinates meet the 
responsibilities of their work. (AS 1010.03)
     The auditor continue professional training to become aware 
of developments in business and the profession, and study, understand, 
and apply new pronouncements on accounting and auditing. (AS 1010.04)
    Key provisions of AS 1015, Due Professional Care in the Performance 
of Work, require that:
     The auditor exercise due professional care in the planning 
and performance of the audit and the preparation of the report, 
including observance of the auditing standards by professionals within 
the auditor's organization. (AS 1015.01-.02)
     The auditor possess ``the degree of skill commonly 
possessed'' by other auditors and exercise it with ``reasonable care 
and diligence'' (i.e., due professional care) in the planning and 
performance of the audit and the preparation of the report. (AS 1015.01 
and .05)
     The engagement team be assigned to tasks and be supervised 
commensurate with their level of knowledge, skill, and ability so that 
they can evaluate the audit evidence they are examining. (AS 1015.06)
     The engagement partner know, at a minimum, the relevant 
professional accounting and auditing standards, be knowledgeable of the 
audit client, and be responsible for the assignment of tasks to, and 
supervision of, the members of the engagement team. (AS 1015.06)
     The auditor exercise professional skepticism throughout 
the audit, with a questioning mind and a critical assessment of audit 
evidence, to diligently gather and objectively evaluate audit evidence, 
and consider the competency and sufficiency of the evidence, and not be 
satisfied with less than persuasive evidence because of a belief that 
management is honest. (AS 1015.07-.09)
     The auditor obtain reasonable assurance about whether the 
financial statements are free of material misstatement, whether caused 
by error or fraud, or whether any material weaknesses exist as of the 
date of management's assessment. Reasonable assurance is ``a high level 
of assurance'' but is not absolute assurance because of the nature of 
audit evidence and the characteristics of fraud. (AS 1015.10)
    Key provisions of other standards relevant to this rulemaking 
include:
     AS 1201.04-.05 and AS 2101.03, which describe the 
engagement partner's responsibilities for supervision and review of 
audit documentation.
     AS 1215.06, which requires the auditor to document 
procedures performed, evidence obtained, and conclusions reached with 
respect to relevant financial statement assertions.
     AS 1215.15, which requires the auditor to complete the 
necessary auditing procedures and assemble for retention a complete and 
final set of audit documentation within 45 days after the report 
release date.
     AS 2810.30, which requires the auditor to evaluate whether 
the financial statements are presented fairly, in all material 
respects, in conformity with the applicable financial reporting 
framework.
     AS 2815, The Meaning of ``Present Fairly in Conformity 
with Generally Accepted Accounting Principles,'' which explains the 
meaning of ``present fairly'' as used in the phrase ``present fairly . 
. . in conformity with generally accepted accounting principles,'' and 
the basis for the auditor's opinion on whether the financial statements 
present fairly an entity's financial position, results of operations, 
and cash flows in conformity with generally accepted accounting 
principles.

Reasons To Improve Auditing Standards

    The new standard and related amendments are intended to modernize, 
clarify, and streamline the general principles and responsibilities of 
the auditor described in the foundational standards. The Board 
identified several areas discussed below that the Board believes will 
enhance the useability of the requirements by making them easier to 
read, understand, and apply.
1. Alignment With Board-Issued Standards and Rules
    Since the adoption of the foundational standards, the Board has 
issued a number of new auditing standards and amendments. Certain of 
these standards address other principles and responsibilities that are 
fundamental to the conduct of an audit, including the engagement 
partner's supervisory and review responsibilities and general 
requirements for audit documentation. Expressly incorporating these 
specific principles and responsibilities for conducting an audit in the 
new standard and related amendments should provide the auditor with 
more complete direction on matters that are central to the auditor's 
work.
    Certain descriptions of requirements in the foundational standards 
do not align with the language used in Board-issued standards. For 
example, some

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provisions in the foundational standards refer to GAAP; \10\ however, 
in recognition of the SEC's acceptance of filings that include 
financial statements prepared under accounting frameworks other than 
U.S. GAAP, such as International Financial Reporting Standards 
(``IFRS''), Board-issued standards are written as framework neutral and 
refer instead to the applicable financial reporting framework.\11\ As 
another example, in describing professional skepticism, AS 1015 refers 
to the competency and sufficiency of the audit evidence rather than 
using terminology consistent with the Board-issued AS 1105, Audit 
Evidence, which refers to audit evidence as sufficient and appropriate. 
The Board believes that aligning the descriptions of the general 
principles and responsibilities in the new standard with language used 
in Board-issued standards will minimize potential confusion.
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    \10\ See, e.g., AS 1001.01 and .03.
    \11\ See paragraph .01, footnote 1 of AS 2410, Related Parties 
(``The auditor should look to the requirements of the U.S. 
Securities and Exchange Commission for the company under audit with 
respect to the accounting principles applicable to that company . . 
.''); Auditing Standard No. 18--Related Parties Amendments to 
Certain PCAOB Auditing Standards Regarding Significant Unusual 
Transactions and Other Amendments to PCAOB Auditing Standards, PCAOB 
Rel. No. 2014-002 (June 10, 2014), at A4-6 (describing the approach 
of AS 2410.01, footnote 1 as ``framework neutral'').
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    The foundational standards were originally written for audits of 
financial statements, but certain general principles and 
responsibilities described in the standards (e.g., reasonable 
assurance, due professional care, and professional skepticism) apply 
equally to audits of internal control over financial reporting 
(``ICFR''). None of the foundational standards mention audits of ICFR 
or refer to AS 2201, An Audit of Internal Control Over Financial 
Reporting That Is Integrated with An Audit of Financial Statements. 
While AS 2201 refers to the foundational standards for the requirements 
related to technical training and proficiency as an auditor, 
independence, and the exercise of due professional care, including 
professional skepticism,\12\ the Board believes it is important to 
clarify in the new standard that the general principles and 
responsibilities apply to an audit of ICFR as well as an audit of 
financial statements.
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    \12\ See AS 2201.04.
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    The application of the general principles and responsibilities 
should be improved by conforming the presentation of the related 
requirements to the structure used in Board-issued standards. This 
includes specifying an introduction and objectives to the new standard. 
In addition, the responsibilities from the foundational standards 
should be clarified by expressing the related requirements using terms 
described in PCAOB Rule 3101, Certain Terms Used in Auditing and 
Related Professional Practice Standards (e.g., using ``must'' and 
``should'' to describe the degree of responsibility that the standards 
impose on auditors). Much of the explanatory material from the 
foundational standards that continues to be relevant has been relocated 
to the discussion in this release, which should facilitate the 
auditor's navigation of the relevant requirements and align with the 
approach taken in Board-issued standards.
2. New or Revised Independence Requirements Issued by the PCAOB and the 
SEC9
    Since the adoption of AS 1005 in 2003, the PCAOB has issued 
independence rules that have imposed certain incremental independence 
requirements on firms, relative to the SEC rules \13\ (e.g., provisions 
related to tax services for persons in financial reporting oversight 
roles at issuer audit clients).\14\ These incremental independence 
requirements are not expressly addressed in AS 1005, but nevertheless 
the auditor is required to comply with them. Further, while AS 1005 
includes a general reference to the SEC's requirements for auditor 
independence, there is no reference to the specific requirements. The 
Board believes it is helpful to refer explicitly in the new standard to 
the requirements that govern auditor independence, including 
independence requirements set out by the federal securities laws and 
related rules, which include an overarching provision for the auditor 
to maintain independence from its client in fact and in appearance.\15\
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    \13\ See generally PCAOB rules under Section 3. Auditing and 
Related Professional Practice Standards, Part 5--Ethics and 
Independence.
    \14\ See PCAOB Rule 3523, Tax Services for Persons in Financial 
Reporting Oversight Roles.
    \15\ See Section 10A(g) of the Securities Exchange Act of 1934 
(``the Exchange Act''), 15 U.S.C. 78j-1(g);, 17 CFR 210.2-01 
(Regulation S-X Rule 2-01).
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3. Advancements in Technology Increasing the Availability of Electronic 
Audit Tools and Use of Audit Software
    Since the foundational standards were adopted by the PCAOB, 
advancements in technology have increased the availability of 
electronic audit tools and use of audit software. Auditors have largely 
moved away from a paper-based approach to audit documentation in favor 
of using software that houses electronic workpapers and audit programs. 
Use of electronic workpapers facilitates more efficient performance and 
review of audit procedures and enables auditors to assemble a complete 
and final set of audit documentation in less time than in a paper-based 
environment.
    Auditors are also expanding their use of and reliance on electronic 
audit tools. For example, some firms have made significant investments 
in internally developed tools for use in the audit. In addition, some 
``off-the-shelf'' applications such as data analysis software have 
become available to auditors. These advancements have changed the way 
that many auditors perform and document their audit procedures and 
retain related audit documentation. Accordingly, the new standard and 
amendments reflect an accelerated documentation completion date and 
related documentation requirements.
4. Outdated and Inconsistent Language
    The foundational standards include outdated and inconsistent 
language that is not relevant to audits conducted under the standards 
of the PCAOB. For example, paragraph .03 of AS 1001 provides that the 
auditor may draft the financial statements in whole or in part based on 
information from management during performance of the audit. This 
provision is outdated and should not be included in PCAOB auditing 
standards because an auditor drafting the financial statements would 
violate the applicable independence rules.\16\ Eliminating outdated 
language used in the foundational standards should remove 
inconsistencies between PCAOB auditing standards and the relevant rules 
of the PCAOB and the SEC. Similarly, in describing the objective of the 
audit, paragraph .01 of AS 1001 refers to financial position, results 
of operations, and cash flows. This language could be unnecessarily 
limiting because the objective of the audit does not change based on 
the subject matter of the audit (e.g., whether it is an audit of ICFR 
or the financial statements). The new standard excludes references that 
are outdated or inconsistent, which the Board believes improves the 
application of the requirements and provides clearer direction to 
auditors in executing their responsibilities.
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    \16\ See 17 CFR 210.2-01(c)(4)(i) (Regulation S-X Rule 2-
01(c)(4)(i)).

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5. Activities of Other Standard Setters
    Since the Board's adoption of the foundational standards, both the 
International Auditing and Assurance Standards Board (``IAASB'') and 
the Auditing Standards Board (``ASB'') of the AICPA have updated their 
analogous standards:
     IAASB Standard--International Standard on Auditing 200, 
Overall Objectives of the Independent Auditor and the Conduct of an 
Audit in Accordance with International Standards on Auditing (``ISA 
200'') (effective 2009); and
     ASB Standard--AU-C Section 200, Overall Objectives of the 
Independent Auditor and the Conduct of an Audit in Accordance With 
Generally Accepted Auditing Standards (``AU-C 200'') (effective 2012).
    These revisions were part of clarity projects that were designed to 
make the standards easier to read, understand, and apply.\17\ These 
standards were updated to align the terminology used throughout the 
standards for consistency and to enhance and update explanatory 
materials.
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    \17\ Descriptions of the clarity projects of the IAASB and ASB 
are available, respectively, at https://www.iaasb.org/projects/clarity-iaasb-standards and https://us.aicpa.org/interestareas/frc/auditattest/improvingclarityasbstandards.
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6. Comments on Reasons for Standard Setting and Proposed Approach
    The proposal sought comment on the appropriateness of the general 
principles and responsibilities of the auditor and the approach to 
reorganize and consolidate those responsibilities. Commenters who 
responded generally agreed that the general principles and 
responsibilities (i.e., reasonable assurance, due professional care, 
professional skepticism, independence, competence, and professional 
judgment) described in the proposal are appropriate. One commenter 
suggested that the Board address the relevance and reliability of audit 
evidence and information in conjunction with the requirements in AS 
1105, as part of the general principles and responsibilities. Some 
commenters addressed the reorganization and consolidation of the four 
existing foundational standards into one new standard and generally 
supported the proposed approach.
    Commenters were generally supportive of the Board's efforts to 
modernize and streamline the general principles and responsibilities of 
the auditor. Several commenters, for example, agreed that the proposed 
standard would provide a more logical presentation, which would enhance 
the useability of the standards by making them easier to read, 
understand, and apply. Some commenters, including investor-related 
groups, also expressed support for the proposal's focus on investor 
protection.
    Two commenters suggested consideration of analogous standards of 
the IAASB and the ASB. One commenter stated that PCAOB auditing 
standards should not diverge from AICPA auditing standards, to the 
extent appropriate. Another commenter recommended that the Board 
consider similar standards of the IAASB and the ASB and assess whether 
their approach could result in higher quality audits.
    The proposal also sought comment on the appropriateness of the 
general principles and responsibilities of the auditor in light of the 
availability of electronic audit tools and the use of audit software by 
both larger and smaller firms. Most commenters did not address this 
question. One commenter agreed that the proposed general principles and 
responsibilities of the auditor are appropriate and clear because they 
are necessary to the audit regardless of electronic tools and audit 
software. Another commenter recommended considering future 
possibilities and uses of machine learning and artificial intelligence 
(``AI'') technologies, which in the views of the commenter ``are 
progressing rapidly.''
    The final standard retains the general principles and 
responsibilities of the auditor described in the proposal, subject to 
revisions described below. The final standard also retains the overall 
approach of consolidating the foundational standards and the general 
principles and responsibilities of the auditor under one standard. The 
Board did not add specific requirements for evaluating the relevance 
and reliability of audit evidence, as suggested by one commenter, 
because AS 1105 provides the necessary framework for this evaluation. 
The final standard includes general requirements for conducting an 
audit, and obtaining sufficient appropriate audit evidence is part of 
those general requirements.
    In addition, in the final standard the Board did not add provisions 
specific to the current and future use of emerging technologies. Due to 
the ever-evolving nature of technology, specifying requirements for 
certain types of technology based on how those tools are used today 
could quickly make the standard become outdated. Further, the general 
principles and responsibilities addressed in the standard apply to all 
audits, irrespective of the technology that may be used in performing 
audit procedures. The Board continues to address emerging technologies 
(e.g., machine learning and AI) as part of the staff's ongoing Data and 
Technology research project.\18\ Research from this project may give 
rise to individual standard-setting projects and may also inform the 
scope or nature of other projects that are included on the Board's 
standard-setting agenda.
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    \18\ See the PCAOB's agenda related to standard setting, 
research, and rulemaking projects, available at https://pcaobus.org/oversight/standards/standard-setting-research-projects.
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    With respect to comments on analogous standards issued by other 
standard setters, the Board believes that AS 1000 is based on general 
principles and responsibilities of the auditor, similar to the bases of 
analogous IAASB and AICPA standards. The Board carefully considered the 
approaches of other standard setters when developing the proposal, and 
the new standard and amendments being adopted reflect the approach that 
the Board believes best protects investors and furthers the public 
interest. As a result, certain differences exist between the Board's 
new standard and those of other standard setters, including a number of 
provisions that the Board believes are appropriate and consistent with 
the Board's statutory mandate to protect the interests of investors and 
further the public interest.

Discussion of Final Rules

A. Overview of Final Rules

    The Board replaced AS 1001, AS 1005, AS 1010, and AS 1015 with one 
standard, AS 1000, that describes the general principles and 
responsibilities of an auditor \19\ in conducting an audit in 
accordance with the standards of the PCAOB. Briefly, the new standard:
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    \19\ The term ``auditor'' includes both a public accounting firm 
registered with the PCAOB and associated persons thereof, as defined 
in PCAOB Rule 1001, Definitions of Terms Employed in Rules. For 
example, engagement quality reviewers (``EQRs''), by virtue of their 
status as associated persons, are within the term ``auditor'' in AS 
1000. See also paragraph .03 of AS 1220, Engagement Quality Review.
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     Includes introductory language that reaffirms the 
auditor's fundamental obligation to protect investors through the 
preparation and issuance of informative, accurate, and independent 
auditor's reports;
     Includes objectives for the auditor to conduct and 
communicate the results of both an audit of a company's financial 
statements and an audit of a company's ICFR and satisfy and fulfill 
other general principles and responsibilities described in this 
standard;

[[Page 49735]]

     Retains and clarifies the general principles and 
responsibilities that are important for an audit, including reasonable 
assurance, due professional care, professional skepticism, and 
professional judgment;
     Aligns the engagement partner's supervisory 
responsibilities under AS 1201 with due professional care;
     Retains the requirement for the auditor to be independent 
but expresses the obligation more directly by referring to the PCAOB's 
independence criteria in its rules and standards, and the independence 
criteria set out in the rules and regulations of the SEC;
     Describes the auditor's obligations to (i) comply with 
ethics requirements, (ii) obtain and maintain competence, and (iii) 
prepare audit documentation;
     Expresses the auditor's responsibilities by using the 
terms set forth in PCAOB Rule 3101 (e.g., must and should) that 
describe the degree of responsibility that PCAOB standards impose on 
auditors; and
     Removes language that is outdated, inconsistent, and not 
relevant to audits conducted under the standards of the PCAOB.
    As previously noted, the Board amended other PCAOB auditing 
standards that address responsibilities fundamental to the conduct of 
an audit to:
     Clarify the engagement partner's existing responsibilities 
for supervision and review in AS 1201, AS 1215, and AS 2101 to provide 
more specificity about the engagement partner's responsibility to 
exercise due professional care related to supervisory and review 
activities required to be performed under existing auditor 
requirements;
     Clarify the requirements for audit documentation in AS 
1215 to identify who performed the work, who reviewed the work, and the 
date of such review;
     Accelerate the period in AS 1215 to assemble a complete 
and final set of audit documentation for retention from 45 days to 14 
days; and
     Update and incorporate the underlying requirements of AS 
2815 into AS 2810, and rescind AS 2815, while preserving the meaning of 
``present fairly'' and streamlining the requirements to provide a more 
logical presentation.
    In a separate release, the Board is also adopting a new quality 
control standard, QC 1000, A Firm's System of Quality Control, and a 
new ethics standard, EI 1000, Integrity and Objectivity, together with 
other amendments to PCAOB standards, rules, and forms.\20\ This release 
includes references to QC 1000 and EI 1000, where appropriate.
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    \20\ See A Firm's System of Quality Control and Other Amendments 
to PCAOB Standard, Rules, and Forms, PCAOB Rel. No. 2024-005 (May 
13, 2024).
---------------------------------------------------------------------------

B. AS 1000

1. Introduction
See Paragraphs .01 Through .02 of the New Standard.
    The first paragraph of the proposed standard, under the heading 
``Introduction,'' described the fundamental obligation of auditors to 
protect investors through the preparation and issuance of informative, 
accurate, and independent auditor's reports. It noted that an audit 
primarily benefits investors who rely on the audit to provide objective 
and independent opinions on whether the company's financial statements 
are presented fairly and, if applicable, on the effectiveness of the 
company's ICFR. The proposed paragraph further provided that a properly 
conducted audit and related auditor's report enhance the confidence of 
investors and other market participants in the company's financial 
statements and, if applicable, ICFR. The existing foundational 
standards do not include an introduction and do not describe the 
auditor's fundamental responsibility to protect investors.
    Investor-related groups strongly supported the proposed standard's 
emphasis on the auditor's obligation to protect investors. These 
commenters suggested some clarification in the language describing the 
auditor's obligation for, and role in, protecting investors, as 
described in the Supreme Court opinion in United States v. Arthur Young 
& Co.\21\ Some pointed to, for example, language stating that the 
auditor ``assumes a public responsibility transcending any employment 
relationship with the client'' and that the auditor ``owes ultimate 
allegiance to the corporation's creditors and stockholders, as well as 
the investing public.'' \22\ One of these commenters stated that 
without additional clarification, the phrase ``fundamental obligation'' 
is a vague concept and open to interpretation. Two commenters 
recommended including in AS 1000 a footnote from the proposal that 
cites the Arthur Young opinion.
---------------------------------------------------------------------------

    \21\ United States v. Arthur Young & Co., 465 U.S. 805, 817-18 
(1984).
    \22\ Id. at 817 (emphasis in original).
---------------------------------------------------------------------------

    Two commenters, including an investor-related group, recommended 
that the standard's reference to investors be broadened to include 
shareholders, debtholders, and other financial statement users who rely 
on a company's financial statements, consistent with the usage by 
Financial Accounting Standards Board (``FASB'') and the Supreme Court 
in the Arthur Young opinion. One of these commenters recommended 
including a definition of ``financial statement users'' in the final 
standard. Another recommended adding a footnote to the first sentence 
of paragraph .01 defining and describing the meaning of ``investors.''
    A number of other commenters, primarily firms, expressed concerns 
that the introduction language describing the auditor's role was 
unclear and could be misleading. For example, several commenters noted 
that the description of the auditor's role in protecting investors 
could be viewed as creating a new legal obligation owed to investors. 
In the view of one commenter, the proposed language implied that 
investor protection is the sole responsibility of the auditor and could 
give investors false confidence that they can solely rely on an 
auditor's report as investment advice, when in fact there are many 
other factors investors should consider. Another commenter asserted 
that the proposed language could create a misimpression that auditors 
are permitted and expected to deviate from auditing standards when they 
believe such a departure would be warranted to further investors' 
interests. These commenters suggested that the Board clarify the 
introduction language in the final standard. Some commenters provided 
alternative language for the Board's consideration. For example, two 
commenters suggested replacing the phrase ``properly conducted'' in the 
last sentence of paragraph .01 with ``conducted in accordance with the 
standards of the PCAOB'' to align with language used in the auditor's 
report. One commenter suggested deleting paragraph .01 entirely.
    After considering the comments received, the Board retained the 
proposed approach to the introduction section, while making certain 
revisions in light of the comments received.
    The Board revised the first sentence of the introduction to state 
that the auditor has a fundamental obligation to protect investors 
through the preparation and issuance of informative, accurate, and 
independent auditor's reports. The Board also removed a redundant 
statement from proposed paragraph .01 (``and that obligation governs 
the auditor's work under the standards of the PCAOB''). This statement 
is unnecessary because paragraph .02 already clarifies that AS 1000 
describes the general principles and

[[Page 49736]]

responsibilities of the auditor in properly conducting an audit in 
accordance with the standards of the PCAOB. This includes the 
fundamental obligation to protect investors as described in paragraph 
.01.
    The fundamental obligation to protect investors is interwoven in 
the general principles and responsibilities that guide auditors 
throughout their work. Under current law, the auditor plays a critical 
role in the financial reporting process. By issuing opinions concerning 
whether financial statements are presented fairly, in all material 
respects, in conformity with the applicable financial reporting 
framework, auditors serve a special ``public watchdog'' function under 
the existing federal securities laws, requiring ``complete fidelity to 
the public trust.'' \23\ As ``gatekeepers,'' auditors have a public 
responsibility to serve the public interest.\24\ Investors rely on 
auditors to promote companies' adherence to federal securities law 
mandates and companies' disclosure of accurate and reliable financial 
information.\25\ ``Investor confidence is bolstered by the knowledge 
that public financial statements have been subjected to the rigors of 
independent and objective investigation and analysis'' by an 
auditor.\26\ This enhanced confidence of investors and other financial 
statement users in the company's financial statements and ICFR also 
plays an integral role in maintaining the public trust in the capital 
markets. The introduction in the final standard underscores the 
auditor's obligation under the Board's auditing standards and other 
applicable laws and regulations.
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    \23\ Arthur Young, 465 U.S. at 817-18.
    \24\ In the Matter of KPMG Peat Marwick LLP, SEC Rel. No. 34-
43862, at 14 & n.54 (Jan. 19, 2001); see John C. Coffee Jr., 
Gatekeepers: The Professions and Corporate Governance 2-3 (2006) 
(describing ``gatekeepers'' as ``repeat players who provide 
certification or verification services to investors, vouching for 
someone else who has a greater incentive than they to deceive'').
    \25\ In the Matter of the Application of SW Hatfield, C.P.A., 
SEC Rel. No. 34-69930, at 33 (July 3, 2013) (reviewing PCAOB 
disciplinary action).
    \26\ McCurdy v. SEC, 396 F.3d 1258, 1261 (D.C. Cir. 2005); see 
Arthur Young, 465 U.S. at 819 n.15.
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    The Board emphasized--in response to commenters who expressed 
concern that the introductory language, and specifically its use of the 
term ``obligation,'' could be interpreted to establish a new legal 
duty--that the introductory language does not alter any existing 
regulatory or legal requirements or obligations between auditors and 
investors. It does not establish a novel duty or new form of legal 
obligation. Rather, it reaffirms the auditor's obligation under the 
existing legal framework and the important role of the auditing 
profession in the capital markets.\27\
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    \27\ See Section 101(c)(6) of Sarbanes-Oxley (authorizing PCAOB 
to enforce compliance with the ``Act, the rules of the Board, 
professional standards, and the securities laws relating to the 
preparation and issuance of audit reports and the obligations and 
liabilities of accountants with respect thereto, by registered 
public accounting firms and associated persons thereof . . ..'') 
(emphasis added).
---------------------------------------------------------------------------

    Paragraph .01 of the final standard has also been revised, as 
suggested by some commenters, to state that the auditor's 
responsibility \28\ transcends the auditor's relationship with 
management and the audit committee of the company under audit, 
providing the foundation for an objective and independent audit. This 
statement expresses a longstanding principle of public accounting.\29\ 
Paragraph .01 also states that a properly conducted audit and the 
related auditor's report enhance the confidence of investors and other 
financial statement users in the company's financial statements and, if 
applicable, ICFR. The Board retained the phrase ``properly conducted 
audit'' to align with the description in paragraph .02. The Board 
removed the sentence that states that ``An audit primarily benefits 
investors, who rely on the audit to provide an objective and 
independent opinion on whether the company's financial statements are 
presented fairly and, if applicable, on the effectiveness of the 
company's internal control over financial reporting'' because it is 
redundant and unnecessary in the context of the surrounding statements. 
The Board does not believe that the language in paragraph .01 suggests 
that auditors may deviate from PCAOB auditing standards to protect 
investors. In fact, the language clearly establishes the fundamental 
duty of auditors to prepare and issue their reports in accordance with 
PCAOB standards. Similarly, the Board does not interpret the language 
of paragraph .01 as suggesting that investors should view auditor's 
reports as the sole source of investment advice. Collectively, these 
provisions emphasize that auditors play a critical role in ensuring the 
accuracy and transparency of a company's financial information, and 
that this role helps investors make well-informed decisions and 
supports trust in a company's financial statements.
---------------------------------------------------------------------------

    \28\ The terms ``obligation'' and ``responsibility'' are used 
synonymously in this standard.
    \29\ See Arthur Young, 465 U.S. at 817-818 (``By certifying the 
public reports that collectively depict a corporation's financial 
status, the independent auditor assumes a public responsibility 
transcending any employment relationship with the client. The 
independent public accountant performing this special function owes 
ultimate allegiance to the corporation's creditors and stockholders, 
as well as to the investing public.'') (emphasis in original); AICPA 
Professional Standards, Vol. 2, Code of Professional Conduct, ET 
Section 53, Article II--The Public Interest (2002) (``.01 A 
distinguishing mark of a profession is acceptance of its 
responsibility to the public. The accounting profession's public 
consists of clients, credit grantors, governments, employers, 
investors, the business and financial community, and others who rely 
on the objectivity and integrity of certified public accountants to 
maintain the orderly functioning of commerce.'').
---------------------------------------------------------------------------

    Finally, a new footnote to paragraph .01 clarifies that references 
to ``investors and other financial statement users'' in AS 1000 
encompass a broad spectrum of stakeholders. This group includes not 
only a company's existing and potential shareholders, but also 
bondholders, lenders, other creditors, and others who use the company's 
financial statements.\30\
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    \30\ See FASB, Statement of Financial Accounting Concepts No. 8, 
Conceptual Framework for Financial Reporting, Chapter 1, The 
Objective of General Purpose Financial Reporting (Dec. 2021) (``The 
objective of general purpose financial reporting is to provide 
financial information about the reporting entity that is useful to 
existing and potential investors, lenders, and other creditors in 
making decisions about providing resources to the entity'').
---------------------------------------------------------------------------

    In addition to the revisions to paragraph .01, the Board relocated 
certain content, discussed in more detail below, from proposed 
paragraph .15 into a new note to paragraph .01. The note reminds 
auditors that their obligation to protect investors provides important 
context to the auditor's work when applying the requirements of AS 1000 
and other PCAOB standards and rules (e.g., when conducting interim 
reviews in accordance with AS 4105, Reviews of Interim Financial 
Information, or when conducting audits of ICFR in accordance with AS 
2201).
    Paragraph .02 summarizes the scope and content of AS 1000. The 
Board did not receive comment on this paragraph and adopted it as 
proposed.
2. Objectives of the Auditor
See Paragraph .03 of the New Standard
    The proposed standard set forth three objectives of the auditor (a) 
in an audit of financial statements, to obtain reasonable assurance 
about whether the financial statements are free of material 
misstatement, whether due to error or fraud, and to issue an auditor's 
report that expresses an opinion about whether the financial 
statements, taken as a whole, are presented fairly, in all material 
respects, in conformity with the applicable financial reporting 
framework; (b) in an audit of internal control over financial 
reporting, to obtain reasonable assurance about whether material 
weaknesses exist as of

[[Page 49737]]

the date specified in management's assessment, and to issue an 
auditor's report that expresses an opinion on the effectiveness of the 
company's internal control over financial reporting; and (c) to 
communicate externally, as required by applicable professional and 
legal requirements. Other than AS 1001,\31\ the existing foundational 
standards do not include an objective.
---------------------------------------------------------------------------

    \31\ See AS 1001.01.
---------------------------------------------------------------------------

    The proposal defined the term ``applicable professional and legal 
requirements'' by referring to the term's definition in proposed QC 
1000.\32\ That proposed definition included (i) professional standards, 
as defined in PCAOB Rule 1001(p)(vi); (ii) rules of the PCAOB that are 
not professional standards; and (iii) to the extent related to the 
obligations and responsibilities of accountants or auditors or to the 
conduct of engagements, rules of the SEC, other provisions of U.S. 
federal securities law, and other applicable statutory, regulatory, and 
other legal requirements.
---------------------------------------------------------------------------

    \32\ See A Firm's System of Quality Control and Other Proposed 
Amendments to PCAOB Standards, Rules, and Forms, PCAOB Rel. No. 
2022-006 (Nov. 18, 2022).
---------------------------------------------------------------------------

    Several commenters expressly supported the proposed objectives of 
the auditor. Some commenters suggested ways to further clarify these 
objectives. For example, one commenter suggested that the objectives be 
reframed as objectives of the ``audit'' rather than of the ``auditor.'' 
Another commenter suggested moving the requirements on the 
determination of critical audit matters (``CAMs'') from AS 3101.11, to 
the objectives of the auditor in AS 1000 in order to highlight the 
importance of CAMs. One commenter recommended that the objective 
related to the audit of ICFR refer to the relevant criteria used (e.g., 
criteria issued by the Committee of Sponsoring Organizations of the 
Treadway Commission) and clarify that it is integrated with the audit 
of financial statements.
    With respect to the communication objective, one commenter stated 
that the proposed objective should also refer to communications with 
the company. Another commenter stated that the term ``applicable legal 
and professional requirements'' is overly broad and may inadvertently 
scope in legal requirements outside of public accountancy laws. An 
additional commenter suggested that AS 1000 refer instead to ``PCAOB 
rules and standards.''
    The Board adopted the objectives in the final standard 
substantially as proposed, with the modifications discussed below.
    The purpose of the objectives is to provide additional context for 
understanding the requirements in the standard. Therefore, the Board 
added the objective to ``satisfy and fulfill the other general 
principles and responsibilities described in this standard.'' This 
provides more explicit linkage to the general principles and 
responsibilities set forth in the final standard.
    The objectives refer, as proposed, to the ``objectives of the 
auditor.'' Because the standard addresses the general principles and 
responsibilities of the auditor in conducting an audit, the Board 
believes that the objectives should be directed at the ``auditor'' 
rather than the audit as a whole.
    The determination of CAMs is an important part of the auditor's 
reporting responsibilities and is encompassed under the applicable 
professional and legal requirements. The auditor's responsibilities for 
determining and communicating CAMs are described in AS 3101 and align 
with the stated objectives of that standard.\33\ Rather than repeating 
these requirements, the Board instead added a note to paragraph .17 of 
the final standard that refers to the potential inclusion of CAMs in 
the auditor's report.
---------------------------------------------------------------------------

    \33\ See AS 3101.04 and .11-.17.
---------------------------------------------------------------------------

    The suggested references to the relevant criteria used in the audit 
of ICFR are not suitable for the objective section of AS 1000 and are 
already covered in other PCAOB standards. The specific requirements 
relevant to performing an audit of ICFR are addressed in AS 2201, which 
provides the appropriate context for the framework to be used by the 
auditor when conducting an ICFR audit and integrating the audit of ICFR 
with an audit of financial statements.
    As was proposed, the final standard includes an objective to 
communicate externally in accordance with applicable legal and 
professional requirements. The auditor has a responsibility to make 
certain communications (e.g., communications about audit results to the 
audit committee under AS 1301, Communications with Audit Committees), 
in addition to reporting externally on the results of the audit. The 
reference to these requirements in the objective is not intended to 
limit or preclude appropriate communications with company personnel. 
For example, PCAOB auditing standards require the auditor to conduct 
various inquiries of management and other company personnel (e.g., AS 
2110, Identifying and Assessing Risks of Material Misstatement, and AS 
2201), which is part of complying with applicable professional and 
legal requirements.
    For ease of reference, the final standard includes the definition 
of the term ``applicable professional and legal requirements'' as:
     Professional standards, as defined in PCAOB Rule 
1001(p)(vi);
     Rules of the PCAOB that are not professional standards; 
and
     To the extent related to the obligations and 
responsibilities of accountants or auditors in the conduct of 
engagements or in relation to the quality control system, rules of the 
SEC, other provisions of U.S. federal securities law, ethics laws and 
regulations, and other applicable statutory, regulatory, and other 
legal requirements.
    This definition is intended to capture all professional and legal 
requirements specifically related to engagements under PCAOB standards 
of issuers and SEC-registered broker-dealers, including relevant 
accounting, auditing, and attestation standards, PCAOB rules, SEC rules 
and regulations, other provisions of federal securities law, other 
relevant laws and regulations (e.g., state law and rules governing 
accountants), applicable ethics law and rules, and other legal 
requirements related to the obligations and responsibilities of 
accountants or auditors in the conduct of the firm's engagements or in 
relation to the quality control system.\34\ It does not encompass 
requirements that apply to businesses generally, such as tax laws, 
safety regulations, and employment law.
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    \34\ The requirements related to compliance with applicable 
professional and legal requirements are meant to make clear that, in 
engagements subject to PCAOB auditing standards, all applicable 
professional and legal requirements must be followed. The 
requirement does not suggest that application of ``other applicable 
statutory, regulatory, and other legal requirements'' could 
supersede rules of the SEC, other provisions of U.S. federal 
securities law, rules of the PCAOB that are not professional 
standards, or PCAOB professional standards. On the contrary, 
requirements relating to ``applicable professional and legal 
requirements'' are meant to highlight the importance of adhering to 
other requirements when those requirements do not conflict with or 
abridge requirements of federal securities laws, PCAOB rules, or 
PCAOB standards.
---------------------------------------------------------------------------

    This definition reflects revisions made in response to comments 
received on proposed QC 1000.\35\ The definition

[[Page 49738]]

was expanded to explicitly mention ethics laws and regulations.\36\ It 
was also refined to make clear that it encompasses statutory, 
regulatory, and other legal requirements beyond professional standards 
and other PCAOB rules ``[t]o the extent related to the obligations and 
responsibilities of accountants or auditors in the conduct of 
engagements or in relation to the quality control system.'' This change 
is designed to limit the breadth of the definition to the relevant 
circumstances. The phrase ``quality control policies and procedures,'' 
used in PCAOB Rule 1001(p)(vi), is drawn from Section 110(5) of 
Sarbanes-Oxley, and therefore no amendment to the PCAOB rule was 
necessary.
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    \35\ Two commenters supported the definition as proposed. One 
commenter recommended including the profession's ethical standards 
explicitly. Two commenters stated the phrase ``other applicable 
statutory, regulatory, and other legal requirements'' could be read 
broadly and extend beyond regulations that directly bear on the 
conduct of audit engagements. Another commenter suggested amending 
the definition of ``professional standards'' in PCAOB Rule 
1001(p)(vi) to refer to ``quality control standards'' rather than 
``quality control policy and procedures.''
    \36\ These include those arising under state law or the law of 
other jurisdictions (e.g., obligations regarding client 
confidentiality).
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3. Professional Qualifications of the Auditor
i. Independence
See Paragraphs .04 Through .05 of the New Standard
    The Board proposed to carry forward the existing requirement in AS 
1005 for the auditor to be independent, and to align the language that 
describes auditor independence obligations with language used in PCAOB 
Rule 3520, Auditor Independence, and SEC Rule 2-01.\37\ Specifically, 
the Board proposed to require the auditor to be independent of its 
audit client both in fact and in appearance throughout the audit and 
professional engagement period.\38\ The proposed standard also 
clarified that the auditor is not independent with respect to an audit 
client if the auditor is not, or a reasonable investor with knowledge 
of all relevant facts and circumstances would conclude that the auditor 
is not, capable of exercising objective and impartial judgment on all 
matters encompassed within the engagement. This clarification aligned 
the standard with language used in SEC Rule 2-01(b) \39\ to explain 
further the meaning of being independent both in fact and in 
appearance. In addition, the Board proposed to require the auditor to 
satisfy the independence criteria set out in the rules and standards of 
the PCAOB, and satisfy all other independence criteria applicable to 
the engagement, including the independence criteria set out in the 
rules and regulations of the SEC under the federal securities laws.
---------------------------------------------------------------------------

    \37\ 17 CFR 210.2-01 (Regulation S-X Rule 2-01).
    \38\ See PCAOB Rule 3501, Definitions of Terms Employed in 
Section 3, Part 5 of the Rules, for the definition of the term 
``audit and professional engagement period.''
    \39\ Under the general standard in SEC Rule 2-01(b), the SEC 
``will not recognize an accountant as independent, with respect to 
an audit client, if the accountant is not, or a reasonable investor 
with knowledge of all relevant facts and circumstances would 
conclude that the accountant is not, capable of exercising objective 
and impartial judgment on all issues encompassed within the 
accountant's engagement.''
---------------------------------------------------------------------------

    Several commenters expressed support for including in AS 1000 the 
existing requirements from AS 1005 and stating more directly the 
auditor's obligation to comply with the independence requirements of 
the PCAOB and SEC. Two commenters, including an investor-related group, 
suggested that the Board replace references to ``audit client'' with 
``company under audit.'' One commenter asserted that using ``client'' 
does not recognize that the auditor's public responsibility transcends 
the employment relationship with the client. Another commenter asserted 
that the use of ``client'' mischaracterizes the relationship between 
auditor and the company or its management, and places the auditor in a 
``subservient'' position. In addition, one commenter suggested adding 
to the final standard additional language from SEC Rule 2-01(b) to 
indicate that the PCAOB and SEC will consider ``all relevant facts and 
circumstances'' in determining independence. That commenter also 
suggested limiting the use of the term ``independent'' in the title of 
the auditor's report to only those auditors that have complied with the 
SEC and PCAOB rules.
    After considering the comments received, the Board adopted the 
requirements related to independence substantially as proposed with 
some modifications. The Board agrees with the commenters' observation 
that language used in the Board's standards can help emphasize that 
audits are performed primarily for the benefit of investors, not 
management of the company. Accordingly, the Board replaced references 
to ``audit client'' with ``company under audit'' and added a footnote 
to clarify that the phrase ``company under audit'' has the same meaning 
as ``audit client'' as defined by PCAOB Rule 3501(a)(iv).
    The Board did not add to the final standard additional language 
from SEC Rule 2-01(b) stating that the PCAOB and SEC will consider 
``all relevant facts and circumstances'' in determining independence. 
The Board's standards do not address the SEC's processes, and need not 
repeat in this standard that relevant matters are considered in PCAOB 
independence determinations.\40\ The Board also did not add limitations 
on the use of the term ``independent'' in the title of the auditor's 
report. AS 3101 contains requirements regarding the content of the 
auditor's report, including the title ``Report of Independent 
Registered Public Accounting Firm.'' AS 3101 also requires that the 
auditor's report include a statement that the auditor is required to be 
independent with respect to the company in accordance with U.S. federal 
securities laws and the applicable rules and regulations of the SEC and 
PCAOB. Imposing any limitations on the use of the term ``independent'' 
in the title, as suggested by a commenter, is outside of the scope of 
this standard.
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    \40\ See Note to paragraph (b) of PCAOB Rule 3525, Audit 
Committee Pre-approval of Non-audit Services Related to Internal 
Control Over Financial Reporting (``Independence requirements 
provide that an auditor is not independent of his or her audit 
client if the auditor is not, or a reasonable investor with 
knowledge of all relevant facts and circumstances would conclude 
that the auditor is not, capable of exercising objective and 
impartial judgment on all issues encompassed within the accountant's 
engagement.'') (emphasis added).
---------------------------------------------------------------------------

ii. Ethics
See Paragraph .06 of the New Standard
    The Board proposed to require the auditor to comply with applicable 
ethics requirements, including the rules and standards of the PCAOB. 
Under the proposed standard, ethics requirements included the rules in 
Section 3, Part 5 of PCAOB rules and proposed EI 1000, Integrity and 
Objectivity, of the QC proposal. The existing foundational standards do 
not reference the auditor's responsibility to comply with ethics 
requirements.
    A few commenters suggested revisions to the proposed requirement. 
Two commenters, including an investor-related group, stated that the 
proposed requirement is weak because it focused on merely complying 
with rules and standards of the Board. The investor-related group also 
suggested adding language that discusses subordination of judgment to 
others, specifically those outside the audit firm (e.g., external 
specialists). The other commenter recommended requiring that firms 
create and maintain codes of ethics embracing the principles of 
proposed EI 1000 and upholding the integrity of capital markets and 
auditors' fundamental obligations to investors. An additional commenter 
suggested addressing in the standard broader ethical principles, such 
as integrity and objectivity, in addition to compliance with rules and 
standards.
    After considering the comments received, the Board retained the 
requirement to comply with ethics

[[Page 49739]]

requirements substantially as proposed, with the modifications 
discussed below. The Board added the word ``ethics'' before ``rules and 
standards of the PCAOB'' to provide a clearer indication of the rules 
and standards referenced. Under the final standard, applicable ethics 
requirements are not limited to the ethics rules and standards of the 
PCAOB but also include state law and the laws of other jurisdictions 
that may establish additional ethics provisions with which the auditor 
is required to comply (e.g., obligations regarding conflicts of 
interest).
    The Board agrees with the underlying point of the comment that 
auditors should not subordinate their judgment to individuals outside 
the audit firm (e.g., external specialists) and believe that the new 
standard will achieve the desired objective of the comment. A 
subordination or relinquishment of professional judgment would be 
inconsistent with the requirements of AS 1000.09-.10 related to due 
professional care, which are discussed below. In addition, EI 1000 
addresses the broader ethical principles of integrity and objectivity. 
Specifically, the overarching requirements in EI 1000 include (i) 
maintaining integrity, which includes being honest and candid, not 
knowingly or recklessly misrepresenting facts, and not subordinating 
judgment; and (ii) maintaining objectivity, which includes being 
impartial, intellectually honest, and free of conflicts of interest. 
The intent of the requirement to comply with ethics in AS 1000 is to 
remind auditors of their responsibilities described in EI 1000 and 
Section 3, Part 5 of PCAOB rules. Therefore, additional discussion of 
broader ethical principles and responsibilities is appropriately 
addressed in EI 1000 and need not be duplicated in AS 1000. The Board 
expanded the reference to EI 1000 in footnote 6 of paragraph .06 of AS 
1000 to clarify that EI 1000 specifically requires auditors to maintain 
integrity and objectivity. Further clarification on matters related to 
subordination of professional judgment is unnecessary in this release. 
Lastly, the Board considered comments related to firms' adoption of an 
ethics code as part of the adoption of EI 1000.
iii. Competence
See Paragraphs .07 and .08 of the New Standard
a. Description of Competence
    The Board proposed to require that the audit be performed by an 
auditor who has competence to conduct an audit in accordance with 
applicable professional and legal requirements. Competence, as 
described in the proposed standard, consists of having the knowledge, 
skill, and ability that enable an auditor to perform the assigned 
activities in accordance with applicable professional and legal 
requirements and the firm's policies and procedures. In the proposing 
release, the Board explained that the auditor's knowledge and skill 
relate to adequate technical training and proficiency as an auditor, 
and the auditor's ability relates to the capabilities to perform, and 
in the case of supervisory staff, to review assigned tasks. The 
proposed standard also provided that, in determining the appropriate 
level of competence, the measure is qualitative rather than 
quantitative because quantitative measurement may not accurately 
reflect the experience gained over time. A note to the proposed 
requirement stated that competence includes knowledge and expertise in 
accounting and auditing standards and in SEC rules and regulations 
relevant to the company being audited and to the related industry or 
industries in which it operates. The proposed requirement was 
consistent with the auditor's existing responsibilities under AS 1010 
for maintaining ``adequate technical training and proficiency'' but 
used updated terminology.
    Several commenters sought greater clarity in the proposed 
requirement, stating that it did not account for the collective 
competence of the engagement team or that it might imply that all 
individual members of an engagement team are expected to have the same 
level of competence. These commenters generally suggested (i) revising 
the requirement to apply to, for example, ``the engagement team, 
including specialists'' or ``auditors, collectively'' instead of ``an 
auditor'' and (ii) clarifying that necessary competence is commensurate 
with the assigned tasks of the individual auditor. One commenter 
suggested (i) defining the individuals intended to be covered by the 
requirement, including subject matter experts and EQRs; (ii) explaining 
that the competence of individuals varies based on a variety of 
factors; and (iii) including quantitative factors in the measure of 
competence. Another commenter noted that the proposed requirement could 
be interpreted to limit the ability to assign challenging work to 
junior staff because they may lack significant experience.
    Some commenters, mostly firms and professional organizations, also 
expressed concern with the description of competence in the note to the 
proposed requirement--which referred to having ``expertise'' in SEC 
rules and regulations and the relevant industry of the company being 
audited--and asked for additional clarification. These commenters 
asserted that the term ``expertise'' may impose a higher standard of 
competence than intended and could imply that the expected level of 
knowledge is that of a person qualified to engage in the practice of 
another profession or occupation (e.g., the legal profession). One of 
these commenters also expressed concern with the implication that a 
partner without relevant expertise in the industry in which the issuer 
operates may not be competent to perform an audit of the issuer, even 
with the assistance of other firm or engagement team members with 
relevant industry expertise. Several commenters recommended deleting 
the reference to ``expertise'' or using alternative language such as 
``proficiency'' or ``sufficient knowledge.''
    After considering the comments received, the Board adopted the 
requirement related to competence substantially as proposed, with the 
modifications discussed below.
    First, consistent with the Board's description in the proposal, the 
Board continues to believe the level of competence needed to conduct 
the audit is driven by the activities assigned to the individual 
auditors performing those activities. As the assigned activities in an 
audit vary from individual to individual, so does the required level of 
competence to complete those activities in accordance with applicable 
professional and legal requirements and the firm's policies and 
procedures. For example, a first-year auditor is not expected to have 
the same level of competence as a more experienced auditor because the 
tasks assigned to the seasoned auditor generally require experience 
gained over time. Further, PCAOB standards and rules use the term 
``auditor'' to mean both a firm registered with the PCAOB and its 
associated persons.\41\ Therefore, the Board believes that defining the 
individuals covered by the requirement or revising terminology to 
``auditors'' or ``engagement team,'' as suggested by some commenters, 
is not necessary. The requirements regarding the appropriate assignment 
of responsibilities to engagement team members and proper supervision 
are addressed in other PCAOB standards.\42\
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    \41\ See PCAOB Rule 1001(a)(xii).
    \42\ See, e.g., paragraph .05 of AS 2301, The Auditor's 
Responses to the Risks of Material Misstatement, and AS 1201.05.
---------------------------------------------------------------------------

    Second, the Board agrees that quantitative measures are not wholly

[[Page 49740]]

irrelevant when measuring competence. Quantitative measures alone may 
not accurately reflect the nature of experience gained over time and 
therefore competence should not be measured exclusively on a 
quantitative basis.\43\ In consideration of comments, the final 
requirement clarifies that competence is measured both qualitatively 
and quantitatively.
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    \43\ The description of competence is consistent with the 
description in QC 1000.
---------------------------------------------------------------------------

    Third, the intent of the proposed requirement's note (providing 
that competence ``includes knowledge and expertise'' in certain areas) 
was to provide additional direction to auditors on the meaning of 
competence in the context of the company being audited. The Board did 
not intend to impose a higher standard of competence beyond having the 
knowledge, skill, and ability to enable the auditor to perform the 
assigned activities in accordance with applicable professional and 
legal requirements. The Board therefore changed ``expertise'' to 
``proficiency'' in the final requirement in response to comments. 
Nevertheless, the Board continues to believe that understanding the 
company's business and being proficient in the rules and regulations 
relevant to the company under audit and its related industry is an 
important part of competence. For example, an engagement partner with 
significant experience mostly in auditing manufacturing companies may 
not necessarily have the appropriate level of competence to oversee, 
and have primary responsibility for, an audit of a financial 
institution.
b. Developing and Maintaining Competence
    The Board also proposed to require that the auditor develop and 
maintain competence through an appropriate combination of academic 
education; professional experience in accounting and auditing with 
proper supervision; and training, including accounting, auditing, 
independence, ethics, and other relevant continuing professional 
education. Existing AS 1010 includes a similar requirement.
    Investor-related groups advocated for the inclusion of investor-
related training that focuses on investors as the primary beneficiaries 
of the audit and being responsive to investors' needs. These commenters 
also emphasized the importance of including the auditor's understanding 
of the business and industry related to the company under audit as part 
of developing competence. One investor-related group suggested specific 
training on materiality.
    The Board retained the requirement to develop and maintain 
competence as proposed. The Board agrees with investor-related groups' 
views on the importance of protecting investors when conducting an 
audit. In that regard, paragraph .01 of the final standard and the 
Board's related discussion provide the context of investor protection 
that is relevant to the auditor's compliance with the requirements for 
developing and maintaining competence. Further, in considering 
commenters' suggestion about investor-focused training, the Board 
believes that the implementation of the final standard will necessarily 
involve training auditors on the application of the relevant 
requirements, including conducting an audit with investor protection in 
mind.
    The note to paragraph .07 of the final standard reinforces the need 
for auditors to have knowledge and proficiency in the requirements 
relevant to the company being audited and the related industry. 
Further, the auditor's responsibilities for understanding the company's 
business and consideration of materiality in planning and performing an 
audit are specifically addressed in other PCAOB auditing standards,\44\ 
and the Board expects that these responsibilities would already be 
included in training on auditing standards.
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    \44\ See AS 2110 and AS 2105, Consideration of Materiality in 
Planning and Performing an Audit.
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4. Due Professional Care, Including Professional Skepticism
i. Due Professional Care
See Paragraphs .09 Through .10 of the New Standard
    The Board proposed to require the auditor to exercise due 
professional care in all matters related to the audit. The proposed 
standard stated that due professional care (i) concerns what the 
auditor does and how well the auditor does it, and (ii) means acting 
with reasonable care and diligence, exercising professional skepticism, 
acting with integrity, and complying with applicable professional and 
legal requirements. The proposed requirement was based on the existing 
requirement in AS 1015 to exercise due professional care.
    The proposing release explained that exercising due professional 
care ``in all matters related to the audit'' would encompass all 
aspects of planning and performing an audit, including client 
acceptance and continuance procedures, and would extend to periods 
after the issuance of the auditor's report, such as completion of audit 
documentation,\45\ reporting on Form AP, Auditor Reporting of Certain 
Audit Participants,\46\ and procedures performed in connection with 
filings under the federal securities statutes.\47\ The Board also 
proposed to retain language from existing standards related to an 
auditor's use of the work of other auditors, which emphasized that 
other auditors are responsible for performing their work with due 
professional care.\48\
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    \45\ See AS 1215.15 (as proposed to be amended).
    \46\ See PCAOB Rule 3211, Auditor Reporting of Certain Audit 
Participants.
    \47\ See AS 4101, Responsibilities Regarding Filings Under 
Federal Securities Statutes, which describes the auditor's 
responsibilities when the auditor's report is included in filings 
under federal securities statutes.
    \48\ See Planning and Supervision of Audits Involving Other 
Auditors and Dividing Responsibility for the Audit with Another 
Accounting Firm, PCAOB Rel. No. 2022-002 (June 21, 2022) (amendments 
approved by the SEC in Rel. No. 34-95488 (Aug. 12, 2022)), which 
amended AS 1015 to add this provision.
---------------------------------------------------------------------------

    Some commenters acknowledged that due professional care is an 
important principle that should be retained in the final standard. 
Several commenters expressed support for requiring auditors to exercise 
due professional care ``in all matters related to the audit.''
    Some commenters, primarily some firms, advocated for retaining 
certain contextual language from AS 1015.03-.04, including, for 
example, the description of due professional care in the 1932 legal 
treatise, Cooley on Torts.\49\ These commenters expressed concern that 
without such language there may be a lack of transparency, or confusion 
among investors and other stakeholders, about the limitations of due 
professional care.
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    \49\ The treatise states, among other things, that ``no man, 
whether skilled or unskilled, undertakes that the task he assumes 
shall be performed successfully, and without fault or error; he 
undertakes for good faith and integrity, but not for infallibility, 
and he is liable to his employer for negligence, bad faith, or 
dishonesty, but not for losses consequent upon pure errors of 
judgment.''
---------------------------------------------------------------------------

    After considering comments, the Board adopted the requirement to 
exercise due professional care as proposed. The Board continues to 
believe that the description of due professional care in the final 
standard is consistent with the description in AS 1015.03 (and the 
reference in the current standard to the legal treatise, Cooley on 
Torts), which uses the terms ``reasonable care and diligence'' and 
``good faith and integrity but not infallibility'' to describe due 
care. As discussed in the proposal, the Board retained explicit 
reference to ``reasonable care and diligence,'' which the Board 
believes is well understood. The Board also believes that ``good faith

[[Page 49741]]

and integrity'' means acting with ``integrity.'' The Board's use of the 
term ``integrity'' aligns with its meaning established in EI 1000, 
which the Board adopted in connection with the Quality Control 
rulemaking. EI 1000 codifies the concepts of integrity and objectivity, 
emphasizing that integrity includes being honest and candid, not 
knowingly or recklessly misrepresenting facts, and not subordinating 
judgment.\50\ The Board believes that the terms used to describe due 
professional care are clear and should not cause confusion, as 
suggested by some commenters, because the Board did not change the 
meaning of due professional care.
---------------------------------------------------------------------------

    \50\ See also PCAOB Rel. No. 2024-005.
---------------------------------------------------------------------------

    The proposed standard specified that, for engagement partners, due 
professional care also includes (i) appropriately assigning 
responsibilities to, and supervising, engagement team members; (ii) 
determining that the audit is properly planned and performed to obtain 
reasonable assurance; (iii) evaluating that significant findings or 
issues are appropriately addressed; (iv) determining that significant 
judgments and conclusions on which the auditor's report is based are 
appropriate and supported by sufficient appropriate audit evidence; and 
(v) determining that required communications under applicable 
professional and legal requirements have been made.
    The proposed clarifications of the engagement partner's 
responsibilities leveraged existing requirements for planning and 
performing an audit and for completing the corresponding audit 
documentation. For example, AS 1215 describes matters that are 
considered to be significant findings or issues in an audit and 
requires the auditor to document the significant findings or issues, 
including the actions taken to address them.\51\ As part of the 
engagement partner's supervisory responsibilities under AS 1201, the 
proposal stated that the engagement partner would need to evaluate (in 
a timely manner) the significant findings and issues identified by the 
engagement team to ensure appropriate action was taken.\52\
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    \51\ See AS 1215.12.
    \52\ See AS 1201.05.
---------------------------------------------------------------------------

    Similarly, the proposal stated that significant judgments made by 
the engagement team, which AS 1220 specifically requires the EQR to 
review, also warrant the engagement partner's review. Because the 
engagement partner has primary responsibility for the engagement, they 
have primary responsibility for the significant judgments made during 
the engagement, notwithstanding any involvement in or responsibility 
for those judgments by firm personnel outside of the engagement team, 
such as members of the firm's national office. Accordingly, the 
``significant judgments made by the engagement team'' include all of 
the significant judgments made during the engagement.\53\ The proposed 
standard aligned the engagement partner's supervisory and review 
activities with existing auditor responsibilities.
---------------------------------------------------------------------------

    \53\ See Auditing Standard No.7--Engagement Quality Review and 
Conforming Amendment to the Board's Interim Quality Controls 
Standards, PCAOB Rel. No. 2009-004 (July 28, 2009), at 4 n.7.
---------------------------------------------------------------------------

    A few commenters addressed the proposed requirement regarding the 
engagement partner's responsibilities for exercising due professional 
care. One commenter recommended separating the partner's 
responsibilities from the broader requirement to exercise due 
professional care. Another commenter expressed concern that, as 
presented, the responsibilities of the engagement partner could be 
viewed as a substitute for the broader responsibilities applicable to 
all auditors. This commenter suggested emphasizing in the final 
standard that for engagement partners, the responsibilities are in 
addition to those required for all auditors.
    Several commenters also suggested clarifications to the proposed 
requirements. For example, one commenter suggested that the 
requirements be extended to team members performing supervisory 
activities. Another commenter pointed to potential inconsistencies with 
requirements of AS 1201 and AS 2101, noting that AS 1201 does not 
explicitly require the partner to assign activities to team members 
that adequately match their levels of competence and allows the partner 
to seek assistance from appropriate engagement team members in 
fulfilling responsibilities. One commenter recommended adding a 
footnote to AS 1220 to the discussion of significant judgments and 
conclusions.
    In response to commenters, the Board relocated the proposed 
engagement partner's responsibility for due professional care into a 
separate paragraph in the final standard, with certain clarifications. 
Specifically, the Board agrees with commenters' views that the 
engagement partner is not required to directly assign responsibilities 
to all engagement team members (e.g., audit staff at other accounting 
firms involved in the audit). Nevertheless, consistent with AS 1015.06, 
the engagement partner is responsible for the appropriate assignment of 
tasks to, and supervision of, engagement team members. As such, the 
final standard states that the engagement partner's responsibility for 
due professional care includes ``being responsible for the appropriate 
assignment of responsibilities to, and supervision of, engagement team 
members.'' This formulation acknowledges that in certain audit 
engagements, such as large, multi-tiered audits, the engagement partner 
may not be directly assigning work to engagement team members. Instead, 
other engagement team members performing supervisory activities may 
assist the engagement partner and inform engagement team members of 
their responsibilities.\54\
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    \54\ See AS 1201.05.
---------------------------------------------------------------------------

    The Board believes that relocating the engagement partner's 
responsibility for due professional care into a separate paragraph 
helps draw a distinction between the responsibilities applicable to all 
auditors and those that are incremental for engagement partners. To 
clarify this further, the Board added ``also'' to the requirement in 
paragraph .10 to indicate that the engagement partner responsibilities 
for due professional care are in addition to those applicable to all 
auditors. The Board did not expand the applicability of the engagement 
partner responsibilities described in AS 1000 to other members of the 
engagement team performing supervisory activities because, as discussed 
above, the intent of this requirement is to focus the engagement 
partner on exercising due professional care as the person with the 
primary responsibility for the engagement and its performance. As 
suggested by one commenter, the Board added a footnote to the final 
standard referencing AS 1220 for the discussion of significant 
judgments and conclusions. The Board adopted the remaining provisions 
of the requirement as proposed.
ii. Description of Professional Skepticism
See Paragraph .11 of the New Standard
    The proposed standard stated that exercising due professional care 
includes exercising professional skepticism in conducting an audit, and 
described professional skepticism as an attitude that includes a 
questioning mind and a critical assessment of information related to 
the audit. This requirement is based on the existing auditor 
responsibility to exercise professional skepticism in AS 1015. The 
Board emphasized in the proposal that

[[Page 49742]]

application of professional skepticism extends beyond the information 
used as audit evidence, which is described in AS 1105.02 as the 
information ``that is used by the auditor in arriving at conclusions on 
which the auditor's opinion is based.'' For example, by exercising 
professional skepticism in the preparation of Form AP, the auditor may 
become aware of inconsistencies in total audit hours reported by 
another accounting firm participating in the audit based on the level 
of work assigned to that accounting firm and take corrective action.
    An investor-related group supported the proposed description of 
professional skepticism to include a critical assessment of information 
related to the audit. In contrast, a number of other commenters, mostly 
firms, expressed concern about the proposed change in the description 
of professional skepticism from a critical assessment of ``audit 
evidence'' to ``information related to the audit,'' stating that this 
language is overly broad and its meaning unclear. Some of these 
commenters noted that, unlike with audit evidence, there is no 
established framework for auditors to assess information related to the 
audit and it is unclear what such an assessment would entail. Many of 
these commenters advocated for retaining the extant description of 
professional skepticism in AS 1015.07, which includes ``a critical 
assessment of audit evidence.''
    Some commenters offered additional explanation or suggestions, for 
example:
     One commenter indicated they were unable to identify 
information, other than Form AP data, that would be considered 
``information related to the audit'' that is not already part of 
``audit evidence.'' This commenter and another recommended specifically 
incorporating Form AP data into the requirement.
     One commenter indicated the proposed language could risk 
including information related to the audit that was never presented to 
the auditor. This commenter suggested retaining reference to ``audit 
evidence'' and including a reference to information obtained to comply 
with rules of the Board.
     Another commenter recommended retaining the reference to 
``audit evidence'' because this concept is supplemented by the 
requirements in proposed paragraph .11 and by the overarching 
responsibility to exercise due professional care in relation to all 
matters related to the audit (including the preparation of Form AP).
    Several commenters offered other views related to the description 
of professional skepticism. For example, one commenter stated that the 
difference between ``critical assessment of information related to the 
audit'' and ``objective evaluation of evidence obtained in an audit'' 
in proposed paragraph .11 is unclear. This commenter suggested 
combining proposed paragraphs .10 and .11 or providing further 
guidance, including guidance that is aligned with other standard 
setters. Another commenter questioned the assumption in the proposed 
standard that all auditors can exercise professional skepticism 
consistently for the duration of the audit, pointing to a lack of 
research.
    After consideration of comments, the Board revised the description 
of professional skepticism. The final standard describes professional 
skepticism as ``an attitude that includes a questioning mind and a 
critical assessment of audit evidence and other information that is 
obtained to comply with PCAOB standards and rules.'' While the Board 
agrees with commenters that information related to the audit that is 
obtained by the auditor is generally audit evidence, the Board 
continues to believe that the exercise of professional skepticism in an 
audit extends beyond the evaluation of the sufficiency and 
appropriateness of audit evidence. Professional skepticism is an 
attitude held by the auditor throughout the audit process. For example, 
AS 2401, Consideration of Fraud in a Financial Statement Audit, 
provides that professional skepticism requires an ongoing questioning 
of whether the information and evidence obtained suggests that a 
material misstatement due to fraud has occurred.\55\ The revised 
description in AS 1000 retains the extant reference to ``critical 
assessment of audit evidence'' but also, as suggested by one commenter, 
refers to information obtained by the auditor to comply with PCAOB 
standards and rules, such as information to complete Form AP. The Board 
believes that the revised description will provide auditors with a 
clear framework for exercising professional skepticism and aligns with 
the auditor's obligation to exercise due professional care, which 
applies to all matters related to the audit.
---------------------------------------------------------------------------

    \55\ See AS 2401.13.
---------------------------------------------------------------------------

    As suggested by one commenter, the final standard also combines in 
paragraph .11 the description of professional skepticism (proposed 
paragraph .10) with the description of what exercising professional 
skepticism entails (proposed paragraph .11) discussed below. The Board 
believes this unified paragraph will provide better context for the 
application of professional skepticism.
iii. Exercise of Professional Skepticism
See Paragraph .11 of the New Standard
    The proposed standard described several factors involved in the 
exercise of professional skepticism, which were largely consistent with 
extant requirements. Under the proposed standard, the auditor's 
exercise of professional skepticism included:
     Objective evaluation of evidence obtained in an audit 
(including information that supports and corroborates management's 
assertions regarding the financial statements or internal control over 
financial reporting and information that contradicts such assertions), 
and consideration of the sufficiency and appropriateness (i.e., 
relevance and reliability) of that evidence;
     Remaining alert to conditions that may indicate possible 
misstatement due to error or fraud;
     Not relying on evidence that is less than persuasive;
     Not assuming that management is honest or dishonest; and
     Consideration of potential bias on the part of management 
and the auditor.
    Some commenters provided views on specific aspects of the factors 
involved in the auditor's exercise of professional skepticism. The 
comments and related responses are discussed in more detail below.
    Objectively evaluating evidence. One commenter suggested requiring 
the auditor to search for contradictory evidence. Another commenter 
stated that the proposed description did not sufficiently address 
professional skepticism in obtaining audit evidence and instead focused 
only on evaluating the evidence. One commenter stated that the proposed 
description was unclear and suggested using more direct language, 
including requiring the auditor to be more neutral in the assessment 
(e.g., evaluating evidence that both supports assertions and evidence 
that does not).
    The intent of paragraph .11a of AS 1000 is not to alter the 
responsibilities for obtaining and evaluating evidence addressed in AS 
1105, but to remind auditors of their responsibility to exercise 
professional skepticism in connection with both obtaining and 
evaluating audit evidence. As discussed in the proposal, sufficient 
appropriate audit evidence is necessary to support the auditor's 
opinion. While primarily obtained from audit procedures performed 
during the audit, audit evidence may also include information

[[Page 49743]]

obtained from other sources such as previous audits, and client 
acceptance or continuance procedures. The exercise of professional 
skepticism is particularly important in obtaining and evaluating audit 
evidence when responding to assessed risks of material misstatement, 
including fraud risks.
    Audit evidence consists of both information that supports and 
corroborates management's assertions and information that contradicts 
such assertions.\56\ The auditor's appropriate application of 
professional skepticism includes critically assessing this information 
and should result in procedures that are focused on obtaining evidence 
that is more relevant and reliable,\57\ such as evidence obtained 
directly by the auditor and evidence obtained from independent, 
knowledgeable sources. Further, if audit evidence obtained from one 
source is inconsistent with audit evidence obtained from another, the 
auditor is required to perform the audit procedures necessary to 
resolve the matter and should determine the effect, if any, on other 
aspects of the audit.\58\
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    \56\ See AS 1105.02. A new footnote has been added to AS 
1000.11a, referring to AS 1105 for the discussion of management's 
assertions regarding the financial statements and internal control 
over financial reporting, and the proposed phrase ``regarding the 
financial statements or internal control over financial reporting'' 
has been deleted from paragraph .11a.
    \57\ See AS 1105.07-.08.
    \58\ See AS 1105.29.
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    Professional skepticism is important in all aspects of the audit, 
particularly in those areas of the audit that involve significant 
management judgments or transactions outside the normal course of 
business. It is ultimately the responsibility of each individual 
auditor to appropriately apply professional skepticism throughout the 
audit, including when (i) identifying and assessing risks of material 
misstatement, (ii) performing tests of controls and substantive 
procedures, and (iii) evaluating audit results. For example, a lack of 
professional skepticism in the risk assessment process could result in 
an auditor not identifying or assessing risks appropriately, which 
could impact the effectiveness of the audit.
    Remaining alert to conditions that may indicate possible 
misstatement due to fraud. The Board did not receive significant 
comments in this area. As part of exercising professional skepticism, 
the auditor remains alert to conditions that may indicate possible 
misstatement due to error or fraud. This includes, for example, being 
alert to information that calls into question the reliability of 
documents and responses to inquiries the auditor plans to use as audit 
evidence. Such information could identify conditions that may indicate 
possible fraud or error in the financial statements. As discussed 
above, AS 2401 provides further requirements regarding potential fraud 
risk factors.
    Not relying on evidence that is less than persuasive. One commenter 
stated that the proposed phrase ``not rely'' appears to be more 
restrictive than the existing phrase ``not be satisfied with'' in AS 
1015.09 because the proposed phrase would preclude the auditor from 
placing any reliance on anything less than completely persuasive 
evidence, even in combination with other persuasive evidence.
    The proposed phrase ``not rely'' was intended to convey that, 
consistent with AS 1015.09, exercising professional skepticism involves 
seeking evidence that is more persuasive rather than settling on 
evidence that may be less so. AS 1000 is not intended to address the 
sufficiency and appropriateness of evidence. To avoid confusion, the 
final standard retains the existing terminology from AS 1015 as ``not 
being satisfied with evidence that is less than persuasive.'' The 
requirements for obtaining audit evidence, including evaluating its 
relevance and reliability, are discussed in AS 1105, which provides 
that the quantity of audit evidence needed is affected by both the risk 
of material misstatement and the quality of the evidence obtained 
(i.e., its relevance and reliability). To supplement evidence that is 
less relevant or obtained from a less reliable source, an auditor would 
need to gather additional evidence. The appropriate application of 
professional skepticism focuses the auditor on seeking the best 
evidence reasonably obtainable.
    Not assuming that management is honest or dishonest. An investor-
related group referenced certain views expressed in the 2000 report by 
the Public Oversight Board's Panel on Audit Effectiveness.\59\ That 
report recommended that auditing standards require forensic-type 
fieldwork in which auditors would ``modify the otherwise neutral 
concept of professional skepticism and presume the possibility of 
dishonesty at various levels of management, including collusion, 
override of internal control and falsification of documents.'' \60\ The 
Board believes that establishing a presumption of management's 
dishonesty would have broader implications beyond the exercise of 
professional skepticism under this standard.
---------------------------------------------------------------------------

    \59\ See Public Oversight Board, The Panel on Audit 
Effectiveness Report and Recommendations (Aug. 31, 2000).
    \60\ Id. at 88-89.
---------------------------------------------------------------------------

    Consideration of potential bias on the part of management and the 
auditor. Several commenters expressed concern that the obligations 
related to consideration of the auditor's own bias were unclear or 
could be viewed as a requirement to seek contradictory evidence. Some 
of these commenters noted that consideration of auditor bias is 
inherent in the requirements for evaluating audit evidence under AS 
1105 and suggested deleting the reference to ``and the auditor'' from 
proposed paragraph .11e. One commenter suggested aligning this concept 
with the approach used by the AICPA in their revised audit evidence 
standard. Two commenters also questioned the nature and extent of 
documentation necessary to demonstrate consideration of auditor bias. 
One investor-related group advocated for requiring the auditor to 
affirmatively consider the risk of bias, particularly confirmation 
bias, arising out of the financial relationship between management and 
the auditor.
    The Board continues to believe that it is important to include 
reference to auditor bias in connection with exercising professional 
skepticism because certain conditions inherent in the audit environment 
create incentives and pressures that could impede the appropriate 
application of professional skepticism and allow unconscious bias to 
influence decisions. Examples of these incentives and pressures include 
avoiding significant conflicts with management, providing an 
unqualified audit opinion prior to the company's filing deadline, 
achieving high client satisfaction ratings, keeping audit costs low, or 
cross-selling other services.
    As discussed in the proposal, it is important for the auditor, as 
part of exercising professional skepticism, to consider the impact of 
management bias and the auditor's own bias that could affect the 
auditor's judgments. For example, the tendency to seek confirming 
information can lead the auditor to seek audit evidence that is only 
consistent with management's explanations, or to favor conclusions that 
are consistent with the auditor's initial beliefs or conclusions 
reached in prior year audits. In exercising professional skepticism, 
the auditor could mitigate such potential bias by being aware of 
``confirmation bias,'' considering alternatives provided by others, and 
being aware of contradictory

[[Page 49744]]

information.\61\ Auditors and management may also have biases related 
to electronic information (e.g., a belief that electronic information 
is either always reliable or inherently prone to error). For example, a 
tendency to favor output generated from automated systems, even when 
contradictory information raises questions as to whether such output is 
reliable, illustrates a form of bias. Exercising professional 
skepticism, including critically assessing information related to the 
audit, helps the auditor address the effects of potential bias on 
professional judgment and decision-making. It is important to clarify, 
however, that the consideration of potential bias discussed above does 
not change the auditor's responsibilities for evaluating contradictory 
evidence, as suggested by some commenters.
---------------------------------------------------------------------------

    \61\ For a discussion of confirmation bias, see, e.g., Raymond 
S. Nickerson, Confirmation Bias: A Ubiquitous Phenomenon in Many 
Guises, 2 Review of General Psychology 175 (1998).
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    Finally, the Board did not add new documentation requirements for 
demonstrating the auditor's exercise of professional skepticism beyond 
those addressed in AS 1215. Auditors can demonstrate that their work 
encompassed the exercise of professional skepticism by documenting the 
procedures performed and conclusions reached in accordance with AS 
1215.
    After consideration of the comments, the Board adopted the 
provisions for exercising professional skepticism substantially as 
proposed, with the modifications discussed above.
5. Professional Judgment
See Paragraph .12 of the New Standard
    Auditors exercise professional judgment throughout the audit, and 
existing standards refer to the use of professional judgment, but do 
not describe in detail what professional judgment means. The proposed 
standard provided that the auditor must exercise professional judgment 
and included a description of professional judgment. As discussed in 
the proposing release, auditors exercise professional judgment 
throughout the audit. For example, the auditor exercises professional 
judgment in:
     Determining the areas to be tested and the nature, timing, 
and extent of the tests to be performed;
     Interpreting the results of audit testing and evaluating 
audit evidence;
     Evaluating the reasonableness of accounting estimates in 
significant accounts and disclosures, based on information that could 
reasonably be expected to be available through the date of the 
auditor's report; \62\
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    \62\ See AS 2501, Auditing Accounting Estimates, Including Fair 
Value Measurements, which discusses the auditor's responsibility to 
obtain sufficient appropriate evidence to determine whether 
accounting estimates in significant accounts and disclosures are 
properly accounted for and disclosed in the financial statements.
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     Determining if there are any CAMs in the audit of the 
financial statements; \63\ and
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    \63\ See AS 3101 for requirements regarding CAMs.
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     Determining the nature and extent of documentation to 
comply with documentation requirements.\64\
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    \64\ See AS 1215 for documentation requirements.
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    As proposed, professional judgment involved applying relevant 
training, knowledge, and experience to make informed decisions and 
reach well-reasoned conclusions about the courses of action that are 
appropriate in the circumstances such that the audit is planned and 
performed, and the report or reports are issued, in accordance with 
applicable professional and legal requirements.
    Several commenters, primarily firms, expressed concern that the 
proposed description of professional judgment could be interpreted as 
imposing a new strict liability requirement. These commenters suggested 
removing the phrase ``such that the audit is planned and performed, and 
the report or reports are issued, in accordance with applicable 
professional and legal requirements'' in the description, noting that a 
deficiency in an auditor's compliance with applicable professional and 
legal requirements should not, by default, indicate a failure to 
exercise appropriate professional judgment. In the view of these 
commenters, this implication would be contrary to the established 
interpretation of an auditor's responsibilities, which recognizes that 
reasonable observers may disagree regarding whether applicable 
standards were complied with while agreeing that the matter in question 
was within the purview of the auditors' professional judgment and could 
result in hindsight challenges of auditors' judgments.
    One commenter recommended that the description of professional 
judgment refer to ``sound'' judgment, consistent with the description 
used by the International Ethics Standards Board for Accountants 
(``IESBA'').\65\ Another commenter asked for clarification of the 
concept of ``well-reasoned conclusions,'' noting potential differences 
with the definition of professional judgment established by other 
standard setters. Two commenters advocated for the establishment of a 
judgment framework by the Board. One commenter stated that they heard 
auditors express the need for more clarity about the degree of 
documentation necessary to demonstrate their reasoned judgment. Another 
commenter suggested adding the concept of materiality to the 
description of an auditor's exercise of judgment, based on the 
description of judgment in AS 2815.04 with regard to the auditor's 
opinion on financial statements.
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    \65\ See IESBA, Handbook of the International Code of Ethics for 
Professional Accountants (2023), Subsection 113--Professional 
Competence and Due Care, at 113.1 A1 (``Serving clients and 
employing organizations with professional competence requires the 
exercise of sound judgment in applying professional knowledge and 
skill when undertaking professional activities.'').
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    The proposed phrase ``such that the audit is planned and performed, 
and the report or reports are issued, in accordance with applicable 
professional and legal requirements'' was meant to provide context to 
the application of professional judgment and was not intended to 
introduce a strict liability requirement. After considering the 
comments received, the Board removed this phrase in the final 
description of professional judgment. The Board continues to believe 
that it is important to clarify that the use of professional judgment 
does not allow for an arbitrary exercise of discretion. While 
conclusions could vary, auditors are required to apply relevant 
training, knowledge, and experience to make informed decisions and 
reach well-reasoned conclusions about the courses of action that are 
appropriate in the circumstances. Therefore, the Board added a note to 
paragraph .12 to clarify that professional judgment is applied in the 
context of conducting an audit with due professional care in accordance 
with applicable professional and legal requirements. The Board believes 
that this note properly frames the exercise of professional judgment 
without implying that a deficiency in an auditor's compliance with 
applicable professional and legal requirements would by default also 
indicate a failure to exercise appropriate professional judgment.
    The Board did not change the description of professional judgment 
to include ``sound judgment'' as the Board believes that term is 
redundant with the phrase ``well-reasoned.'' The phrase ``well-
reasoned,'' used in the context of an auditor exercising professional 
judgment and reaching conclusions, is clear because it refers to 
judgment made and conclusions reached that are based on logical 
thinking and an analysis of relevant information.
    As discussed earlier, the auditor is required to exercise due 
professional care in all matters related to the audit. The concept of 
the auditor's exercise of

[[Page 49745]]

professional judgment is rooted in conducting the audit with due 
professional care. Therefore, the Board retained the phrase ``well-
reasoned'' as proposed. Regarding the degree of documentation related 
to professional judgment, the auditor is expected to comply with 
documentation requirements of AS 1215, which includes requirements for 
considering the nature and extent of documentation needed.
    The Board believes that creating a ``framework'' for how auditors 
should exercise their professional judgment, as suggested by some 
commenters, would be beyond the scope of this project. The Board 
further believes it is better for auditors to adhere to overarching 
principles and standards that mandate the exercise of professional 
judgment in connection with conducting an audit with due professional 
care. This approach acknowledges the multifaceted nature of audits and 
allows auditors to exercise their professional judgment in the unique 
circumstances of each audit engagement.
6. Conducting an Audit
i. Auditor and Management Responsibilities
See Paragraph .13 of the New Standard
    The Board proposed to require the auditor to plan and perform the 
audit to obtain sufficient appropriate audit evidence to (a) obtain 
reasonable assurance about whether: (1) in an audit of financial 
statements, the financial statements are free of material misstatement, 
whether due to error or fraud, or (2) in an audit of ICFR, material 
weaknesses exist as of the date specified in management's assessment; 
and (b) provide the auditor with a reasonable basis for forming an 
opinion. This requirement was retained from AS 1001 and AS 1015 but 
expanded to cover an audit of ICFR. The Board also proposed to include 
a note to the requirement that clarified the distinction between the 
responsibilities of the auditor and those of management, and to expand 
those responsibilities to include an audit of ICFR. Specifically, the 
note stated that in an audit of financial statements, the financial 
statements are management's responsibility and the auditor's 
responsibility is to express an opinion on the financial statements. In 
an audit of ICFR, management is responsible for maintaining effective 
ICFR and for assessing the effectiveness of ICFR, and the auditor's 
responsibility is to express an opinion on the effectiveness of the 
company's ICFR.
    Several commenters discussed the importance of clearly 
distinguishing the responsibilities of the auditor from those of 
management and suggested retaining the corresponding language from AS 
1001.02-.03. For example, one commenter observed that some investors 
may mistakenly believe that the auditor drafts the financial 
statements. In the view of this commenter, stating that management is 
``responsible'' for the financial statements may be interpreted as a 
legal responsibility and does not explicitly convey that management 
prepares the financial statements.
    The Board retained the requirement substantially as proposed. In 
response to commenters, the Board updated the language in the note to 
clarify that the financial statements, ``including their preparation,'' 
are the responsibility of management and that management is responsible 
for ``establishing and maintaining'' effective ICFR.
ii. Reasonable Assurance
See Paragraph.14 of the New Standard
    The Board proposed to retain the concept of reasonable assurance 
from AS 1015. Specifically, the proposed standard stated that 
reasonable assurance is a high level of assurance and is obtained by 
reducing audit risk to an appropriately low level through the 
application of due professional care, including in obtaining sufficient 
appropriate audit evidence.\66\ The auditor is able to obtain 
reasonable, but not absolute, assurance that (1) misstatements are 
detected that, individually or in combination, would result in material 
misstatement of the financial statements; and (2) in an audit of ICFR, 
material weaknesses are detected.
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    \66\ See paragraph .03 of AS 1101, Audit Risk.
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    Commenters generally supported retaining the concept of reasonable 
assurance but provided views on its proposed description. A number of 
commenters, primarily firms, recommended that the Board retain certain 
statements from AS 1015.10-.13 (or similar language) that describe the 
limitations of an audit. These statements include:
     Absolute assurance is not attainable because of the nature 
of audit evidence and the characteristics of fraud. Therefore, an audit 
conducted in accordance with the standards of the PCAOB may not detect 
a material weakness in internal control over financial reporting or a 
material misstatement to the financial statements.\67\
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    \67\ See AS 1015.10.
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     Even with good faith and integrity, mistakes and errors in 
judgment can be made . . . . . [I]n the great majority of cases, the 
auditor has to rely on evidence that is persuasive rather than 
convincing.\68\
---------------------------------------------------------------------------

    \68\ See AS 1015.11.
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     Because of the characteristics of fraud, a properly 
planned and performed audit may not detect a material misstatement.\69\
---------------------------------------------------------------------------

    \69\ See AS 1015.12.
---------------------------------------------------------------------------

     [T]he auditor is not an insurer and his or her report does 
not constitute a guarantee. Therefore, the subsequent discovery that 
either a material misstatement, whether from error or fraud, exists in 
the financial statements or a material weakness in internal control 
over financial reporting exists does not, in and of itself, evidence 
(a) failure to obtain reasonable assurance, (b) inadequate planning, 
performance, or judgment, (c) the absence of due professional care, or 
(d) a failure to comply with the standards of the PCAOB.\70\
---------------------------------------------------------------------------

    \70\ See AS 1015.13.
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    A few of these commenters also pointed to the characterization of 
reasonable assurance in the standards of other standard setters (e.g., 
ISA 200).\71\ These commenters generally expressed concern that without 
such language, the proposal would reduce transparency and contribute to 
the expectation gap among investors and other stakeholders regarding 
the nature of reasonable assurance (as compared to absolute assurance). 
For example, one commenter stated that the elimination of the existing 
clarifying language could also result in ambiguity as to whether a new 
level of assurance would be expected, beyond reasonable assurance but 
less than absolute assurance.
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    \71\ Paragraph 13(m) of ISA 200 defines reasonable assurance as 
``in the context of an audit of financial statements, a high, but 
not absolute, level of assurance.'' Paragraph 5 of ISA 200 further 
describes that reasonable assurance ``is obtained when the auditor 
has obtained sufficient appropriate audit evidence to reduce audit 
risk (that is, the risk that the auditor expresses an inappropriate 
opinion when the financial statements are materially misstated) to 
an acceptably low level. However, reasonable assurance is not an 
absolute level of assurance, because there are inherent limitations 
of an audit which result in most of the audit evidence on which the 
auditor draws conclusions and bases the auditor's opinion being 
persuasive rather than conclusive.''
---------------------------------------------------------------------------

    Some commenters offered other clarifications. For example, two 
commenters suggested retaining certain language from AS 1001.02, which 
states that the auditor has no responsibility to plan and perform the 
audit to obtain reasonable assurance that misstatements, whether caused 
by errors

[[Page 49746]]

or fraud, that are not material to the financial statements are 
detected. One of these commenters also acknowledged that identifying 
limitations on the auditor's responsibilities should not be the main 
focus of the standard. One commenter recommended that the final 
standard include guidance on determining whether audit risk is reduced 
to an appropriately low level, including a requirement to consider 
changes in technology, the nature and quality of an issuer's financial 
reporting system, relevant academic and other research, and any other 
factor that can reduce the risk of material misstatements or fraud.
    As discussed further below, the Board retained the description of 
reasonable assurance as proposed with some modifications. The concept 
of ``reasonable assurance'' is not new. Reasonable assurance refers to 
the auditor's degree of satisfaction that the evidence obtained during 
the audit supports the assertions of the financial statements. It is a 
high level of assurance and is obtained by reducing audit risk to an 
appropriately low level (i.e., the risk that the auditor expresses an 
inappropriate audit opinion when the financial statements are 
materially misstated or in an audit of ICFR, when a material weakness 
exists) through applying due professional care, including obtaining 
sufficient appropriate audit evidence.\72\ AS 1101 discusses audit risk 
and the relationships among the various components of audit risk in an 
audit of financial statements. The Board retained a reference to AS 
1101 in the final standard and added the description of the term 
``audit risk.'' The Board believes that additional guidance on 
consideration of audit risk, as suggested by one commenter, is outside 
the scope of this standard. If additional guidance is necessary 
regarding the auditor's assessment of and response to the risks of 
material misstatement in an audit, it would be provided in connection 
with the Board's risk assessment standards.\73\
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    \72\ See AS 1101.03-.04.
    \73\ See, e.g., AS 1101, AS 2101, AS 2105, AS 2110, and AS 2301.
---------------------------------------------------------------------------

    The Board did not change the meaning of reasonable assurance or the 
requirement to obtain reasonable assurance. In consideration of 
comments received, the Board emphasized in the final requirement that 
reasonable assurance is not absolute assurance. As observed by some 
commenters, absolute assurance is not attainable because of the nature 
of audit evidence (e.g., selective testing involving professional 
judgments \74\ regarding the nature, timing, and extent of procedures 
to be performed; and inherent uncertainty of accounting estimates), and 
the characteristics of fraud (e.g., falsified company documentation). 
In many cases, the auditor has to rely on evidence that is persuasive 
rather than convincing. Because the Board did not change the meaning of 
reasonable assurance, the Board believes that further explanation of 
the difference between reasonable assurance and absolute assurance is 
not needed in the final standard.
---------------------------------------------------------------------------

    \74\ The discussion above describes requirements for exercising 
professional judgment.
---------------------------------------------------------------------------

    The Board did not retain additional descriptions of the inherent 
limitations of an audit from AS 1015.10-.13. The Board believes that 
these matters are part of the differences between reasonable and 
absolute assurance discussed above or addressed elsewhere in PCAOB 
standards. Although a properly planned and performed audit may not 
detect a material misstatement because of the characteristics of fraud, 
that does not diminish the auditor's responsibility to plan and perform 
the audit to obtain reasonable assurance about whether the financial 
statements are free of material misstatement, whether due to error or 
fraud.
iii. Compliance With Applicable Professional and Legal Requirements
See Paragraph .15 of the New Standard
    The Board proposed to require that the auditor comply with 
applicable professional and legal requirements in conducting the audit. 
As discussed above, the term ``applicable professional and legal 
requirements'' was proposed to have the same meaning as defined in 
proposed QC 1000. Under existing provisions, auditors are required to 
comply with PCAOB standards and rules. The proposed requirement 
emphasized that the overall objective of the auditor is achieved by 
complying with more than just the standards of the PCAOB. This includes 
compliance with requirements of Section 10A of the Exchange Act related 
to illegal acts, related party transactions, and an evaluation of 
whether there is substantial doubt about the ability of the company to 
continue as a going concern.\75\ The proposed requirement also stated 
that, in fulfilling these requirements, the auditor should keep in mind 
its role in protecting investors.
---------------------------------------------------------------------------

    \75\ 15 U.S.C. 78j-1.
---------------------------------------------------------------------------

    One commenter on this proposed paragraph stated that the term 
``applicable professional and legal requirements'' appears to exceed 
the Board's authority, citing Sections 104 and 105 of Sarbanes-Oxley 
and urged that the Board replace it with ``PCAOB rules and standards.'' 
Two other commenters noted that applicable professional and legal 
requirements could be read broadly as a wide range of laws and 
regulations that do not directly bear on the conduct of audit 
engagements. Another commenter recommended adding clarifying language 
in the release to state that although the auditor is expected to comply 
with applicable legal requirements, the auditor is not expected to have 
the expertise of a lawyer or to express opinions on matters of law.
    The Board disagrees with the commenter's assertions regarding the 
Board's authority, which extends beyond PCAOB rules and standards. For 
example, Section 105(c)(4) of Sarbanes-Oxley empowers the Board to 
sanction a registered firm and its associated persons for violations 
not only of PCAOB rules and standards but also violations of ``the 
provisions of the securities laws relating to the preparation and 
issuance of audit reports and the obligations and liabilities of 
accountants with respect thereto, including the rules of the Commission 
issued under [the] Act[.]''
    As discussed above, the final standard includes a definition of the 
term ``applicable professional and legal requirements'' rather than a 
reference to the definition in QC 1000. The definition that was 
proposed in the QC 1000 project has been modified in response to 
comments received in that rulemaking, to explicitly mention ethics laws 
and regulations. The definition was also refined to limit the breadth 
of the term, by clarifying that it encompasses statutory, regulatory, 
and other legal requirements beyond professional standards and other 
PCAOB rules ``[t]o the extent related to the obligations and 
responsibilities of accountants or auditors in the conduct of 
engagements or in relation to the quality control system.'' The Board 
believes that further changes to this term in the final standard are 
not necessary.
    As discussed above, the Board changed ``expertise'' to 
``proficiency'' in the final description of competence in response to 
comments. While the Board does not expect auditors to have the 
expertise of a lawyer, the Board believes that understanding the 
company's business and being proficient in the rules and regulations 
relevant to the company under audit and the related industry is 
important.

[[Page 49747]]

    Some commenters also stated that the requirement for auditors to 
``keep in mind their role in protecting investors'' when fulfilling the 
requirement to comply with applicable professional and legal 
requirements was unclear, including how to apply such a requirement. As 
discussed above, investor-related groups suggested including the 
language from the Arthur Young opinion to describe the auditor's 
responsibility. Other commenters suggested that the proposed reference 
to the auditor's role in protecting investors be deleted from the final 
requirement or reframed. One commenter pointed to research noting that 
encouraging auditors to adopt an investor perspective when making 
judgments may be detrimental to audit quality.\76\
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    \76\ This commenter cited two research papers: (i) Altiero, 
Kang, and Peecher (2022) ``show that auditors prompted to take an 
investor perspective are less likely to assess a misstatement as 
material'' and (ii) Dong, Wang, and Chien (2022) ``highlight that 
taking an investor perspective can decrease assessed risk of 
material misstatement.'' See additional discussion below.
---------------------------------------------------------------------------

    After considering comments and for the reasons discussed above, the 
Board retained the requirement to comply with applicable professional 
and legal requirements. The Board removed the reference to ``keep in 
mind their role in protecting investors'' from the final standard based 
on changes made to paragraph .01 of the final standard. As discussed 
earlier, in connection with certain revisions made to the introductory 
paragraph of the final standard, the Board added a note to paragraph 
.01 to remind auditors that their obligation to protect investors is 
important when complying with all requirements of this and other PCAOB 
standards and rules.
iv. Relevant Guidance
See Paragraph .15 of the New Standard
    The Board also proposed a note to paragraph .15 stating that, as 
part of complying with all applicable professional and legal 
requirements in conducting the audit, the auditor is required to take 
into account relevant guidance applicable to the audit. The proposed 
requirement was an extension of the existing requirement in AS 1001.11 
that the auditor be aware of and consider auditing interpretations 
issued by the AICPA as of 2003, and adopted by the PCAOB and in effect. 
Under the proposal, relevant guidance included PCAOB auditing 
interpretations, Board-issued guidance, and releases that accompany the 
rules and standards of the Board.
    Many commenters, mostly firms and firm-related groups, expressed 
concern that the proposed note is overly broad and unclear. For 
example, some commenters cited a lack of clarity as to (i) the scope of 
the Board-issued guidance including whether documents such as concept 
releases would be covered; (ii) the timeline in which the requirement 
would apply; (iii) the hierarchy of guidance and what types of guidance 
would be considered authoritative; and (iv) how to reconcile 
potentially conflicting information between proposing and final 
releases. These commenters generally suggested either deleting the 
note, codifying the relevant guidance to ensure consistent application, 
or specifying that relevant guidance includes releases accompanying 
``final'' standards. Another commenter also suggested clarifying the 
meaning of ``take into account,'' including defining the phrase in 
PCAOB Rule 3101.
    A few commenters, including an investor-related group, recommended 
including relevant guidance within the standard rather than the 
accompanying release. Two commenters suggested that the Board consider 
restructuring guidance in a manner similar to the application and other 
explanatory material, as presented in the AICPA and IAASB standards. An 
investor-related group recommended a ``codification'' approach that 
would include placing all guidance, interpretations, releases, 
amendments, and rules in the same location.
    After considering comments received, the Board revised the note as 
follows:
     Replaced the reference to ``relevant guidance'' with 
``PCAOB auditing interpretations''; and
     Replaced a footnote describing the scope of the relevant 
guidance with a footnote describing the scope of PCAOB auditing 
interpretations.
    The note in the final standard provides that, when complying with 
PCAOB standards, the auditor is required to also take into account 
PCAOB auditing interpretations applicable to the audit. As mentioned 
previously, this is an existing requirement that is being carried 
forward with modifications. In the final standard, PCAOB auditing 
interpretations refer to the PCAOB publications entitled ``Auditing 
Interpretations'' as currently in effect.\77\ These interpretations 
were originally adopted by the Board in 2003 along with the interim 
standards. Since that time, certain of these auditing interpretations 
have been and continue to be revised or rescinded in connection with 
the other amendments to PCAOB standards. The requirement in the final 
standard, as it did previously, relates to the interpretations 
currently in effect.
---------------------------------------------------------------------------

    \77\ PCAOB auditing interpretations do not include independence 
interpretations. The requirements to comply with independence 
interpretations are covered by PCAOB Rule 3500T, Interim Ethics and 
Independence Standards.
---------------------------------------------------------------------------

    Apart from the PCAOB auditing interpretations referenced in 
paragraph .15, the PCAOB also supports the implementation of and 
compliance with its standards in many other ways, including providing 
guidance in rulemaking releases that accompany standards, amendments, 
or rules, or issuing staff guidance.\78\ Although there is no 
requirement to follow these guidance documents, the Board continues to 
believe that it is important for auditors to pay attention to such 
guidance, if relevant, when conducting an audit in accordance with 
PCAOB standards because it may help the auditor understand and comply 
with complex provisions of those standards or rules. For example, staff 
guidance can help auditors better understand how the PCAOB intends to 
implement, inspect against, or enforce existing rules and standards.
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    \78\ PCAOB staff prepares guidance to assist in the 
implementation of PCAOB standards and rules. The typical legend on 
such guidance states that the document represents the views of PCAOB 
staff and not necessarily those of the Board, and that the document 
is not a rule, policy, or statement of the Board. PCAOB staff audit 
practice alerts are examples of staff guidance that highlight new, 
emerging, or otherwise noteworthy circumstances that may affect how 
auditors conduct audits under existing PCAOB standards.
---------------------------------------------------------------------------

    The phrase ``take into account'' in the rule text is not new. It 
has been used previously in PCAOB standards in reference to information 
or matters that the auditor should think about or give attention to in 
performing an audit procedure or reaching a conclusion.\79\ 
Accordingly, the results of the auditor's thinking on the relevant 
matters should be reflected in the performance and documentation of the 
respective audit procedure performed or conclusion reached.
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    \79\ See, e.g., AS 3101.12 and AS 2501.
---------------------------------------------------------------------------

    Lastly, the Board did not consider the ``codification'' approach 
because it is out of scope for this project.
v. Audit Documentation
See Paragraph .16 of the New Standard
    The Board proposed to require the auditor to prepare audit 
documentation in accordance with AS 1215. This requirement was intended 
to emphasize the importance of adequate audit documentation to planning 
and performing the audit and to the supervision and review of work 
performed during the audit. Commenters did not express concerns

[[Page 49748]]

with the documentation requirement, and the Board adopted it as 
proposed.
vi. Auditor Communications
See Paragraphs .17 Through .20 of the New Standard
    The Board proposed an explicit requirement for the auditor's report 
to contain (i) an expression of opinion on the financial statements, 
taken as a whole, or an assertion that an opinion cannot be expressed; 
and (ii) in an audit of internal control over financial reporting, an 
expression of opinion on the effectiveness of the company's internal 
control over financial reporting or an assertion that an opinion cannot 
be expressed. Under the proposed standard, the auditor would be in a 
position to express an unqualified opinion only when the auditor has 
performed the audit in accordance with standards of the PCAOB and has 
obtained sufficient appropriate audit evidence to conclude that: (i) in 
an audit of financial statements, the financial statements, taken as a 
whole, are presented fairly, in all material respects, in conformity 
with the applicable financial reporting framework; and (ii) in an audit 
of internal control over financial reporting, the company maintained, 
in all material respects, effective internal control over financial 
reporting. The proposal also briefly addressed when circumstances 
require an auditor to express a qualified opinion, adverse opinion, or 
disclaimer of opinion and referred to AS 3105 and AS 2201 for a 
description of those circumstances. The proposed requirements were 
retained from AS 1001 with modifications to be consistent with 
provisions of AS 3101 and AS 2201.
    One investor-related group requested that the required 
communications include CAMs, and that paragraph .17a of the proposed 
standard be revised to refer to CAMs ``as a `must contain' item in the 
auditor's report.'' The commenter was concerned with the low numbers of 
CAMs in auditor's reports and that auditors treat the determination of 
CAMs as ``nearly a `check the box' exercise.'' Another commenter 
suggested edits to proposed paragraphs .17 and .19 to align with 
existing requirements (e.g., adding the phrase ``In an audit of 
financial statements'' to paragraph .17a and moving the phrase ``the 
company's'' within paragraph .19).
    The Board adopted paragraphs .17-.19 substantially as proposed with 
some modifications. After considering the comments received, the 
reference to CAMs in a footnote has been moved to a note to paragraph 
.17 to emphasize the importance of CAMs. The Board did not make any 
additional changes to address concerns regarding CAMs. The proposal was 
not designed to address concerns about the frequency or informative 
quality of CAMs. Although the Board understands the importance of the 
concern raised by commenters, this is outside the scope of this 
project. The Board also revised paragraph .17a and paragraph .19 to 
incorporate commenters' suggestions described above. Additionally, the 
Board changed the phrase ``modify the report'' to ``depart from an 
unqualified opinion'' in paragraph .19 to align with other Board-issued 
standards that describe reports that include opinions other than an 
unqualified opinion.\80\
---------------------------------------------------------------------------

    \80\ See, e.g., AS 3105.
---------------------------------------------------------------------------

    The Board proposed in paragraph .20 to require that the auditor 
communicate externally in accordance with applicable professional and 
legal requirements. This is an overarching requirement to communicate 
externally that is based on existing auditor communication requirements 
(e.g., AS 1301). The Board did not receive any comments on this 
requirement and are adopting it with slight modification. The Board 
changed ``as required by'' to ``in accordance with'' applicable 
professional and legal requirements to align with similar phrases used 
in other Board-issued standards.

Amendments Related to AS 1000

    The amendments the Board adopted are described below.
1. Amendments to AS 2810 and Rescission of AS 2815
    The Board proposed to incorporate into AS 2810 the requirements of 
AS 2815 regarding the determination of whether the financial statements 
are presented fairly in conformity with the applicable financial 
reporting framework for a more logical presentation, and to rescind AS 
2815. Currently, AS 2810 requires the auditor to evaluate whether the 
financial statements are presented fairly, in all material respects, in 
conformity with the applicable financial reporting framework, and AS 
2815 describes the meaning of this evaluation. The proposed approach 
was intended to streamline these requirements into one standard and 
eliminate redundant or unnecessary language. A number of commenters 
commented on the proposed amendments to AS 2810. After considering the 
comments received, the Board adopted amendments to AS 2810 with certain 
modifications discussed below.
i. Clarifying the Meaning of ``Present Fairly''
    The discussion in the proposing release was designed to clarify the 
auditor's existing obligation to evaluate the fairness of the financial 
statements in conformity with the applicable financial reporting 
framework by stating that ``present fairly,'' under extant PCAOB 
standards, is a concept that goes beyond mere technical compliance with 
the requirements of the applicable financial reporting framework.
    Some commenters, primarily investor-related groups, supported 
clarifying the meaning of ``present fairly'' and provided additional 
suggestions on amendments to AS 2810. Two investor-related groups 
suggested that the Board consider going further and require auditors to 
focus on whether the financial statements are a fair presentation of 
the company's position rather than narrowly focusing on whether the 
company is following U.S. GAAP. One investor-related group suggested 
adding the word ``and'' immediately before the phrase ``in conformity'' 
to make it clear that there is an expectation that the financials are 
presented fairly, in all material respects in addition to conforming 
with the applicable financial reporting framework. Another group said 
that auditors should aid in disclosing and providing transparency 
around the sensitivity and accuracy of climate-related estimates and 
assumptions.
    Other commenters, primarily firms and firm-related groups, viewed 
the proposed amendments as an expansion of auditors' existing 
responsibilities. Some commenters asserted that the statement in the 
proposal that the auditor's judgments concerning the fair presentation 
of the financial statements go beyond compliance with the applicable 
financial reporting framework may create a conflict between the 
auditor's judgment and management's judgment and introduce potential 
inconsistency in accounting treatment. Others expressed concern that 
under the proposal, auditors would expect the company to override the 
requirements of an applicable financial reporting framework if the 
financial statements prepared in accordance with the framework did not 
fairly present the substance of the company's financial results.
    Some commenters suggested retaining language from AS 2815.03 which 
states, ``The independent auditor's judgment concerning the `fairness' 
of the overall presentation of financial statements should be applied 
within the framework of generally accepted accounting

[[Page 49749]]

principles. Without that framework, the auditor would have no uniform 
standard for judging the presentation of financial position, results of 
operations, and cash flows in financial statements.'' Other commenters 
suggested explicitly retaining the concept of professional judgment for 
evaluation of fair presentation.
    The Board's proposed clarification of ``present fairly'' was not 
intended to change the auditor's existing responsibilities for the 
evaluation of whether the financial statements are presented fairly in 
conformity with the applicable financial reporting framework.
    First, the amendments to AS 2810 clarify that ``presents fairly'' 
involves evaluating whether information in the financial statements is 
presented and classified appropriately and in a manner that is not 
misleading, and that this evaluation is made within the applicable 
financial reporting framework. Contrary to the views of some 
commenters, the amendments do not require auditors to expect that the 
company override or deviate from the requirements of the applicable 
financial reporting framework. Any override or deviation from the 
requirements of the applicable financial reporting framework would 
normally result in a departure from an unqualified opinion under PCAOB 
standards.\81\ Further, the auditor is required to evaluate the risk of 
omitted, incomplete, or inaccurate disclosures as part of the auditor's 
risk assessment procedures.\82\
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    \81\ See AS 3105. In addition, under SEC rules, a company's 
``[f]inancial statements filed with the Commission which are not 
prepared in accordance with generally accepted accounting principles 
will be presumed to be misleading or inaccurate, despite footnote or 
other disclosures, unless the Commission has otherwise provided.'' 
17 CFR 210.4-01(a)(1) (Regulation S-X Rule 4-01(a)(1)). Paragraph 
(a) of that rule also provides that ``the information required with 
respect to any statement shall be furnished as a minimum requirement 
to which shall be added such further material information as is 
necessary to make the required statements, in the light of the 
circumstances under which they are made, not misleading.''
    \82\ See, e.g., AS 2110.67, which requires the auditor, as part 
of the auditor's evaluation of fraud risk factors, to include 
evaluation of how fraud could be perpetrated or concealed by 
presenting incomplete or inaccurate disclosures or omitting 
disclosures that are necessary for the financial statements to be 
presented fairly in conformity with the applicable financial 
reporting framework.
---------------------------------------------------------------------------

    Second, the amendments acknowledge that applicable financial 
reporting frameworks recognize that additional disclosures may be 
needed to ensure fair presentation. For example, as noted above, the 
SEC requires by rule that a company provide further material 
information as necessary to make any required statements, in the light 
of the circumstances under which they are made, not misleading.\83\ 
This obligation is also consistent with the accounting standards issued 
by the FASB \84\ and International Accounting Standards Board 
(``IASB'').\85\ Thus, when the auditor evaluates whether company 
transactions have been recorded and presented in conformity with the 
applicable financial reporting framework, the auditor may determine 
that additional company disclosures are needed to better reflect the 
substance of the transactions. Such evaluation is currently required 
under both AS 2810.31 and AS 2815.06, and the requirement is retained 
in the amendments to AS 2810.30A and .31.
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    \83\ See 17 CFR 210.4-01(a) (Regulation S-X Rule 4-01(a).
    \84\ See, e.g., FASB Accounting Standards Codification (``FASB 
ASC'') paragraph 105-10-05-1, Generally Accepted Accounting 
Principles--Overall--Overview and Background (``Rules and 
interpretive releases of the Securities and Exchange Commission 
(SEC) under authority of federal securities laws are also sources of 
authoritative GAAP for SEC registrants.''); FASB ASC paragraph 235-
10-05-3, Presentation--Notes to Financial Statements--Overall--
Overview and Background--Importance of Accounting Policies 
Disclosure (``The accounting policies of an entity are the specific 
accounting principles and the methods of applying those principles 
that are judged by the management of the entity to be the most 
appropriate in the circumstances to present fairly financial 
position, cash flows, and results of operations in accordance with 
generally accepted accounting principles (GAAP) and that, 
accordingly, have been adopted for preparing the financial 
statements.'').
    \85\ See, e.g., IASB International Accounting Standards 
(``IAS'') 1, paragraph 15, Presentation of Financial Statements--
Financial Statements--General features--Fair presentation and 
compliance with IFRSs (``Financial statements shall present fairly 
the financial position, financial performance and cash flows of an 
entity. Fair presentation requires the faithful representation of 
the effects of transactions, other events and conditions in 
accordance with the definitions and recognition criteria for assets, 
liabilities, income and expenses set out in the Conceptual Framework 
for Financial Reporting (Conceptual Framework). The application of 
IFRSs, with additional disclosure when necessary, is presumed to 
result in financial statements that achieve a fair presentation.''); 
IAS 1, paragraphs 19-24, Presentation of Financial Statements--
Financial Statements--General features--Fair presentation and 
compliance with IFRSs (describing financial reporting 
responsibilities in the ``extremely rare circumstances in which 
management concludes that compliance with a requirement in an IFRS 
would be so misleading that it would conflict with the objective of 
financial statements set out in the Conceptual Framework''); IAS 8, 
paragraph 10, Accounting Policies, Changes in Accounting Estimates 
and Errors (``In the absence of an IFRS that specifically applies to 
a transaction, other event or condition, management shall use its 
judgement in developing and applying an accounting policy that 
results in information that is: (a) relevant to the economic 
decision-making needs of users; and (b) reliable, in that the 
financial statements: (i) represent faithfully the financial 
position, financial performance and cash flows of the entity; (ii) 
reflect the economic substance of transactions, other events and 
conditions, and not merely the legal form; (iii) are neutral, ie 
free from bias; (iv) are prudent; and (v) are complete in all 
material respects.'').
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    In response to commenters, the Board retained, in the first note to 
AS 2810.30, the language of AS 2815.03, with some modifications. 
Specifically, the Board revised the reference to ``generally accepted 
accounting principles'' to ``applicable financial reporting 
framework.'' The Board rephrased the sentence to emphasize that the 
``applicable financial reporting framework provides the basis for the 
auditor's judgment regarding the presentation of financial position, 
results of operations, cash flows, and disclosures in financial 
statements.'' The Board also agrees with commenters that the auditor's 
evaluation of fairness of presentation of the financial statements is 
an exercise of professional judgment in the context of an applicable 
financial reporting framework. The first note to AS 2810.30 refers to 
the auditor's judgment when evaluating the fairness of the overall 
presentation of financial statements.
    The Board also added a new footnote to paragraph .30A, as discussed 
below, referencing SEC Rule 4-01(a) that describes the company's 
obligation regarding additional information that may need to be 
disclosed in the financial statements so that the financial statements 
are not misleading.
ii. References to SEC Rule 12b-20
    The proposed amendment to AS 2810.30 included a new footnote 17A 
that referred to a company's responsibility pursuant to SEC Rule 12b-20 
under the Exchange Act, 17 CFR 240.12b-20 (``SEC Rule 12b-20''). That 
rule requires the company to disclose ``such further material 
information, if any, as may be necessary to make the required 
statements, in the light of the circumstances under which they are made 
not misleading.''
    Most commenters who addressed the proposed citation to SEC Rule 
12b-20 expressed concern with it. While one investor-related group 
recommended relocating the proposed footnote to the body of the 
amendments due to its significance, other commenters suggested removing 
the reference to SEC Rule 12b-20, with some commenters objecting 
primarily because the rule pertains to companies' disclosures within or 
beyond the financial statements. Some commenters emphasized that 
disclosures beyond the financial statements are the responsibility of 
companies rather than of auditors. Many expressed concerns that 
referring to the rule might be viewed as expanding the auditor's 
responsibilities, or would conflict with

[[Page 49750]]

the auditor's responsibilities described in AS 3101.08e.\86\ One of 
these commenters suggested citing SEC Rule 4-01(a)(1) instead, because 
that rule relates specifically to financial statements, upon which the 
auditor expresses an opinion.
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    \86\ AS 3101.08e requires that the auditor's report include an 
opinion that the financial statements present fairly, in all 
material respects, the financial position of the company, results of 
operations, and cash flows in conformity with the applicable 
financial reporting framework, and that the opinion identify the 
applicable financial reporting framework.
---------------------------------------------------------------------------

    After considering the comments received, the Board deleted proposed 
footnote 17A with the reference to SEC Rule 12b-20 from the final 
amendment to AS 2810.30 because that rule reflects a company's 
responsibilities for information beyond as well as within the financial 
statements.\87\ Instead, the Board retained the existing note to that 
paragraph requiring that the auditor look to the requirements of the 
SEC for the company under audit with respect to the accounting 
principles applicable to that company. The requirements of the SEC for 
the company under audit are included in SEC Rule 4-01(a), which the 
Board referenced in a new footnote to paragraph .30A, to remind 
auditors of the company's obligation regarding additional information 
that may need to be disclosed in the financial statements so that the 
financial statements are not misleading.
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    \87\ The auditor's responsibility for other information outside 
of the financial statements is specified in AS 2710, Other 
Information in Documents Containing Audited Financial Statements.
---------------------------------------------------------------------------

iii. Other Clarifications To Proposed AS 2810.30A
    The Board proposed a new paragraph AS 2810.30A based on the extant 
requirement from AS 2815.04, using language consistent with other PCAOB 
standards. Specifically, the Board:
     Combined the concepts in AS 2815.04a-b regarding 
acceptability and appropriateness of accounting principles and 
presented them in AS 2810.30Ab;
     Retained the concepts from AS 2815.04c-d regarding 
informativeness of information presented in the financial statements 
and presented them as a new AS 2810.30Aa; and
     Retained the concepts from AS 2815.04e regarding 
transactions presented in the financial statements within a range of 
acceptable limits as a new AS 2810.30Ac and an amendment to AS 2810.31.
    Several commenters expressed concern about not retaining the 
reference to the ``within a range of acceptable limits'' from AS 2815 
and suggested (i) retaining this phrase in AS 2810.30A or (ii) revising 
proposed 2810.30A to include a footnote referencing AS 2110 or a note 
describing the relationship between AS 2810.30A and AS 2110 and adding 
``in all material respects'' to AS 2810.30Ac. Another commenter 
suggested defining ``a reasonable investor'' used in AS 2810.30Aa. One 
commenter encouraged the Board to provide guidance on the use of the 
term ``informative'' in AS 2810.30A because it could be widely 
interpreted and applied in practice.
    In addition, several commenters suggested including or clarifying 
certain terminology or concepts used in the proposed new paragraph, AS 
2810.30A. Suggestions included:
     Referencing the importance of exercising professional 
judgment when evaluating the requirements specified in AS 2810.30A; and
     Clarifying that (i) ``financial statements'' include all 
notes to the statements and all related schedules; \88\ and (ii) 
``disclosures'' used in AS 2810.30A means ``accompanying notes,'' not 
other information included in management discussion and analysis 
(``MD&A'') and other disclosures included in the annual report.
---------------------------------------------------------------------------

    \88\ See 17 CFR 210.1-01(b) (Regulation S-X Rule 1-01(b)).
---------------------------------------------------------------------------

    After considering the comments received, the Board retained 
proposed paragraph .30A with modifications discussed below.
    The final AS 2810.30A requires an auditor, when evaluating whether 
the financial statements (including the accompanying notes) present 
fairly the financial position, results of operations, and cash flows, 
in all material respects, in conformity with the applicable financial 
reporting framework, to evaluate whether:
    a. The financial statements are informative of matters that may 
affect their use, understanding, and interpretation; and the 
information in the financial statements is presented and classified 
appropriately and in a manner that is not misleading;
    b. The accounting principles selected and applied by the company's 
management are appropriate in the circumstances; and
    c. Company transactions and relevant events and conditions are 
appropriately recognized, measured, and disclosed in the financial 
statements.
    The Board added ``(including the accompanying notes)'' in AS 
2810.30A to clarify that financial statements include the accompanying 
notes, to match the description in AS 2810.31 of financial statements 
as ``financial statements (including the accompanying notes).'' Because 
the Board uses ``disclosures'' as an interchangeable term with 
``notes'' or ``accompanying notes'' throughout PCAOB standards, it is 
unnecessary to further clarify the terms in AS 2810.30A. The Board also 
did not add a reference to professional judgment in AS 2810.30A, but as 
discussed above the Board revised the first note to AS 2810.30 to 
clarify that the auditor uses professional judgment when evaluating the 
fairness of financial statements.
    The term ``informative'' is in AS 2815.04c, which refers to AS 
2810.31, which in turn provides additional considerations for 
evaluation of information disclosed in the financial statements (e.g., 
consideration of the form, arrangement, and the amount of detail 
given). To clarify this further, the Board retained in the final 
standard language from AS 2815.04c stating that the information in the 
financial statements is presented appropriately, in a manner that is 
``informative of matters that may affect their use, understanding and 
interpretation'' and not misleading. The Board removed the reference to 
``reasonable investor'' from AS 2810.30A because it was limiting and 
did not consider a broader population of financial statement users 
(e.g., creditors). The Board also believes that introducing 
``reasonable investor'' in AS 2810.30A may create confusion by implying 
that an analysis is needed that is distinct from determining if the 
financial statements are presented fairly in conformity with the 
applicable financial reporting framework.
    Finally, the Board does not believe it is necessary to retain a 
reference to ``within a range of acceptable limits'' in AS 2810.30A. 
The standard is clear that evaluation of fairness is based on auditor 
judgment and that the concept of materiality is inherent in that 
judgment, which involves the consideration of qualitative as well as 
quantitative factors. The combination of these considerations should be 
clear that not every transaction or account is evaluated to arrive at 
the conclusion that the company's financial statements, taken as a 
whole, are presented fairly, in all material respects.
iv. Other Clarifications to Proposed AS 2810.31
    The Board proposed to revise the note to AS 2810.31 by (i) removing 
the first sentence that describes the requirements from AS 3105 (i.e., 
inadequate disclosures) and instead adding a reference to AS 
3105.24-.27 in paragraph .31, and (ii) adding an extant

[[Page 49751]]

requirement from AS 2815.06 for the auditor to also evaluate whether 
the substance of transaction or events differs materially from their 
form, but changing it from ``should consider'' to ``should evaluate.''
    Several commenters suggested, in addition to retaining the 
requirement from AS 2815.06, to also retain a provision from AS 2815.06 
that states ``generally accepted accounting principles recognize the 
importance of reporting transactions and events in accordance with 
their substance.'' Some commenters suggested not changing the ``should 
consider'' requirement from extant AS 2815.06 to ``should evaluate'' 
when evaluating a transaction in substance over form. Additionally, 
some commenters recommended removing or relocating the note in AS 
2810.31 to proposed AS 2810.30A for better context.
    Two investor-related groups suggested providing guidance on AS 
2810.31 by adding the existing concept of what the auditors are 
required to do (per AS 2815.04c) when the applicable financial 
reporting framework does not provide guidance (e.g., financial 
statements and accompanying notes do not disclose the necessary 
information required), or what considerations should be given by 
auditors in evaluating fair presentation of financial statements in 
accordance with proposed AS 2810.30.
    After considering the comments received, rather than amending the 
existing note to AS 2810.31, the Board removed the note in its 
entirety. The Board believes that a separate requirement to evaluate 
whether the substance of transactions differs from their form is 
unnecessary in light of the requirement in new AS 2810.30Aa. As 
discussed above, AS 2810.30Aa requires auditors to evaluate ``whether 
the financial statements are informative of matters that may affect 
their use, understanding, and interpretation;'' and the information in 
the financial statements is presented and classified appropriately and 
in a manner that is not misleading. This evaluation includes 
determining whether additional disclosures are necessary to reflect, 
for example, the substance of the company's transactions. The auditor's 
evaluation of whether company transactions have been recorded and 
presented in conformity with the applicable financial reporting 
framework includes the determination of whether additional disclosures 
are needed in the financial statements.
    The Board also believes that AS 2810.31 and the amendments are 
comprehensive and clear, and thus no additional guidance is warranted. 
For example, under US GAAP and IFRS, management has a range of 
conforming choices in selecting classifications and measurements of 
revenue recognition, segment reporting, and fair value measurement. The 
auditor is responsible for evaluating whether the disclosures reflect 
the choices made by management and are not misleading to investors and 
other financial statement users.
2. Amendments Related to Engagement Partner Responsibilities for 
Supervision
i. Seeking Assistance From Other Engagement Team Members
    AS 1201 and AS 2101 establish the engagement partner's 
responsibility for the engagement and its performance, including 
planning, supervision, and review. The Board proposed to amend the 
existing requirements in AS 1201 and AS 2101 to clarify that even when 
the engagement partner seeks assistance from other engagement team 
members, the engagement partner retains the primary responsibility for 
the engagement and its performance. One commenter strongly supported 
these amendments, and the Board adopted them as proposed.
    The final notes added to AS 1201 and AS 2101 clarify that while an 
engagement partner may seek assistance on specific tasks from other 
engagement team members, they continue to retain the primary 
responsibility for supervising, reviewing, and ensuring the quality of 
the work performed in the audit. In other words, the work of other 
engagement team members does not replace or reduce the engagement 
partner's responsibility for the engagement and its performance.
ii. Timing of review
    The Board also proposed a requirement to clarify that the review 
and evaluation by the engagement partner (and as applicable by other 
engagement team members performing supervisory activities) of work 
performed by engagement team members, as described in AS 1201.05c, must 
be completed prior to the report release date. These amendments did not 
receive any comment and are being adopted as proposed.
iii. Workpaper Review
    The Board proposed to amend AS 1201 to clarify the extent of the 
planning, supervisory, review, and documentation activities to be 
performed by the engagement partner by aligning those activities with 
existing auditor responsibilities under AS 1015 because the Board 
believes that the engagement partner's review of audit documentation is 
an important part of supervision. These amendments were intended to 
reaffirm the engagement partner's supervisory and review 
responsibilities in the context of exercising due professional 
care.\89\ Specifically, the Board proposed to add a note stating that 
notwithstanding assistance from other engagement team members 
performing supervisory activities, the engagement partner is required 
to review sufficient documentation to determine that (i) the engagement 
was performed as planned; (ii) significant judgments were appropriate 
and significant findings and issues, along with matters brought to the 
engagement partner's attention pursuant to AS 1201.05b, were 
appropriately addressed; (iii) the conclusions expressed in the 
auditor's report are appropriate and supported by sufficient 
appropriate evidence; and (iv) matters requiring communication under 
applicable professional and legal requirements are appropriately 
identified and communicated. The proposed note also provided that the 
engagement partner's review includes review of documentation of 
significant findings or issues \90\ and review of documentation that is 
also subject to review by the EQR, citing the provisions of AS 1220 
that specifically require the EQR to review certain documentation.\91\
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    \89\ See AS 1000.10 discussed above.
    \90\ See AS 1215.12.
    \91\ See AS 1220.09-.10 and .14-.15.
---------------------------------------------------------------------------

    One commenter stated that the proposed amendments were overly 
prescriptive and should allow more flexibility regarding the engagement 
partner's review and sign-off. Another commenter recommended clarifying 
how due professional care in AS 1201 relates to the engagement 
partner's responsibilities in AS 1000. This commenter further 
recommended better aligning AS 1201 with proposed AS 1000.09, including 
the interplay between Note 2 of AS 1201.05, which has specific 
workpaper review requirements by the engagement partner, while AS 
1201.04 also allows the engagement partner to seek assistance from 
other engagement team members.
    After considering the comments received, the Board adopted 
amendments to AS 1201 substantially as proposed. The Board believes 
that the amendments clarify the engagement partner's existing 
obligations for supervision and review. As the engagement team member 
with primary responsibility for the engagement, the engagement partner 
must review, at minimum, sufficient documentation of

[[Page 49752]]

specific audit areas that are deemed important to support the auditor's 
opinion. Without reviewing sufficient documentation in these areas, the 
engagement partner would not be able to demonstrate that the engagement 
partner has the primary responsibility for the audit.
    One commenter asserted that the proposed requirement that the 
``engagement partner's review should include review of documentation . 
. . subject to review by the engagement quality reviewer'' could be 
interpreted to require the engagement partner to review all 
documentation reviewed by the EQR, beyond what is required in AS 
1220.10 or .15. Another commenter expressed concern about the proposed 
note stating that in multi-tiered audits, other audit partners, not 
only the engagement partner, should retain the ability to review all 
documentation subject to EQR review. This commenter suggested not 
linking engagement partner review requirements to documentation subject 
to review by EQR.
    In response to the commenters, the Board clarified the final 
requirement by changing the phrase ``review of documentation subject to 
review by the engagement quality reviewer'' to ``review of 
documentation required to be reviewed by the engagement quality 
reviewer pursuant to the requirements of paragraphs .09-.10 and .14-.15 
of AS 1220 . . . .'' This revision further clarifies that the Board 
expects the engagement partner to review the documentation that the 
engagement quality reviewer is required to review in order to comply 
with those provisions of AS 1220, rather than all of the documentation 
that the engagement quality reviewer may have actually reviewed. The 
Board believes that the documentation of significant judgments made and 
conclusions reached by the engagement team that is required to be 
reviewed by the EQR provides important information to the engagement 
partner. This is true for all engagements, including multi-location and 
multi-tiered engagements. The extent of documentation reviewed by the 
EQR and, under the final amendment, by the engagement partner, will 
depend on the facts and circumstances of the particular engagement. 
Further, the requirement for the engagement partner to review 
documentation required to be reviewed by the EQR does not preclude 
other engagement team members performing supervisory activities to also 
review this documentation.
    Several commenters further expressed concerns that the proposed 
amendments create an incorrect perception that the responsibility for 
all phases of the audit resides with the engagement partner only 
without any consideration given to the responsibility of the firm or 
other engagement team members. One of these commenters further 
suggested including a statement that the engagement partner should 
tailor the extent of their supervision based on a variety of factors as 
described in AS 1201.06. AS 1201.05 specifically addresses the 
responsibilities of the engagement partner relating to supervision of 
engagement team members, and the Board does not think it is necessary 
to change these requirements to address the responsibilities of others.
    One commenter stated that the engagement partner's review of 
documentation to determine that the engagement was performed as planned 
may be construed as expanding the partner review requirements beyond AS 
1215.12c because the review of documentation only relates to ``results 
of auditing procedures that indicate a need for significant 
modification of planned auditing procedures.'' The Board does not 
believe that Note 2 of AS 1201.05 expands the engagement partner's 
responsibilities. AS 2101.03 states that the engagement partner is 
responsible for planning the audit and that the engagement partner 
retains primary responsibility for the engagement and its performance. 
In addition, the documentation requirements under AS 1215 are not 
limited to the significant findings and issues described in AS 1215.12 
and there are other documentation requirements outside of documenting 
specific matters.
    Another commenter further suggested that the Board define 
``sufficient documentation'' used in proposed Note 2 of AS 1201.05. The 
Board does not believe this is necessary. What is sufficient will 
depend on the facts and circumstances of the particular engagement 
under review. The amount of documentation that the engagement partner 
would review will vary depending on the associated risk involved in the 
audit area and the nature of the work performed that the engagement 
partner reviews. The Board further clarified this point, by changing 
``sufficient documentation to determine'' to ``documentation sufficient 
to determine'' in the final amendment. This change is designed to 
better connect the concept of sufficiency with the matters that the 
engagement partner will determine.
    The Board also proposed other amendments to AS 1201 and AS 2101 to 
conform to the adoption of AS 1000. These technical and clarifying 
amendments included replacing references to titles of existing 
standards with the title of the new standard and updating cross-
referenced terminology and paragraph citations. The Board adopted these 
other amendments as proposed as no comments were received.
3. Amendments Related to Documentation
    The Board proposed several amendments to AS 1215 discussed in more 
detail below. Commenters generally supported the proposed amendments to 
AS 1215. Some commenters provided specific comments related to (i) 
documentation completion date and (ii) specific audit documentation and 
timing for documentation review. These are discussed in more detail 
below.
i. Documentation Completion Date
    Audit documentation is the written record of the basis for the 
auditor's conclusions that provides the support for the auditor's 
representations, whether those representations are contained in the 
auditor's report or otherwise. Audit documentation also facilitates the 
planning, performance, and supervision of the engagement, and is the 
basis for the review of the quality of the work because it provides the 
reviewer with written documentation of the evidence supporting the 
auditor's significant conclusions.\92\ Under existing standards, a 
complete and final set of audit documentation is required to be 
assembled for retention as of a date not more than 45 days after the 
report release date, known as the documentation completion date.\93\ 
The Board proposed to accelerate the documentation completion date by 
reducing the maximum period from 45 days to 14 days.
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    \92\ See AS 1215.02.
    \93\ See AS 1215.15.
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    Many commenters who addressed the amendment generally supported it 
or agreed that the proposed acceleration of the documentation 
completion date would be appropriate or result in increased audit 
quality. Two commenters further stated that the shorter period of 14 
days would not cause significant changes at most firms.
    Several commenters raised concerns over the acceleration of the 
documentation completion date. One commenter stated that the 
acceleration would likely lead to more audit quality issues due to the 
increasingly more complex financial accounting, reporting, and auditing 
landscape requiring more

[[Page 49753]]

time as well as the current talent crisis. Another commenter stated 
that 14 days is too short to handle any unforeseen consequences (e.g., 
technology interruptions). Another commenter questioned whether 
acceleration of documentation will (i) have any meaningful impact on 
PCAOB inspection timelines and operating efficiencies and (ii) be 
workable for smaller firms, who may not have the technology to 
implement this change.
    Two commenters, both investor-related groups, recommended further 
shortening the documentation completion date to two days because an 
earlier PCAOB inspection would benefit investors. These two investor-
related groups and another commenter questioned why 14 days is a more 
appropriate timeframe. Focusing on challenges that smaller firms may 
face in implementing the acceleration, and the diversity across global 
network firms in documentation archive systems, several commenters 
recommended a phased implementation approach or extending the 
implementation over a longer period (e.g., two-year period).
    The proposal also sought comment, in light of the proposed 14-day 
documentation completion date, on whether firms would have difficulty, 
when filing Form AP within 35 days of the audit report being filed, 
complying with AS 1215.16. That paragraph of AS 1215 prohibits the 
deletion or discarding of audit documentation after the documentation 
completion date but permits the addition of documentation under certain 
conditions. Two firms stated that they did not foresee significant 
difficulties in complying with AS 1215.16 with additional costs, while 
another firm indicated some technological and process challenges. Two 
commenters recommended making both due dates (i.e., documentation 
completion date and Form AP due date) the same.
    After considering the comments received, the Board adopted the 
accelerated documentation completion date of 14 days as proposed with 
modification to the effective date for certain firms discussed below. 
The 14-day timeline strikes a good balance of meeting the objectives of 
this amendment (e.g., enhance investor protection by enabling the Board 
to begin the inspection process sooner after the completion of an 
audit) while still allowing a two-week period (14 calendar days) to 
assemble audit documentation for retention (i.e., archive audit 
documentation). As echoed by some commenters, the Board believes that 
the accelerated documentation period will not require a significant 
change for many firms. In the Board's view, the changes to the 
archiving period (i.e., 14 days) are necessary to focus auditors on 
assembling a complete set of audit documentation that is high-quality 
and without documentation errors or omissions in a timely manner. The 
Board believes that a delay in assembling the audit documentation 
increases the potential for omissions to occur.
    Further, shortening the archiving period also reduces the window of 
opportunity for improper alteration of audit documentation and 
increases the quality of documentation because recalling and describing 
audit procedures long after the work was actually performed can be 
difficult.
    In accordance with AS 1215, the auditor must have completed all 
necessary auditing procedures and obtained sufficient evidence to 
support the representations in the auditor's report before the report 
release date.\94\ The presence of complex financial accounting, 
reporting, or auditing matters should not have a bearing on the 
archiving period as the effects of such matters on the audit should be 
addressed before the report release date (i.e., before the 14 days to 
assemble the audit documentation). Under existing AS 1215.16 auditors 
are allowed to add documentation after the documentation completion 
date, if needed.\95\ While the Board understands that in practice some 
firms use a short archiving period, the Board believes that an 
archiving period of two days, as suggested by investor-related groups, 
may be too short to handle any unforeseen consequences (e.g., 
technology interruptions) and could result in inadvertent non-
compliance.
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    \94\ See AS 1215.15 (as amended).
    \95\ See AS 1215.16.
---------------------------------------------------------------------------

    The Board also continues to believe that the accelerated 
documentation completion date of 14 days is still appropriate even when 
considering the Form AP deadline of 35 days. The Board acknowledged 
that in most situations, firms currently have 35 days to file Form 
AP,\96\ and a firm must document the computation of total audit hours 
and include that computation in the files.\97\ If the actual hours 
become available after the documentation completion date but before the 
Form AP filing, the auditor is required under provisions of AS 1215 to 
add that information to the audit documentation after the documentation 
completion date.\98\ The instructions to Form AP also provide that 
firms may use a reasonable method to estimate audit hours when actual 
hours have not been reported or are otherwise unavailable.\99\
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    \96\ Form AP has a filing deadline of 35 days after the date the 
auditor's report is first included in a document filed with the SEC, 
or 10 days after the auditor's report is first included in a 
document filed with the SEC for a registration statement under the 
Securities Act of 1933. PCAOB Rule 3211(b).
    \97\ See Improving the Transparency of Audits: Rules to Require 
Disclosure of Certain Audit Participants on a New PCAOB Form and 
Related Amendments to Auditing Standards, PCAOB Rel. No. 2015-008 
(Dec. 15, 2015).
    \98\ See AS 1215.16.
    \99\ See Instructions to Form AP, Part IV--Responsibility for 
the Audit is Not Divided.
---------------------------------------------------------------------------

    The Board acknowledged that certain firms may have less 
technologically advanced systems in place and may need more time to 
implement new processes to comply with the accelerated documentation 
completion date requirement. Therefore, as discussed in more detail 
below, the effective dates for this requirement allow a phased-in 
approach for smaller firms to comply with the 14-day documentation 
completion date. This approach addresses implementation challenges that 
some commenters suggested smaller firms may face.
ii. Specific Audit Documentation and Timing of Review
    The Board also proposed to emphasize that audit documentation must 
clearly demonstrate who performed the work, who reviewed the work, and 
the date of such review.\100\ In order for an engagement partner to 
conclude that the audit evidence obtained is sufficient and appropriate 
to support the opinion expressed in the auditor's report,\101\ the 
audit work is required to be reviewed prior to the report release date. 
Therefore, the Board also proposed to amend AS 1215.15 to clarify that, 
before the report release date, the engagement partner and other 
engagement team members performing supervisory activities have 
completed their reviews of audit documentation.
---------------------------------------------------------------------------

    \100\ See AS 1215.06.
    \101\ See AS 2810.02.
---------------------------------------------------------------------------

    One commenter raised a concern that the amendments may result in 
lower quality documentation and an increase in late filings, providing 
an example of when a significant issue emerged closer to the issuer's 
filing deadline, because additional time to complete and review the 
relevant documentation would be needed. Another commenter suggested 
further clarifying whether the engagement partner and other supervisors 
must ensure that all review notes have been sufficiently addressed 
prior to the report release date.
    The Board adopted the amendments to AS 1215 as proposed. The

[[Page 49754]]

requirement for the engagement partner and other supervisors to review 
relevant audit documentation prior to the report release date is a 
clarification of existing requirements in AS 1215 and AS 2101. As 
discussed earlier, since the auditor's report is dated no earlier than 
the date on which the auditor has obtained sufficient appropriate 
evidence to support the auditor's opinion,\102\ the auditor must have 
completed all necessary auditing procedures, including documentation to 
support the work performed that is reviewed by the engagement partner 
and other reviewers, on or before the auditor's report date, in all 
cases. The engagement partner and other supervisors should refer to 
existing requirements in AS 1215.07, in determining the sufficiency of 
audit documentation. Several factors to consider include nature of the 
audit procedure, risk of material misstatement associated with the 
assertion, and extent of judgment required in performing the work and 
evaluating the results (i.e., accounting estimates require greater 
judgment and commensurately more extensive documentation).\103\
---------------------------------------------------------------------------

    \102\ See paragraph .01 of AS 3110, Dating of the Independent 
Auditor's Report.
    \103\ See AS 1215.07.
---------------------------------------------------------------------------

    Lastly, in relation to proposed amendments in AS 1215.06 and .06A, 
one commenter agreed with the addition of paragraph .06A but suggested 
removing the phrase of ``who performed the work, the person or persons 
who reviewed the work, and the date of such review'' in AS 1215.06 
because the same phrase is already included in AS 1215.06Ab. The Board 
did not make changes to the final amendments to AS 1215.06 and .06A. 
The addition of the phrase in paragraph .06 is an intentional 
clarification, rather than duplication, of what the audit documentation 
is required to demonstrate. The requirement in paragraph .06, is 
different, and relates to the sufficiency of documentation needed to 
meet the experienced auditor threshold.
    The Board also proposed other amendments to AS 1215 to conform to 
AS 1000. These technical and clarifying amendments included replacing 
references to titles of existing standards with the title of the new 
standard and updating cross-referenced terminology and paragraph 
citations. The Board did not receive any comments relating to other 
amendments to AS 1215 and adopted those as proposed.
4. Other Amendments
    In connection with the adoption of AS 1000, the Board also adopted 
other amendments to several PCAOB standards to conform with AS 1000, 
amendments to AS 2810, and rescission of AS 2815. These amendments 
include superseding the foundational auditing standards.
    The other changes adopted include replacing references to titles of 
existing standards with the title of the final standard and updating 
cross-referenced terminology and paragraph citations.
    The proposed amendments that received comments are discussed in 
more detail below.
i. Amendments to AS 2710, Other Information in Documents Containing 
Audited Financial Statements
    AS 2710.05 refers to differences in the auditor's judgment or 
opinion. The Board proposed to amend that standard in two ways, by 
clarifying that the difference of judgment or opinion is ``between the 
auditor and the client,'' and by adding a footnote clarifying the 
meaning of ``judgment.'' One commenter suggested replacing ``the 
client'' with ``management'' to be consistent with other PCAOB 
standards. Although the Board adopted other amendments that refer to 
the management and audit committee of the company under audit rather 
than to the auditor's ``client,'' the Board did not make this change 
throughout the auditing standards because such a sweeping change is 
outside the scope of this project and may not be warranted in each 
instance, and thus could create confusion. Because ``client'' is used 
in AS 2710 throughout the standard, the Board retained the use of that 
term in the existing standard and in the amendment, and thus adopted 
the amendments to AS 2710.05 as proposed.
ii. Amendments to AS 3101, The Auditor's Report on an Audit of 
Financial Statements When the Auditor Expresses an Unqualified Opinion
    The Board proposed to move certain language in paragraph .01 of AS 
3101 to AS 1000. The Board also proposed to move footnote 2 that 
describes the term ``taken as a whole'' to paragraph .02 of AS 3101. 
Two commenters on the proposed amendments to AS 3101 suggested amending 
paragraph .11 and paragraph .14, primarily due to the declining number 
of CAMs disclosed by firms. Other commenters suggested adding language 
about the meaning of reasonable assurance means and the limitation of 
the audit in the auditor's report (paragraph .09 and Appendix B). The 
Board did not make these changes suggested by commenters because they 
are outside the scope of this project.
    One commenter expressed concern that the meaning of ``taken as a 
whole'' was changed because a footnote was added to AS 3101.02. As 
discussed above, the Board did not change the meaning of ``taken as a 
whole'' by moving the existing footnote to another paragraph. The Board 
therefore adopted the amendments as proposed.
iii. Amendments to AS 4105, Reviews of Interim Financial Information
    The Board proposed to replace references to titles of existing 
standards with the title of the final standard and update cross-
referenced terms and paragraph citations in paragraphs .01 and .07. 
Three commenters noted that the amendments are appropriate. One 
commenter suggested adding ``to the extent those standards are 
relevant'' in AS 4105.01 when referencing AS 1000 because interim 
reviews are not required to provide reasonable assurance. The Board 
believes this addition is not necessary because the amendment refers 
only to compliance with independence and ethics requirements, 
competence, and exercise of due professional care, which are 
fundamental to any audit, review, or attestation engagements under the 
PCAOB standards. All of these concepts are relevant to AS 4105 without 
exception. The Board adopted the amendments as proposed.
iv. Amendments to Attestation Standards
    The Board proposed to replace references to titles of existing 
standards with the title of the final standard and update cross-
referenced terms and paragraph citations. One commenter on these 
amendments stated that they are appropriate. Another commenter offered 
suggestions to (i) limit the references to AS 1000 in attestation 
standards because the general principles and responsibilities in AS 
1000 should be specifically tailored to attestation engagements to be 
operable, (ii) retain paragraph .41 of AT Section 101, Attest 
Engagements a reference to Cooley on Torts, which was removed, and 
(iii) change the reference in footnote 9A of Attestation Standard No. 
2, Review Engagements Regarding Exemption Reports of Brokers and 
Dealers, as ``review'' engagement as opposed to ``examination'' 
engagement. The Board noted that the references to AS 1000 have been 
tailored to the attestation standards. The Board did not retain the 
reference to the 1932 treatise Cooley on Torts because, as the Board 
explained when it proposed AS 1000, that reference is unnecessary and 
AS 1000 explains the concept of due professional care in plain language 
without changing

[[Page 49755]]

its meaning.\104\ The Board revised the footnote of AT No. 2 to refer 
to a ``review'' engagement. Otherwise, the Board adopted the amendments 
as proposed.
---------------------------------------------------------------------------

    \104\ See PCAOB Rel. No. 2023-001, at 22.
---------------------------------------------------------------------------

Effective Date

    In the proposing release, the Board sought comment on the amount of 
time auditors would need before the proposed standard and related 
proposed amendments to PCAOB standards would become effective, if 
adopted by the Board and approved by the SEC. The Board proposed an 
effective date of June 30 of the year after approval by the SEC.
    A number of commenters, mostly firms, suggested that an effective 
date be based on a fiscal year end date (e.g., audits of fiscal years 
ending on or after December 15) rather than the proposed effective date 
of June 30 in the year after SEC approval. These commenters generally 
pointed to challenges associated with a mid-year implementation (e.g., 
need to update firm methodologies for foundational standards and for 
performance standards amended by this project, provide training). 
Specific dates suggested by commenters included: (i) audits of periods 
beginning on or after December 15, 2024 (assuming 2023 SEC approval); 
(ii) 12 months after SEC approval; (iii) 18 months after SEC approval; 
and (iv) 24 months after SEC approval.
    In addition, a firm and a firm-related group suggested that the 
Board consider the effective dates for other standard-setting projects 
such as QC 1000 when setting the effective date for AS 1000. In 
response to commenters, and after considering the effective dates for 
other Board rulemaking projects, the Board revised the effective date 
for the new standard and related amendments.
    Subject to approval by the SEC, the new standard and related 
amendments will take effect for audits of financial statements for 
fiscal years beginning on or after December 15, 2024, except for the 
14-day documentation completion date requirement (AS 1215.15). For that 
requirement, the Board adopted a phased approach to provide smaller 
firms more time to prepare for implementation. The requirement will 
take effect as follows:
     For public accounting firms that, during the calendar year 
ending December 31, 2024, issued audit reports with respect to more 
than 100 issuers, the 14-day documentation completion requirement will 
take effect for audits of financial statements for fiscal years 
beginning on or after December 15, 2024; and
     For all other registered public accounting firms, the 14-
day documentation completion requirement will take effect for audits of 
financial statements for fiscal years beginning on or after December 
15, 2025.
    The Board believes that changing the effective date to fiscal years 
beginning on or after December 15, 2024 responds to commenters who (i) 
expressed concerns about having a mid-year implementation and (ii) 
suggested that an effective date be based on a fiscal year-end date. 
Given the nature of requirements of the new standard and related 
amendments, as well as the extent of the differences between the new 
standard and the foundational standards, the Board believes that the 
general effective date will provide auditors with reasonable time to 
implement the new standard and related amendments. Further, extending 
the effective date for implementation of the 14-day documentation 
completion date requirement responds to the need articulated by 
commenters to provide smaller firms more time to prepare for 
implementation.

D. Economic Considerations and Application to Audits of Emerging Growth 
Companies

    The Board is mindful of the economic impacts of its standard 
setting. This section describes the economic baseline, need, and 
expected economic impacts of the final standard and related amendments, 
as well as alternative approaches considered by the Board. Due to data 
limitations, the economic analysis is generally qualitative in nature.
    The Board sought and received comments on the economic analysis in 
the proposing release.\105\ A majority of the commenters expressed 
views related to the economic analysis, and they generally agreed with 
the need for the standard. Some commenters suggested that the use of 
certain proposed language or certain proposed clarifications could 
result in potential confusion or expansion of auditors' 
responsibilities or that the proposed removal of certain extant 
explanatory language could reduce transparency regarding the meaning of 
the general principles and responsibilities and exacerbate an audit 
expectation gap. Some commenters suggested that the economic analysis 
should more carefully consider potential costs or unintended 
consequences associated with certain key provisions. These comments are 
addressed below. One commenter asserted that costs that have not been 
analyzed, quantitatively or qualitatively, include costs to firms from 
new legal duties and auditor responsibilities. The commenters did not 
provide data to support their concerns about potential costs and 
unintended consequences. Their views were based on interpretations that 
the Board's proposal would make broader changes. However, the Board 
believes the economic analysis is appropriate and consistent with the 
limited scope of changes the rulemaking requires. Commenters generally 
agreed that accelerating the documentation completion date is feasible 
for firms and beneficial to investors, although some commenters noted 
potential costs or questioned the expected benefits. One commenter 
suggested potential unintended consequences associated with clarifying 
engagement partner responsibilities. Three commenters referenced 
additional academic research for the Board's consideration. These 
comments are addressed below.
---------------------------------------------------------------------------

    \105\ See id. at 55-57.
---------------------------------------------------------------------------

    The Board considered all of the comments received and have 
developed an economic analysis below that includes these considerations 
and evaluates the expected benefits and costs of the final standard and 
related amendments, discusses potential unintended consequences, and 
facilitates comparison to alternative actions considered. Specific 
input is discussed where relevant in the analysis that follows.

A. Baseline

    The discussion above describes important components of the baseline 
against which the economic impacts of the standard can be considered, 
including an overview of existing requirements. Below is the Board's 
discussion of additional matters that informed its understanding of the 
baseline for each of the changes.
1. Modernization of the Foundational Standards
    The discussion above provides an overview of existing requirements 
of the auditing standards that describe the general principles and 
responsibilities of the auditor in conducting an audit in accordance 
with the standards of the PCAOB (i.e., foundational standards). The 
general principles and responsibilities addressed by the foundational 
standards are described above and include reasonable assurance, due 
professional care, professional skepticism, independence, competence, 
and professional judgment.

[[Page 49756]]

    The foundational standards are required to be followed in every 
audit conducted in accordance with PCAOB standards. The general 
principles and responsibilities in the foundational standards are 
reflected in firm methodologies, commercially published guidance, and 
other technical tools. Although there may be circumstances where some 
auditors' understanding of the general principles and responsibilities 
is made more difficult than necessary by how the foundational standards 
are organized and written, the Board does not have evidence that 
auditors are systematically confused about the meaning of the general 
principles and responsibilities or that the foundational standards are 
insufficient to support high-quality audits, when applied 
appropriately.
    One commenter suggested there is no evidence that audit personnel 
are unclear or uncertain about the meaning of the proposed 
requirements. An investor-related group noted that the proposed 
standard was consistent with the extant standards.
    The views expressed by the commenters align with the Board's belief 
that the core general principles and responsibilities encompassed by 
the foundational standards are well-established and sound. While the 
foundational standards are currently spread across four standards 
(i.e., AS 1001, AS 1005, AS 1010, AS 1015), contain some extraneous 
restrictive language, and do not emphasize the investor protection 
obligation as prominently as desired, applied appropriately, they are 
sufficient to support high-quality audits.
2. Clarification of Engagement Partner Responsibilities
    Under PCAOB standards, engagement partners are responsible for the 
engagement and its performance, including the proper planning and 
supervision of the engagement and its compliance with PCAOB standards. 
While engagement partners are permitted to seek assistance from other 
team members performing supervisory activities, engagement partners are 
responsible for proper supervision of the engagement and have primary 
responsibility for the engagement.
    As discussed in the proposal, the staff reviewed firms' available 
methodology documentation to obtain an understanding of firms' policies 
and practices for engagement partner review.\106\ A number of larger 
firms have developed specific guidance, checklists, and other tools to 
facilitate the engagement partner's review. For example, some firms 
mandate the use of tools that specify workpapers or topics that 
engagement partners are required to review directly. These tools 
require the engagement partner to document their review. Conversely, 
similar policies of some smaller firms are designed to be applied at a 
higher level and are not as specific about the required review.\107\ 
The Board did not receive comments that provided additional information 
addressing the baseline for engagement partner review.
---------------------------------------------------------------------------

    \106\ See id. at 36.
    \107\ The observations in this paragraph are based on the 
staff's review of the policies of U.S. global network firms 
(``GNFs'') and U.S. non-affiliate firms (``NAFs''). GNFs are the 
member firms of the six global accounting firm networks (BDO 
International Ltd., Deloitte Touche Tohmatsu Ltd., Ernst & Young 
Global Ltd., Grant Thornton International Ltd., KPMG International 
Ltd., and PricewaterhouseCoopers International Ltd.). NAFs are both 
U.S. and non-U.S. accounting firms registered with the Board that 
are not GNFs. Some of the NAFs belong to international networks.
---------------------------------------------------------------------------

3. Accelerating the Documentation Completion Date
    The auditor is required to complete all necessary auditing 
procedures, review those procedures, and obtain sufficient appropriate 
audit evidence prior to the report release date. Auditors may need some 
time after the report release date to assemble the final audit file and 
complete the audit documentation. The PCAOB standard on audit 
documentation currently requires completion of documentation within 45 
days after the report release date.
    When PCAOB inspection staff select issuer audits for inspection, 
PCAOB notice of inspection and access to firm audit documentation 
generally do not occur until after the documentation completion date. 
After an inspection is complete, the Board issues a report on the 
inspection, and a portion of each report is made available to investors 
and the public on the PCAOB's website.
    As discussed in the proposal, the staff reviewed firms' stated 
archiving policies and firms' archiving practices to obtain an 
understanding of firms' policies and practices for completing audit 
documentation.\108\ The Board found a wide range of archiving periods 
among firms, from the full 45-day period to a much shorter period. In 
addition, PCAOB staff has observed that certain firms require audit 
documentation to be archive-ready upon completion of interim audit 
procedures. The PCAOB established the 45-day period in 2004 \109\ when 
firms relied more on paper documentation and needed time to copy, 
collate, finalize, and file workpapers. PCAOB staff has observed that 
most firms today have electronic audit tools and audit software that 
either make those tasks unnecessary or enable the tasks to be performed 
much faster.
---------------------------------------------------------------------------

    \108\ See PCAOB Rel. No. 2023-001, at 37.
    \109\ See Audit Documentation and Amendment to Interim Auditing 
Standards, PCAOB Rel. No. 2004-006 (June 9, 2004), at 5.
---------------------------------------------------------------------------

    Some U.S. GNFs require engagement teams to archive audit 
documentation within 10 days after the report release date. Other firms 
require engagement teams to archive audit documentation within longer 
periods (ranging from 30 to 45 days after the report release date). Of 
the firms with policies that allow longer periods, certain of them 
express expectations to complete documentation within a much shorter 
period.
    All GNFs have established global policies for archiving to be used 
by their respective non-U.S. affiliate firms. The global policies 
generally allow for completion of documentation not more than 45 days 
after the report release date. The global policies of certain GNFs 
specify a documentation completion date within 14 days after the report 
release date, or sooner when required by local laws or regulations. In 
addition to the global policies, certain non-U.S. affiliates of GNFs 
have local policies requiring documentation completion dates earlier 
than their respective global policies. Examples observed through the 
PCAOB's 2022 inspections include non-U.S. affiliates that have local 
policies specifying completion of documentation by deadlines such as 2 
days, 7 days, 10 days, 14 days, and 30 days after the report release 
date. Additionally, even among certain non-U.S. affiliates that have 
stated policies of 45 days after the report release date, their 
documentation systems require completion of documentation within 15 to 
40 days (depending on the firm). Generally, non-U.S. affiliates of GNFs 
use electronic audit documentation systems for documentation and 
archiving.
    The archiving policies of NAFs generally specify a documentation 
completion date of 45 days after the report release date. PCAOB staff 
has observed certain NAFs annually inspected by the PCAOB that, in 
practice, typically archive documentation within 40 days of the report 
release date. In addition, PCAOB staff has noted that certain other 
NAFs generally complete their documentation at the end of the full 45-
day archiving period. While most NAFs use electronic audit 
documentation systems, PCAOB staff is aware that some smaller firms 
still use paper-based workpapers.
    The Board did not receive comments specific to the baseline for the 
documentation completion date,

[[Page 49757]]

including additional information on firms' current archiving policies 
and practices.

B. Need

    The changes introduced in the final standard are part of the 
Board's effort to continuously improve and update PCAOB standards. In 
practice, PCAOB standards are used by auditors, who are responsible for 
applying the general principles and responsibilities of the 
foundational standards. Investors and other stakeholders may also rely 
on the foundational standards (directly or indirectly) to establish 
expectations about auditor responsibilities.
1. Problem To Be Addressed
i. Modernization of the Foundational Standards
    The Board identified three potential concerns about the 
foundational standards: (i) compliance with the standards; (ii) 
soundness of the general principles and responsibilities; and (iii) 
clarity of the standards. The next three subsections explain that the 
Board does not see a need to make changes to the standards based on 
compliance with the standards or soundness of the general principles 
and responsibilities, but does see a need to make changes to modernize 
and enhance the clarity of the foundational standards.
a. Compliance With the Foundational Standards
    In some instances, auditors have not performed audits in compliance 
with the foundational standards. For example, for the years 2018-2022, 
the PCAOB issued almost two dozen enforcement orders that described the 
violation of at least one of the foundational standards. One commenter, 
an academic, noted research that suggests that audit failures often 
relate to basic areas of auditor responsibility, such as failure to 
gather sufficient appropriate audit evidence, failure to exercise due 
professional care, or insufficient professional skepticism.\110\ The 
commenter added that contributing factors to the noted failures appear 
to be auditor disincentives to be skeptical \111\ or high auditor 
workloads.\112\ For example, research indicates that professional 
skepticism could be affected by priorities such as engagement budgets 
rather than investor protection.\113\ The commenter also suggested that 
persistent audit deficiencies, despite PCAOB inspection and enforcement 
efforts, highlight the importance of auditors' understanding of and 
compliance with foundational auditing principles.\114\ The views 
expressed by the commenter seem to align with the Board's understanding 
of auditors' adherence to the foundational standards and the Board's 
assessment of the need to modernize and clarify those standards, 
including a reaffirmation of the auditor's obligation to protect 
investors.
---------------------------------------------------------------------------

    \110\ See, e.g., Mark S. Beasley, Joseph V. Carcello, Dana R. 
Hermanson, and Terry L. Neal, An Analysis of Alleged Auditor 
Deficiencies in SEC Fraud Investigations: 1998-2010 (commissioned by 
Center for Audit Quality) (May 2013).
    \111\ See, e.g., Joseph F. Brazel, Scott B. Jackson, Tammie J. 
Schaefer, and Bryan W. Stewart, The Outcome Effect and Professional 
Skepticism, 91 The Accounting Review 1577 (2016) and Joseph F. 
Brazel, Christine Gimbar, Eldar M. Maksymov, and Tammie J. Shaefer, 
The Outcome Effect and Professional Skepticism: A Replication and a 
Failed Attempt at Mitigation, 31 Behavioral Research in Accounting 
135 (2019).
    \112\ See, e.g., Julie S. Persellin, Jaime J. Schmidt, Scott D. 
Vandervelde, and Michael S. Wilkins, Auditor Perceptions of Audit 
Workloads, Audit Quality, and Job Satisfaction, 33 Accounting 
Horizons 95 (2019).
    \113\ See, e.g., Brazel et al., The Outcome Effect and 
Professional Skepticism and Brazel et al., The Outcome Effect and 
Professional Skepticism: A Replication and a Failed Attempt at 
Mitigation.
    \114\ See, e.g., Ashna L. Prasad and John C. Webster, What Are 
the Trends in PCAOB Inspections and the Reported Audit Deficiencies? 
37 Journal of Accounting, Auditing & Finance 523 (2022).
---------------------------------------------------------------------------

b. Soundness of the General Principles and Responsibilities
    The foundational standards address the general principles and 
responsibilities of reasonable assurance, due professional care, 
professional skepticism, independence, competence, and professional 
judgment. These principles and responsibilities are interconnected. For 
example, due professional care requires the auditor to exercise 
professional skepticism, including a questioning mind and a critical 
assessment of audit evidence. Audit procedures performed with due 
professional care allow the auditor to obtain reasonable assurance 
about whether the financial statements are free of material 
misstatement. Reasonable assurance is achieved, in part, by the 
exercise of professional judgment, which involves the auditor making 
decisions based on applying relevant training, knowledge, and 
experience. There is ample published research that studies alternative 
versions of these general principles and responsibilities. Below is a 
summary of several papers that demonstrate an ongoing debate regarding 
alternatives.
    As noted in the proposal,\115\ academic research regarding 
professional skepticism provides a model that identifies two 
components--skeptical judgment and skeptical action--that are necessary 
for the effective exercise of professional skepticism.\116\ In a 
synthesis of literature on professional skepticism, researchers 
conclude that professional skepticism is foundational to the 
performance of a high-quality audit, and they note that academic 
research tends to focus on skeptical judgment while PCAOB inspections 
tend to focus on skeptical action.\117\ When accountability to 
regulators is an incentive based on principles, research suggests that 
auditors may exhibit more skeptical judgment.\118\ When accountability 
is based on a checklist mentality of following a set of strictly 
specific requirements, research suggests that auditors may engage in 
cognitive processing that reduces skeptical judgment.\119\ On the other 
hand, a principles-only approach to standards may provide insufficient 
guidance to support the exercise of judgment.\120\ Overall, therefore, 
there is a spectrum of possible approaches to audit regulation that 
lies between excessively vague principles and excessively specific 
requirements. In practice, effective auditing standards may fit into 
the middle of that spectrum by emphasizing core principles while 
including some specific requirements to help support skeptical judgment 
and skeptical action.\121\ One commenter, an academic, noted that 
research on rules- versus principles-based requirements for 
independence and ethics suggests that a combination of rules and 
principles is

[[Page 49758]]

likely to be the most effective approach.\122\
---------------------------------------------------------------------------

    \115\ See PCAOB Rel. No. 2023-001, at 39.
    \116\ See Mark W. Nelson, A Model and Literature Review of 
Professional Skepticism in Auditing, 28 Auditing: A Journal of 
Practice & Theory 1, 5 (2009).
    \117\ See R. Kathy Hurtt, Helen Brown-Liburd, Christine E. 
Earley, and Ganesh Krishnamoorthy, Research on Auditor Professional 
Skepticism: Literature Synthesis and Opportunities for Future 
Research, 32 Auditing: A Journal of Practice & Theory 45, 47 (2013). 
According to the authors, ``Skeptical judgment occurs when an 
auditor recognizes that a potential issue may exist and that more 
work or effort is necessary. Skeptical action occurs when an auditor 
changes his/her behavior based on the skeptical judgment. Both 
skeptical judgment and skeptical action are essential to the audit, 
with skeptical judgment being a necessary condition for skeptical 
action.''
    \118\ See Hurtt, et al., Research on Auditor 62.
    \119\ See M. David Piercey, Documentation Requirements and 
Quantified versus Qualitative Audit Risk Assessments, 30 Auditing: A 
Journal of Practice & Theory 223, 242-43 (2011).
    \120\ See, e.g., SEC, Study Pursuant to Section 108(d) of the 
Sarbanes-Oxley Act of 2002 on the Adoption by the United States 
Financial Reporting System of a Principles-Based Accounting System 
(July 25, 2003).
    \121\ See, e.g., AS 1210, Using the Work of an Auditor-Engaged 
Specialist.
    \122\ See, e.g., Terri L. Herron and David L. Gilbertson, 
Ethical Principles vs. Ethical Rules: The Moderating Effect of Moral 
Development on Audit Independence Judgments, 14 Business Ethics 
Quarterly 499 (2004) and Bryan K. Church, J. Gregory Jenkins, and 
Jonathan D. Stanley, Auditor Independence in the United States: 
Cornerstone of the Profession or Thorn in Our Side? 32 Accounting 
Horizons 145 (2018).
---------------------------------------------------------------------------

    One commenter referenced several academic papers and highlighted 
pragmatic challenges and costs auditors face when applying the concept 
of professional skepticism.\123\ The commenter reported that past 
economic research finds violations of professional skepticism 
underlying audit deficiencies.\124\ The commenter also reported that 
lack of professional skepticism by auditors regarding frauds of the 
early 2000s generated academic literature on models of professional 
skepticism,\125\ a scale to measure professional skepticism 
traits,\126\ and interventions designed to help increase professional 
skepticism.\127\ Moreover, the commenter reported that an area of 
academic psychology research asserts that skeptical behavior is a 
personality trait that may require a counter-dispositional change in 
mindset.\128\ (The Board noted that this research does not specifically 
study professional skepticism as a general principle or responsibility 
in auditing.) In contrast, another commenter reported that academic 
research highlights the merits of focusing on both obtaining and 
evaluating information as a pragmatic approach in the exercise of 
professional skepticism.\129\
---------------------------------------------------------------------------

    \123\ See, e.g., Brazel et al., The Outcome Effect; Ashleigh L. 
Bakke, Elizabeth N. Cowle, Stephen P. Rowe, and Michael S. Wilkins, 
How Do Audit Firms Treat Partners Who Issue Adverse Internal Control 
Opinions? Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4383557 (2023); Richard C. Hatfield, Scott B. 
Jackson, and Scott D. Vandervelde, The Effects of Prior Auditor 
Involvement and Client Pressure on Proposed Audit Adjustments, 23 
Behavioral Research in Accounting 117 (2011); and Sandra Waller 
Shelton, The Effect of Experience on the Use of Irrelevant Evidence 
in Auditor Judgment, 74 The Accounting Review 217 (1999).
    \124\ See, e.g., Mark S. Beasley, Joseph V. Carcello, and Dana 
R. Hermanson, Top 10 Audit Deficiencies, Journal of Accountancy 63 
(2001).
    \125\ See, e.g., Mark W. Nelson, A Model and Literature Review 
of Professional Skepticism in Auditing, 28 Auditing: A Journal of 
Practice & Theory 1 (2009).
    \126\ See, e.g., R. Kathy Hurtt, Development of a Scale to 
Measure Professional Skepticism, 29 Auditing: A Journal of Practice 
& Theory 149 (2010).
    \127\ See, e.g., Jessica Maree Cross, Robyn Moroney, and Soon-
Yeow Phang, Is it All in the Mind(Fulness)? An Exploratory Study 
Assessing the Impact of Mindfulness on Professional Skepticism, 37 
Accounting Horizons 25 (2023).
    \128\ See, e.g., Lewis R. Goldberg, The Structure of Phenotypic 
Personality Traits, 48 American Psychologist 26 (1993); Paul E. 
Bebbington, Orla McBride, Craig Steel, Elizabeth Kuipers, Mirjana 
Radovanovic, Traolach Brugha, Rachel Jenkins, Howard I. Meltzer, and 
Daniel Freeman, The Structure of Paranoia in the General Population, 
202 The British Journal of Psychiatry 419 (2013); and Ryan Hamilton, 
Kathleen D. Vohs, Anne-Laure Sellier, and Tom Meyvis, Being of Two 
Minds: Switching Mindsets Exhausts Self-Regulatory Resources, 115 
Organizational Behavior and Human Decision Processes 13 (2011).
    \129\ See, e.g., Jonathan H. Grenier, Encouraging Professional 
Skepticism in the Industry Specialization Era, 142 Journal of 
Business Ethics 241 (2017) and Noel Harding and Ken T. Trotman, The 
Effect of Partner Communications of Fraud Likelihood and Skeptical 
Orientation on Auditors' Professional Skepticism, 36 Auditing: A 
Journal of Practice & Theory 111 (2017).
---------------------------------------------------------------------------

    These comments suggest that efforts by firms, such as training and 
on-the-job-coaching, may be needed regarding professional skepticism, 
but do not suggest that professional skepticism as a general principle 
and responsibility of auditors is flawed. In addition, the views shared 
by these commenters underscore the need for a well-defined standard 
that sets forth the requirements of due professional care and 
professional skepticism, which is discussed further below.
    As noted in the proposal, research also offers insights on the 
appropriate and expected levels of assurance for investors and other 
users of financial statements.\130\ One accounting firm referenced a 
literature review that notes the audit expectation gap has existed for 
many years and describes it as a phenomenon in which the expectations 
of beneficiaries of audited financial statements exceed what auditors 
can reasonably be expected to accomplish.\131\ Early research on the 
audit expectation gap concludes that the majority of investors prefer 
absolute assurance that financial statements are free of material 
misstatement, in contrast to the profession's standard that an audit 
should provide reasonable assurance.\132\ Similarly, a more recent 
multi-country study finds that survey respondents appear to expect much 
more than reasonable assurance from auditors in order to prevent fraud 
and company failure.\133\
---------------------------------------------------------------------------

    \130\ See PCAOB Rel. No. 2023-001, at 39.
    \131\ See Reiner Quick, The Audit Expectation Gap: A Review of 
the Academic Literature, 94 Maandblad voor Accountancy en 
Bedrijfseconomie 5 (2020).
    \132\ See, e.g., Marc J. Epstein and Marshall A. Geiger, 
Investor Views of Audit Assurance: Recent Evidence of the 
Expectation Gap, 177 Journal of Accountancy 60, 64 (1994).
    \133\ See Association of Chartered Certified Accountants, 
Closing the Expectation Gap in Audit (May 2019) (``ACCA Report'').
---------------------------------------------------------------------------

    The Board believes this cross-section of research, either noted in 
the proposal or by commenters, aligns with the Board's decision to 
maintain the core general principles and responsibilities of the 
foundational standards. The synthesis research supports professional 
skepticism as foundational to the performance of effective audits. 
Likewise, the research on audit assurance supports the principle of 
reasonable assurance as an appropriate level of assurance based on the 
underlying benefits and costs of an audit engagement.\134\ As explained 
above, absolute assurance is not attainable because of the nature of 
audit evidence and the characteristics of fraud. As described above, AS 
1000 clarifies the general principles and responsibilities without 
substantially modifying the general principles and responsibilities. 
Moreover, the Board does not anticipate that the final standard and 
related amendments will markedly influence the current audit 
expectation gap since the Board preserved the core concepts while 
making marginal adjustments to reaffirm the auditor's obligation to 
protect investors.
---------------------------------------------------------------------------

    \134\ See, e.g., Ernest L. Hicks, Materiality, 2 Journal of 
Accounting Research 158 (1964).
---------------------------------------------------------------------------

c. Clarity of the Foundational Standards
    As discussed in the proposal, some current features of the 
foundational standards do not support the most efficient use of the 
standards.\135\ The general principles and responsibilities are 
currently spread across four standards, which were not developed 
originally as a cohesive whole. Their current organization continues to 
reflect their origin as separate requirements that were not drafted to 
be read together. In addition, the foundational standards contain 
language that was used in the AICPA's former standards but is outdated 
and inconsistent for audits conducted today under the standards of the 
PCAOB. This could undermine users' understanding of the general 
responsibilities of the auditor for audits conducted in accordance with 
PCAOB standards. The foundational standards also do not conform to the 
structure of Board-issued standards, which may hinder an auditor's 
navigation of the requirements. Finally, the foundational standards do 
not reflect developments in the auditing environment since their 
adoption in 2003, including the PCAOB's adoption of standards and 
rules, such as standards on audit documentation and engagement 
supervision, and this lack of consistency or alignment may draw 
attention away from the general principles and responsibilities.
---------------------------------------------------------------------------

    \135\ See PCAOB Rel. No. 2023-001, at 40.
---------------------------------------------------------------------------

    Overall, these current features of the foundational standards may 
reduce

[[Page 49759]]

efficient use of the standards by requiring more time and attention 
than necessary to read, understand, and apply the standards and may 
lead to inconsistent application, potential misinterpretation, and 
ineffective regulatory intervention. Clarity of auditing standards 
requires effective communication through features such as relevant 
language, consistency with Board-issued standards and rules, and well-
organized presentation, which appear throughout PCAOB and SEC 
rulemaking initiatives.
    Several firms and a firm-related group acknowledged that 
modernization efforts to streamline and clarify the foundational 
standards will enhance users' awareness and understanding of the 
auditor's responsibilities.
(1) Characteristics of Modernized Auditing Standards
    Academic research identifies three characteristics of effective 
disclosure documents that align well with the features of modernized 
auditing standards: simplicity,\136\ salience,\137\ and 
standardization.\138\ Simplicity can be achieved with an auditing 
standard that eliminates language that is outdated and inconsistent. 
Salience can be achieved with an auditing standard that emphasizes 
requirements while including explanations in the Board's release rather 
than the rule text and that incorporates the latest developments in the 
auditing environment, including the adoption of Board-issued standards 
and rules. Standardization can be achieved with an auditing standard 
that is well-organized, with general principles and responsibilities 
presented in a single standard that is structured similar to other 
standards.
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    \136\ See, e.g., R.E. Nisbett and L. Ross, Human Inference: 
Strategies and Shortcomings of Social Judgment (1980) (finding that 
individuals have limited cognitive resources to absorb and process 
information).
    \137\ See, e.g., Daniel Kahneman, Thinking, Fast and Slow (2013) 
(suggesting that individuals who focus their limited cognitive 
resources on a subset of information are able to give more weight to 
the subset when making decisions).
    \138\ See, e.g., Jeffrey R. Kling, Sendhil Mullainathan, Eldar 
Shafir, Lee C. Vermeulen, and Marian V. Wrobel, Comparison Friction: 
Experimental Evidence from Medicare Drug Plans, 127 The Quarterly 
Journal of Economics 199 (2012) (finding that standardized 
information better enables individuals to assess tradeoffs and make 
coherent, rational decisions).
---------------------------------------------------------------------------

    In addition, the Board is aware of other regulatory initiatives 
that emphasize clear, well-organized writing as characteristics of 
effective communication with stakeholders. Two examples of other 
regulatory initiatives are the SEC Plain English Disclosure rule \139\ 
for issuers' prospectuses, and the Plain Writing Act of 2010 \140\ for 
government communications with the public. The purpose of the Plain 
English Disclosure rule was to make financial and business information 
available to investors in a form they could read and understand, and 
the rule includes specific guidance for clear, concise language.\141\ 
The purpose of the Plain Writing Act was to improve the effectiveness 
and accountability of federal agencies to the public by promoting clear 
communication that the public can understand and use, and the statute 
defines plain writing as writing that is clear, concise, and well-
organized, and that follows other best practices appropriate to the 
subject and the intended audience.\142\ While neither the Plain English 
Disclosure rule nor the Plain Writing Act imposes obligations on the 
PCAOB, their overall objective to promote effective communication for 
efficiency of stakeholders' understanding is aligned with the 
objectives of and approach to the Board's modernization of the 
foundational standards.
---------------------------------------------------------------------------

    \139\ Plain English Disclosure, SEC Rel. No. 33-7497 (Oct. 1, 
1998).
    \140\ Plain Writing Act of 2010, Public Law 111-274.
    \141\ The economic effects of easy-to-read disclosure documents 
are quantified in research that demonstrates a decrease in company 
valuation caused by a decrease in readability of disclosure 
documents. See Byoung-Hyoun Hwang and Hugh Hokwang Kim, It Pays to 
Write Well, 124 Journal of Financial Economics 373 (2017).
    \142\ Using the Plain Writing Act as an exogenous event, 
research has found that the Plain Writing Act resulted in improved 
readability of Form 10-Ks that caused the risk of stock price crash 
to fall. See Shiyan Yin, Thanaset Chevapatrakul, and Kai Yao, The 
Causal Effect of Improved Readability of Financial Reporting on 
Stock Price Crash Risk: Evidence from the Plain Writing Act of 2010, 
216 Economics Letters (2022). Research has also found that while 
readability of disclosures improved following the Plain English 
Disclosure rule, improved readability does not appear to influence 
more experienced market participants, as measured by equity 
analysts' earnings forecasts. See Samuel B. Bonsall IV, Andrew J. 
Leone, Brian P. Miller, and Kristina Rennekamp, A Plain English 
Measure of Financial Reporting Readability, 63 Journal of Accounting 
and Economics 329 (2017).
---------------------------------------------------------------------------

    The Board did not receive comments that provided additional 
information regarding characteristics of modernized auditing standards.
(2) Useability of Modernized Auditing Standards
    As summarized above, the Board continues to believe that auditors 
generally understand their responsibilities under the foundational 
standards. Nonetheless, there could be certain circumstances where some 
auditors' understanding of the general principles and responsibilities 
is made more difficult than necessary by the current language and 
organization of the foundational standards. New entrants, for example, 
may need to spend more time navigating and distilling the extant 
general principles and responsibilities than they would with more 
modernized language and organization. These new entrants may include 
accounting students seeking to enter the auditing profession. They may 
also include auditors who are experienced in applying other auditing or 
attestation standards, such as those of the AICPA for entities other 
than issuers, but who are seeking to perform an audit under PCAOB 
standards for the first time and who need to confirm their 
responsibilities under PCAOB rules.
    In addition, the current language and organization of the 
foundational standards could impede investors' abilities to form 
accurate expectations about auditor responsibilities under PCAOB 
standards. Investors form expectations from a number of sources, 
including potentially the language of the standards themselves, but 
also from third parties (e.g., media) who may write about PCAOB 
standards. Standards that are not modernized could contribute to an 
expectation gap--in this case, a gap between what investors expect from 
an audit and what auditing standards require.\143\ Such a gap could in 
principle exist in either direction. Investors could be led to expect 
more than what an audit is required to deliver, and thereby fail to 
price the risk appropriately. Alternatively, investors could be led to 
expect less than what an audit is required to deliver, and thereby fail 
to appreciate the important functions performed by auditors regarding 
reasonable assurance.
---------------------------------------------------------------------------

    \143\ Research finds evidence of a persistent gap between 
investors' expectations of an audit and auditors' performance based 
on requirements under auditing standards. See, e.g., Klaus Ruhnke 
and Martin Schmidt, The Audit Expectation Gap: Existence, Causes, 
and the Impact of Changes, 44 Accounting and Business Research 572, 
592 (2014) (finding that the public has expectations of auditors' 
responsibilities that do not exist under auditing standards, such as 
conducting a management audit) and ACCA Report (finding that the 
persistence of the audit expectation gap reflects, in part, the fact 
that public expectations of audits can grow in line with what 
auditors can accomplish).
---------------------------------------------------------------------------

    Audit committees may also form inaccurate expectations about the 
content of PCAOB standards if the standards are not modernized, via 
mechanisms similar to investors. Given audit committee members' greater 
familiarity with auditing through their position and responsibilities 
with the issuer and other relevant professional background, the Board 
believes this is

[[Page 49760]]

less likely to occur for audit committees than for investors. However, 
the negative impact of an audit committee member failing to correctly 
comprehend the auditor's general responsibilities under PCAOB standards 
could be more severe, given the audit committee's role in supervising 
the audit and the auditor under Sarbanes-Oxley for the benefit of 
investors.
    The Board did not receive comments that provided additional 
information regarding useability of modernized auditing standards.
ii. Clarification of Engagement Partner Responsibilities
    One of the responsibilities of engagement partners is to review the 
work of engagement team members. Any uncertainty under the standards 
may give engagement partners an incentive, particularly under time 
pressures, to de-emphasize or omit the review of workpapers. For 
example, the Board has found instances in which engagement partners did 
not fulfill their responsibilities for review.\144\ However, engagement 
partner review of workpapers is a critical step to promote audit 
quality. As noted above, firms have varying policies and tools to 
facilitate the review required by the engagement partner.
---------------------------------------------------------------------------

    \144\ See, e.g., In the Matter of Jin Tae Kim, PCAOB Rel. No. 
105-2022-013 (Aug. 16, 2022) and In the Matter of KPMG Assurance and 
Consulting Services LLP and Sagar Pravin Lakhani, PCAOB Rel. No. 
105-2022-033 (Dec. 6, 2022).
---------------------------------------------------------------------------

    One commenter, an academic, referenced academic studies regarding 
engagement partner impacts. The commenter reported that one study using 
data from Taiwan finds evidence that suggests there is variation in the 
quality of engagement partners and that the market responds to 
engagement partner quality.\145\ In addition, the commenter reported 
that a group of studies finds evidence that engagement partners can 
negatively impact audit quality when they do not follow auditing 
standards, such as by not promoting the need for professional 
skepticism, ethical behavior, and continuing education.\146\ The views 
shared by the commenter align with the Board's identification of the 
need to clarify the engagement partner's responsibility to review 
certain audit documentation.
---------------------------------------------------------------------------

    \145\ See, e.g., Daniel Aobdia, Chan-Jane Lin, and Reining 
Petacchi, Capital Market Consequences of Audit Partner Quality, 90 
The Accounting Review 2143 (2015).
    \146\ See, e.g., Sean A. Dennis and Karla M. Johnstone, A Field 
Survey of Contemporary Brainstorming Practices, 30 Accounting 
Horizons 449 (2016); Harding and Trotman, The Effect of Partner 111; 
Christopher Koch and Steven E. Salterio, The Effects of Auditor 
Affinity for Client and Perceived Client Pressure on Auditor 
Proposed Adjustments, 92 The Accounting Review 117 (2017); and 
William F. Messier, Jr. and Martin Schmidt, Offsetting 
Misstatements: The Effect of Misstatement Distribution, Quantitative 
Materiality, and Client Pressure on Auditors' Judgments, 93 The 
Accounting Review 335 (2018).
---------------------------------------------------------------------------

iii. Accelerating the Documentation Completion Date
    The discussion above emphasizes the importance of adequate audit 
documentation and the auditor's responsibilities for documentation 
under AS 1215, which currently specifies an audit documentation 
completion date no more than 45 days after the report release date. 
PCAOB standards require auditors to complete all necessary auditing 
procedures, review those procedures, and obtain sufficient appropriate 
audit evidence prior to the report release date. The extant 
requirements were established in part because documentation that is 
added well after the completion of an audit is likely to be of lesser 
quality than documentation produced contemporaneously when audit 
procedures are performed because reconstructing and recalling 
activities related to performing audit procedures long after the work 
was actually performed can be difficult.\147\ Separately, significant 
advancements in electronic audit tools and the use of audit software 
have occurred over the last two decades, which facilitate 
contemporaneous documentation and more timely documentation completion. 
Based on these observations and some firms' policies and practices 
summarized above, the current documentation completion date that is 45 
days after the report release date may provide more time than necessary 
to complete and finalize the audit documentation.
---------------------------------------------------------------------------

    \147\ See PCAOB Rel. No. 2004-006.
---------------------------------------------------------------------------

    The PCAOB inspection process generally cannot begin until after the 
documentation completion date. In cases where the PCAOB would like to 
initiate inspections earlier, the 45-day period imposes an 
unnecessarily long lag before the PCAOB can provide notice of 
inspection and obtain access to audit documentation, which may prevent 
timely identification and resolution of audit deficiencies and delay 
information on firm performance that is useful to investors for 
assessing attributes such as audit quality or auditor effort.\148\
---------------------------------------------------------------------------

    \148\ See, e.g., Jagan Krishnan, Jayanthi Krishnan, and Hakjoon 
Song, PCAOB International Inspections and Audit Quality, 92 The 
Accounting Review 143 (2017) (finding evidence consistent with 
improvements in audit quality for foreign firms after PCAOB 
inspections) and Daniel Aobdia, The Impact of the PCAOB Individual 
Engagement Inspection Process--Preliminary Evidence, 93 The 
Accounting Review 53 (2018) (finding increases in auditor effort 
subsequent to deficiencies found through PCAOB inspections). The 
Board notes that the results from these studies do not necessarily 
mean that PCAOB inspections cause higher audit quality.
---------------------------------------------------------------------------

    As discussed in the Board's proposal, the 45-day period also may 
pose a greater risk of improper alteration of audit documentation 
because it provides a lengthy window of opportunity between the release 
of the audit report and the completion of the audit documentation.\149\
---------------------------------------------------------------------------

    \149\ For examples of improper alteration of audit documentation 
within the 45-day archiving period, see, e.g., In the Matter of 
Deloitte LLP, PCAOB Rel. No. 105-2021-014 (Sept. 29, 2021) and In 
the Matter of Richard J. Bertuglia, CPA, SEC Rel. No. 84419 (Oct. 
12, 2018).
---------------------------------------------------------------------------

    The Board did not receive comments that provided additional 
information regarding the need to accelerate the documentation 
completion date.
2. How the Changes Address the Need
i. Modernization of the Foundational Standards
    The changes modernize the foundational standards by reorganizing 
and consolidating four standards, eliminating language that is no 
longer relevant, establishing conformity with the structure of Board-
issued standards, and harmonizing with PCAOB standards and rules issued 
after the adoption of interim standards in 2003. These changes are 
designed to make AS 1000 a more effective and efficiently used standard 
through a well-organized presentation with relevant language that is 
more consistent with other PCAOB standards.
ii. Clarification of Engagement Partner Responsibilities
    The changes clarify engagement partner responsibilities by 
specifying the engagement partner's due professional care 
responsibilities, explicitly stating that the engagement partner has 
primary responsibility for the engagement that is not reduced when 
assistance is provided by other engagement team members, and explicitly 
stating that audit documentation must clearly demonstrate the person or 
persons who reviewed the work and the date of such review. 
Clarification of the engagement partner's responsibility to review 
certain audit documentation--including review of documentation of 
significant findings or issues and review of documentation that is 
required to be reviewed by the EQR--reaffirms the existing minimum 
level of responsibilities under due

[[Page 49761]]

professional care and promotes consistency across audits regarding an 
engagement partner's oversight of the audit.
iii. Accelerating the Documentation Completion Date
    The changes accelerate the documentation completion date by 
reducing the maximum period for the auditor to assemble a complete and 
final set of audit documentation from 45 days to 14 days after the 
report release date. This change enables PCAOB inspections staff 
earlier access to audit documentation and reduces the window of 
opportunity for improper alteration of audit documentation prior to the 
documentation completion date.

C. Economic Impacts

    This section discusses the expected benefits and costs of the 
changes and potential unintended consequences. The proposal described 
expected benefits and costs, resulting in comments on each.\150\ Two 
commenters on the proposal noted that the changes will not result in 
any significant additional costs to auditors or the companies they 
audit or in any significant benefits to market participants. Some 
commenters suggested that the economic analysis should more carefully 
consider potential costs or unintended consequences associated with 
certain key provisions, as discussed further below. The Board expects 
the economic impacts of AS 1000, including both benefits and costs, to 
be relatively modest, especially for those firms that have already 
incorporated in practice an engagement partner's responsibility for 
review and an accelerated documentation completion date.
---------------------------------------------------------------------------

    \150\ See PCAOB Rel. No. 2023-001, at 45-50.
---------------------------------------------------------------------------

1. Benefits
i. Modernization of the Foundational Standards
    To the extent that current features of the existing foundational 
standards reduce efficient use of the standards, the changes will help 
enhance useability by making the general principles and 
responsibilities of the auditor in conducting an audit in accordance 
with the standards of the PCAOB easier to read, understand, and apply 
in practice.
    For users trying to navigate and understand the general principles 
and responsibilities, efficiency gains may be associated with each of 
the changes as follows:
     The change to reorganize and consolidate the standards 
into a single standard will reduce time and attention required to 
navigate several standards to locate the general principles and ensure 
relevant requirements are met.
     The changes to eliminate language that is no longer 
relevant will reduce time and attention required to read, understand, 
and apply the standard by facilitating a focus on core requirements of 
the standard.
     The changes to establish conformity with the structure of 
Board-issued standards and make certain enhancements will help expedite 
navigation of the requirements and ensure relevant requirements are met 
by: (i) providing more uniformity among the PCAOB standards with an 
introduction and objectives that emphasize the auditor's obligations; 
(ii) updating the articulations of the concepts of due professional 
care, professional skepticism, professional judgment, and reasonable 
assurance; (iii) clarifying auditor responsibilities by expressing the 
requirements using Rule 3101 terms; and (iv) minimizing explanatory 
material that is instead included in the release discussion.
     The changes to harmonize with PCAOB standards and rules 
issued after adoption of the interim standards in 2003 will reduce time 
and attention required to read, understand, and apply the standard by 
drawing attention to: (i) changes to auditing requirements through 
Board-issued standards; (ii) clarifying the meaning of present fairly; 
(iii) an overarching objective for audits of ICFR; and (iv) new rules 
issued by the Board.
    Auditors learning the general principles and responsibilities for 
the first time may do so more quickly and easily, thereby reducing the 
cost of training and potentially facilitating the newer auditor's 
ability to perform PCAOB audits.
    While the obligation of auditors would not change, reaffirming the 
auditor's obligation to protect investors could serve as a reminder. 
Especially to the extent that auditors do not currently fulfill this 
obligation, it may prompt auditors to reflect on a sense of obligation 
to investors and the public that goes beyond their responsibilities to 
a specific company under audit. At the margins, the emphasis on 
investor protection could reinforce support for auditors in 
circumstances where they face decisions that may require them to 
prioritize the interests of the public over their own interests or the 
interests of the company under audit. Further, by highlighting the 
important role auditors play in protecting investors, it could 
underscore the value of the auditing profession to capital markets.
    In addition, a modernized standard may enhance investors' and audit 
committees' awareness and understanding of the auditor's 
responsibilities. Investors could be able to more appropriately assess 
financial statement risk by better understanding the nature and extent 
of auditor responsibilities. Audit committees' oversight of the auditor 
could be enhanced, for example, if enhanced clarity of standards 
facilitates communication between the audit committee and the auditor. 
Referencing academic research, one commenter on the proposal explained 
that the role of the audit committee in ensuring the quality of 
reported financial results requires improved and expanded dialogue 
between the audit committee and the auditor.\151\
---------------------------------------------------------------------------

    \151\ See, e.g., Jeffrey Cohen, Lisa Milici Gaynor, Ganesh 
Krishnamoorthy, and Arnold M. Wright, Auditor Communications with 
the Audit Committee and the Board of Directors: Policy 
Recommendations and Opportunities for Future Research, 21 Accounting 
Horizons 165 (2007).
---------------------------------------------------------------------------

ii. Clarification of Engagement Partner Responsibilities
    To the extent that engagement partners currently do not fulfill 
their responsibilities for an appropriate review of the work of other 
engagement team members as required under the existing standards,\152\ 
the clarification of engagement partner responsibilities could improve 
auditor performance and audit quality by: (i) improving the timeliness 
of the engagement partner's evaluation of significant findings and 
judgments; (ii) enhancing the ability of the engagement partner to 
prevent or detect audit deficiencies; and (iii) facilitating 
improvements in the quality of the work of other engagement team 
members. As summarized above, one commenter referenced academic studies 
that suggest engagement partners can negatively impact audit quality 
when they do not follow auditing standards.
---------------------------------------------------------------------------

    \152\ See, e.g., Jin Tae Kim, PCAOB Rel. No. 105-2022-013 and 
KPMG Assurance and Consulting Services LLP, PCAOB Rel. No. 105-2022-
033.
---------------------------------------------------------------------------

iii. Accelerating the Documentation Completion Date
    The amendment to accelerate the documentation completion date by 
reducing the maximum period for the auditor to assemble a complete and 
final set of audit documentation from 45 days to 14 days after the 
report release date will promote contemporaneous documentation and more 
timely documentation completion. Documentation that is produced 
contemporaneously when audit procedures are performed and then 
completed soon thereafter is likely to provide a more accurate and 
complete

[[Page 49762]]

audit file for the engagement. The amendment will also support PCAOB 
efforts to enhance audit quality via timelier identification and 
potential resolution of audit deficiencies in cases where inspections 
are initiated earlier. In such cases, the amendment could facilitate 
earlier issuance of inspection reports and their availability to 
investors. In addition, the amendment could enhance auditor performance 
and audit quality for firms that do not currently implement best 
practices, but will be more inclined to do so, by proactively focusing 
on sequencing of work, allocation of resources, and other operating 
practices.
    The benefits associated with an accelerated documentation 
completion date are likely to be greater for firms that currently make 
use of the entire 45-day period permitted under current PCAOB standards 
due to current operating circumstances. These firms would need to make 
more adjustments to their sequencing of work and allocation of effort 
to meet the accelerated period. Thus, the concomitant benefits to audit 
quality would therefore be greater. Based on firms' current archiving 
policies and practices summarized above, the benefits associated with 
an accelerated documentation completion date are likely to be higher 
for NAFs than for GNFs in cases where NAFs experience operating 
efficiencies associated with changes in their sequencing of work, 
allocation of resources, and other operating practices to comply with 
the documentation completion date.
    The benefits associated with an accelerated documentation 
completion date will be lower for firms that already either: (i) have a 
policy that requires that documentation be completed in 14 days or 
fewer or (ii) have a policy that is closer to or equal to the current 
45-day period but in practice complete their documentation shortly 
after releasing the audit report. Specifically, the benefits to audit 
quality will be lower for these firms, but the benefits to investors of 
earlier PCAOB inspections will still be achieved in cases where 
inspections are initiated earlier.
    Commenters on the proposal generally agreed that accelerating the 
documentation completion date is feasible for firms and beneficial to 
investors. One commenter suggested the ability to inspect audits sooner 
is a benefit that will not significantly increase costs. Another 
commenter, an academic, suggested there could be market benefits 
associated with earlier inspections if inspection reports are publicly 
available earlier and the content of inspection reports is meaningful. 
The commenter referenced several academic studies that demonstrate 
improvements in audit quality after PCAOB inspections.\153\ The 
commenter reported that one study finds improvements in internal 
control audits after PCAOB inspections \154\ and that another study 
finds increases in auditor effort after PCAOB inspections find audit 
deficiencies.\155\ One commenter questioned whether accelerating the 
documentation completion date would have any meaningful impact on 
inspection timelines. Based on the acceleration of the documentation 
completion date by 31 days, the Board noted that the most an inspection 
report could be accelerated as a result of the accelerated 
documentation completion date is 31 days.
---------------------------------------------------------------------------

    \153\ See, e.g., Krishnan, et al., PCAOB International 
Inspections. The Board notes that the results from these studies do 
not necessarily mean that PCAOB inspections cause higher audit 
quality.
    \154\ See, e.g., Mark L. DeFond and Clive S. Lennox, Do PCAOB 
Inspections Improve the Quality of Internal Control Audits? 55 
Journal of Accounting Research 591 (2017).
    \155\ See, e.g., Aobdia, The Impact of the PCAOB.
---------------------------------------------------------------------------

2. Costs
i. Modernization of the Foundational Standards
    The primary costs of the modernization efforts reflected in the 
standard will be one-time costs to firms for updating references within 
firm methodologies and related guidance to reflect the final standard 
and related amendments. Larger firms that develop their own 
methodologies will update references directly in those methodologies. 
Smaller firms generally purchase methodologies from third-party 
vendors. The implementation costs of the changes may be offset over 
time because a more logical and easy-to-read-and-navigate standard 
could enable auditors to save time reading, understanding, and applying 
the standard. Third parties that refer to PCAOB standards (e.g., in 
textbooks, training, or review materials) will also need to update 
those materials.
    To the extent that auditors are not taking into account PCAOB 
auditing interpretations, as used in paragraph .15 and the related note 
of the standard, those firms will also incur one-time and ongoing costs 
related to methodology and periodic training for PCAOB auditing 
interpretations.
    To the extent that auditors do not currently fulfill their 
obligation to protect investors, auditors who face decisions that 
require them to prioritize the interests of the public over their own 
interests or the interests of the company under audit may make 
decisions that benefit the public at a potential cost to the auditor, 
such as alienating or losing a company under audit. There is likely 
already a balance struck between fulfilling the auditor's obligation to 
protect investors and the risk of alienating or losing a company under 
audit. At the margins, the emphasis on investor protection may move the 
fulcrum closer to the public interest.
    The Board did not receive comments that provided additional 
information regarding costs of modernization.
ii. Clarification of Engagement Partner Responsibilities
    To the extent that engagement partners currently do not fulfill 
their responsibilities for an appropriate review of the work of other 
engagement team members as required under the existing standards,\156\ 
those firms may incur one-time costs to update firm methodologies and 
ongoing costs related to fulfilling their responsibilities. Larger 
firms that develop their own methodologies will update references 
directly in those methodologies. Smaller firms generally purchase 
methodologies from third-party vendors.
---------------------------------------------------------------------------

    \156\ See, e.g., Jin Tae Kim, PCAOB Rel. No. 105-2022-013 and 
KPMG Assurance and Consulting Services LLP, PCAOB Rel. No. 105-2022-
033.
---------------------------------------------------------------------------

    While the responsibilities of engagement partners would not change 
under the new standard, the clarification for engagement partners to 
perform their duties with due professional care, including their 
responsibility for performing an appropriate review of the work of 
other engagement team members, could also impose incremental costs 
related to fulfilling engagement partner responsibilities to the extent 
that engagement partners are not currently fulfilling their 
responsibilities.
    One commenter reported that research highlights the importance of 
and variation in the direction, supervision, and review of audit 
work.\157\ The commenter further noted that direction, supervision, and 
review are functions that are performed by auditors at different levels 
of experience, not just engagement partners, and cited research that 
highlights that the effectiveness of the functions can vary across

[[Page 49763]]

hierarchical levels.\158\ While the Board acknowledged the commenter's 
points regarding the effectiveness of functions performed by auditors 
at different levels of experience, the Board's analysis of costs here 
is limited to costs that are relevant to the economic impacts of the 
clarification of engagement partner responsibilities.
---------------------------------------------------------------------------

    \157\ See, e.g., J.S. Rich, I. Solomon, and K.T. Trotman, The 
Audit Review Process: A Characterization from the Persuasion 
Perspective, 22 Accounting, Organizations & Society 481 (1997) and 
Mark Nelson and Hun-Tong Tan, Judgment and Decision Making Research 
in Auditing: A Task, Person, and Interpersonal Interaction 
Perspective, 24 Auditing: A Journal of Practice & Theory 41 (2005).
    \158\ See, e.g., Robert J. Ramsay, Senior/Manager Differences in 
Audit Workpaper Review Performance, 32 Journal of Accounting 
Research 127 (1994) and Noel Harding and Ken T. Trotman, 
Hierarchical Differences in Audit Workpaper Review Performance, 16 
Contemporary Accounting Research 671 (1999).
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iii. Accelerating the Documentation Completion Date
    The amendment to accelerate the documentation completion date by 
reducing the maximum period for the auditor to assemble a complete and 
final set of audit documentation from 45 days to 14 days after the 
report release date will allow less time to assemble the final set of 
workpapers after the audit report is released. However, the PCAOB 
requirement to complete necessary auditing procedures, review those 
procedures, and collect sufficient appropriate audit evidence prior to 
the report release date could help mitigate costs to implement the 
amendment because the only activities that remain are assembling a 
complete and final set of audit documentation. In addition, the 
widespread use of electronic audit tools and audit software could help 
mitigate any costs associated with the amendment.
    The costs associated with an accelerated documentation completion 
date are likely to be greater for firms that currently specify by 
policy an archiving period that is near or equal to the maximum 
permitted under current AS 1215.15 and that currently take all or 
nearly all of the full 45-day period to complete their archiving 
because of operating circumstances that inhibit faster completion. 
These firms will have to invest additional resources to enhance 
sequencing of their work, allocation of resources, and other operating 
practices, or may have to enhance their audit documentation systems, or 
both, in order to comply with the documentation completion date. Based 
on firms' current archiving policies and practices summarized above, 
the costs associated with an accelerated documentation completion date 
are likely to be higher for NAFs than for GNFs in cases where NAFs 
currently use the entire 45-day period. However, the extended effective 
date of the 14-day requirement for firms that issued audit reports with 
respect to 100 or fewer issuers during the calendar year ending 
December 31, 2024, will allow those firms more time to implement the 
revised requirement. By contrast, GNFs that already require the 
completion of documentation within a 14-day period will likely not 
incur substantial additional costs to comply with the revised 
requirement.
    Electronic audit tools and audit software may facilitate compliance 
with the requirement by automating, and thereby performing more 
quickly, certain processes. For firms without electronic systems in 
place, costs associated with an accelerated documentation completion 
date may include additional resources, such as in-house personnel or 
capital investments in audit software, to help assemble a complete and 
final set of audit documentation in the 14-day time period. PCAOB staff 
is aware that some small NAFs still use paper-based systems. However, 
these firms generally perform smaller, less complex audits, such that 
the firms do not have to mail audit workpapers from multiple locations; 
therefore, even with a paper-based system, effective sequencing of 
work, allocation of resources, and other operating practices could 
enable them to meet the 14-day documentation completion date.
    For firms with electronic audit tools and audit software in place, 
the earlier documentation completion date should not change the 
functionality or cost of software, which will facilitate a low-cost 
transition to the new archiving period. Some firms already have 
policies that require documentation completion within 14 days of the 
report release date, and some firms require audit documentation to be 
archive-ready upon completion of interim procedures. These practices 
suggest that much of the process involved in assembling a complete and 
final set of audit documentation, such as assembly, cleanup, and 
retention, is substantially finished in advance of 45 days. Any firms 
that currently have a policy or practice of completing audit 
documentation on or near the 45th day may do so merely because the 
current standard allows 45 days, and thus will not incur costs to meet 
the accelerated documentation completion date. Alternatively, any firms 
that currently complete audit documentation on or near the 45th day 
because of operating circumstances may incur costs associated with 
implementing best practices to effectively sequence work, allocate 
resources, and incorporate other operating practices to comply with the 
accelerated documentation completion date. In this case, the Board 
anticipates that the costs will be offset over time by improvements in 
operating efficiencies to the extent that operating circumstances are 
within the firm's control.
    An accelerated documentation completion date may also impose costs 
on multi-firm audits if electronic audit documentation systems are not 
integrated across firms. GNFs are more likely than NAFs to perform 
multi-firm audits, but some NAFs do perform multi-firm audits.\159\ If 
electronic systems are not integrated across firms, which is more 
likely for NAFs, other auditors may need to transmit documentation to 
the lead auditor to assemble the final set of workpapers. If electronic 
systems are integrated across firms, the lead auditor may be able to 
seamlessly archive the work of other auditors.
---------------------------------------------------------------------------

    \159\ See PCAOB Rel. No. 2022-002, at 26-52.
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    Any costs associated with the requirements may be passed through to 
investors, or costs may be internalized by firms. While competition in 
the audit market is characterized by a combination of unique 
features,\160\ issuers that engage firms that pass through any costs 
may switch firms if the benefits of switching justify the costs of 
switching.
---------------------------------------------------------------------------

    \160\ See, e.g., Joseph Gerakos and Chad Syverson, Competition 
in the Audit Market: Policy Implications, 53 Journal of Accounting 
Research 725 (2015) (explaining that the audit market exhibits a set 
of features that distinguish it from other markets for business 
services, including its role in capital market transparency, 
mandated demand, and concentrated supply).
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    Some commenters noted potential costs associated with accelerating 
the documentation completion date. One commenter generally supported 
accelerating the documentation completion date but noted that firms 
that use proprietary audit tools and audit software will incur costs 
related to reprogramming and testing that could be exacerbated for GNFs 
that are subject to differing jurisdictional requirements. The same 
commenter also noted that accelerating the documentation completion 
date may negatively impact smaller firms that do not utilize electronic 
audit tools to the extent that they are unable to comply with the 
requirement without considerable investments that may not be 
economically feasible. Another commenter disagreed with accelerating 
the date because of human capital factors and a complex auditing 
landscape. Another commenter reported that academic research 
investigating the SEC's acceleration of Form 10-K filing deadlines in 
the 2000s suggests that accelerating the filing deadlines more

[[Page 49764]]

quickly than 15 days was costly to issuers regarding misstated 
financial statements.\161\ The commenter acknowledged the analogy may 
not align with the documentation completion date but suggested that it 
is likely that firms currently requiring more than 29 days to complete 
audit documentation will likely incur non-trivial compliance costs.
---------------------------------------------------------------------------

    \161\ See, e.g., Lisa Bryant-Kutcher, Emma Yan Peng, and David 
P. Weber, Regulating the Timing of Disclosure: Insights from the 
Acceleration of 10-K Filing Deadlines, 32 Journal of Accounting and 
Public Policy 475 (2013); Colleen M. Boland, Scott N. Bronson, and 
Chris E. Hogan, Accelerated Filing Deadlines, Internal Controls, and 
Financial Statement Quality: The Case of Originating Misstatements, 
29 Accounting Horizons 551 (2015); and Khaled Alsabah, The 15-Day 
Debate and the Value of Early Release of Information: Evidence from 
10-K Filings, 42 Journal of Accounting and Public Policy 1 (2023).
---------------------------------------------------------------------------

    The Board acknowledged that firms that use proprietary audit tools 
and audit software will incur costs related to reprogramming and 
testing. While the Board also acknowledged that some smaller firms may 
incur costs related to investments and some firms may incur costs 
related to human capital or a complex auditing landscape, the Board 
believes that most firms will incur incremental costs because they 
already use electronic audit documentation systems. Likewise, the Board 
believes the contrast between the SEC's acceleration of Form 10-K 
reporting deadlines and the Board's acceleration of the documentation 
completion date is too stark to be a useful comparison because the 
auditing standards require that all necessary auditing procedures, 
review of those procedures, and collection of sufficient appropriate 
audit evidence be completed prior to the report release date. Based on 
the broad support by commenters for accelerating the documentation 
completion date and the existing requirement that all necessary 
auditing procedures, review of those procedures, and collection of 
sufficient appropriate audit evidence be completed prior to the report 
release date, the Board continues to believe that accelerating the 
documentation completion date by reducing the maximum period for the 
auditor to assemble a complete and final set of audit documentation 
from 45 days to 14 days after the report release date will provide 
better protection for investors.
    One commenter suggested that keeping the 35-day filing requirement 
for Form AP in light of accelerating the documentation completion date 
could create technological and process challenges for firms. Another 
commenter suggested that firms could incur incremental costs such as 
process changes and administrative costs. In contrast, some commenters 
said they would not have difficulty filing Form AP within 35 days of 
the audit report being filed with the SEC. Two commenters suggested the 
time to file Form AP should be consistent with the documentation 
completion date. The Board adopted the 14-day deadline for archiving 
audit documentation. The Board noted that firms, under AS 1215, can add 
information to the audit documentation after the documentation 
completion date, if necessary, to record their compliance with Form AP 
requirements. Consequently, the Board does not perceive any conflict or 
a necessity to modify either the 35-day Form AP filing requirement or 
the proposed 14-day deadline for archiving audit documentation.
3. Potential Unintended Consequences
    In addition to the benefits and costs discussed above, the final 
standard and related amendments could have unintended economic 
consequences. The proposal described potential unintended consequences, 
which commenters addressed in their letters.\162\ This section 
discusses the potential unintended consequences the Board considered as 
well as its consideration of such consequences in adopting the final 
standard and related amendments. The discussion also addresses, where 
applicable, any mitigating or countervailing factors, including 
revisions to the proposed standard and related amendments reflected in 
the final standard and related amendments the Board adopted.
---------------------------------------------------------------------------

    \162\ See PCAOB Rel. No. 2023-001, at 50-51.
---------------------------------------------------------------------------

i. Modernization of the Foundational Standards
    The changes to modernize the foundational standards are not 
intended to impose new requirements on auditors or substantially change 
the requirements of PCAOB standards.
    Commenters noted potential unintended consequences related to the 
removal of explanatory language or the use of certain language in the 
proposed rule text or release discussion. Several commenters suggested 
that removing explanatory language on limitations of an audit may 
exacerbate the audit expectation gap and cause potential confusion 
among auditors. Commenters also suggested that the use of certain 
proposed language or certain proposed clarifications could result in 
potential confusion or unintended expansion of auditors' 
responsibilities. For example, one commenter suggested that requiring 
auditors to ``keep in mind their role in protecting investors'' could 
encourage auditors to adopt an investor perspective when making 
judgments, which research highlights may be detrimental to audit 
quality.\163\
---------------------------------------------------------------------------

    \163\ See, e.g., Elizabeth C. Altiero, Yoon Ju Kang, and Mark E. 
Peecher, Motivated Perspective Taking: Why Prompting Auditors to 
Take an Investor's Perspective Makes Them Treat Identified Audit 
Differences as Less Material, 39 Contemporary Accounting Research 
339 (2022) and Lei Dong, Lei Wang, and Wen-Wen Chien, The Joint 
Effect of Supervisor Influence and Investor Perspective: Unintended 
Consequences on Assessing Accounting Estimates, 37 Managerial 
Auditing Journal 151 (2022).
---------------------------------------------------------------------------

    These potential unintended consequences will be mitigated by 
changes to language in the adopted rule text or release discussion. 
Throughout the rulemaking process, the Board emphasized that 
eliminating restrictive provisions does not alter the core principles 
and responsibilities that are transitioned from the current standards 
to AS 1000. The Board removed the reference to ``keep in mind their 
role in protecting investors'' from the final standard based on changes 
made to paragraph .01 of the final standard. While the Board emphasized 
the investor protection obligation, the Board clarified that the 
emphasis does not create any new legal requirements. The Board does not 
believe that highlighting the auditor's existing obligation to protect 
investors will widen any expectation gap or decrease audit quality. 
Instead, the Board's goal was to heighten auditors' awareness and 
reinforce their existing obligation.
ii. Clarification of Engagement Partner Responsibilities
    An unintended consequence of the amendment to clarify engagement 
partner responsibilities would occur if, contrary to the Board's 
expectation, some firms whose engagement partners currently do more 
than will be required to meet the minimum requirement for engagement 
partner review, do less in the future to merely meet the minimum 
requirement.\164\
---------------------------------------------------------------------------

    \164\ See, e.g., Aobdia, The Impact of the PCAOB (finding that 
auditor effort declines subsequent to PCAOB inspections of 
engagements that do not receive a Part I finding).
---------------------------------------------------------------------------

    This potential unintended consequence will be mitigated by the 
extent to which engagement partners are aware that the engagement's 
performance is primarily their responsibility. Furthermore, in contrast 
to a highly specific minimum threshold, the Board noted that engagement 
partners under AS 1000 are bound to broad due professional care 
responsibilities that are less likely to incentivize engagement 
partners to merely meet a precise set of criteria

[[Page 49765]]

without exceeding those criteria. In addition, economic reasons that 
generate enhanced performance in the first place, such as partner 
compensation, inspections, and litigation threat, help to mitigate this 
potential unintended consequence.
    One commenter suggested that the amendment to clarify engagement 
partner responsibilities is reasonable and clear but could present 
unintended consequences by limiting firms' abilities to attract and 
retain talent, which could potentially result in lower audit quality if 
people leave the profession. The Board anticipates that the amendments 
related to engagement partner responsibilities will be unlikely to 
significantly affect firms' abilities to attract or retain talent, or 
to disincentivize individuals from being willing to serve as engagement 
partners because AS 1000 clarifies existing engagement partner 
responsibilities. As outlined in the rest of the economic analysis, the 
Board acknowledges that some marginal economic impacts could follow 
from these amendments, but does not agree with the commenter that those 
effects will be dramatic.
iii. Accelerating the Documentation Completion Date
    Unintended consequences of accelerating the documentation 
completion date would occur if, contrary to the Board's expectation, 
(i) auditor time prior to the report release date that was previously 
spent focusing on audit procedures is now spent on assembling final 
workpapers or (ii) the archiving period results in higher costs that 
cause firms with paper-based documentation systems to exit the audit 
market or to not enter the audit market.
    These potential unintended consequences will be mitigated by the 
current requirement that all necessary auditing procedures, review of 
those procedures, and collection of sufficient appropriate audit 
evidence be completed prior to the report release date.\165\ 
Furthermore, if firms proactively sequence work, allocate resources, 
and incorporate other operating efficiencies, they should not 
experience substantial disruptions and should be able to handle the 
accelerated archiving deadline without major problems.
---------------------------------------------------------------------------

    \165\ See AS 1215.15.
---------------------------------------------------------------------------

    One commenter acknowledged that accelerating the documentation 
completion date may enhance audit quality overall but suggested that it 
could have an initial negative impact on audit quality as a result of 
accelerating the archiving process into the period when many SEC 
practice audit professionals need to start working on other issuer 
audit engagements. Another commenter also acknowledged that 
accelerating the documentation completion date may enhance audit 
quality and said it may allow PCAOB inspections to begin sooner after 
completion of an audit, but issuers may have various filing deadlines 
or require extensions that will necessitate the full attention of 
professionals on those engagements. One commenter acknowledged that the 
acceleration is beneficial and appropriate, but suggested that 
beginning the inspection process earlier could be detrimental to audit 
quality because earlier inspections could cause auditors to reallocate 
their time to the inspection process and away from audits of financial 
statements. Consistent with the acknowledgements by these commenters, 
the Board continues to believe that accelerating the documentation 
completion date will be facilitated by the widespread use of electronic 
audit tools and audit software by most firms, which could mitigate 
potential operating disruptions that firms experience as they adjust to 
the accelerated date.
    One commenter stressed the importance of the quality of audit 
documentation and noted that technology interruptions or cybersecurity 
matters could impact the ability of a firm to meet the accelerated 
deadline. However, the possibility of technology interruptions or 
cybersecurity matters could impact a firm's ability to meet any 
deadline. Another commenter reported that academic studies find there 
can be unintended consequences of additional regulation, including new 
costs associated with extensive audit documentation, auditors taking a 
``box-ticking'' approach to extensive documentation requirements, and 
reduced auditor retention.\166\ However, accelerating the documentation 
completion date does not add any new documentation requirements.
---------------------------------------------------------------------------

    \166\ See, e.g., Colleen M. Boland, Brian E. Daugherty, and 
Denise Dickins, Evidence of the Relationship between PCAOB 
Inspection Outcomes and the Use of Structured Audit Technologies, 38 
Auditing: A Journal of Practice & Theory 57 (2019) and Marion 
Brivot, M[eacute]lanie Roussy, and Maryse Mayer, Conventions of 
Audit Quality: The Perspective of Public and Private Company Audit 
Partners, 37 Auditing: A Journal of Practice & Theory 51 (2018).
---------------------------------------------------------------------------

D. Alternatives Considered

    During the formulation of the proposal and adoption of the final 
standard and related amendments, the Board considered a number of 
alternative approaches to the final standard and related amendments the 
Board adopted, including those suggested by commenters.
1. Modernization of the Foundational Standards
    The Board considered whether to update the foundational standards 
and keep them as individual standards, but the Board believes that 
combining the general principles and responsibilities into one standard 
is more logical and easier to navigate. This approach is also 
consistent with the approaches of other standard setters. For example, 
both the IAASB and the ASB address general responsibilities of the 
auditor in one standard (see IAASB's ISA 200 and ASB's AU-C 200).
    The Board also considered whether to incorporate the requirements 
of AS 2815 into AS 1000, but believes that it is more logical to 
incorporate the requirements of AS 2815 into AS 2810 because both 
standards address requirements for concluding audit procedures. This 
approach also eliminates unnecessary cross-references between the two 
standards and makes the auditor's responsibilities easier to locate. AS 
1000 includes a reference to AS 2810 for the auditor's responsibilities 
related to the evaluation of whether the financial statements are 
presented fairly, in all material respects, in conformity with the 
applicable financial reporting framework.
2. Clarification of Engagement Partner Responsibilities
    With respect to engagement partner responsibilities, the Board 
considered retaining the language of AS 1010 that describes the use of 
judgment in the context of the partner's responsibilities for 
supervision. However, the Board believes that leveraging the 
requirements of AS 1201, a more recent standard, avoids potential 
confusion and aligns the engagement partner's responsibilities with 
Board-issued standards. Other alternatives to the amendments related to 
engagement partner responsibilities, including comments received, were 
considered as discussed above.
3. Accelerating the Documentation Completion Date
    For the documentation completion date, the Board considered a 
length of time between the current 45-day period and the 14-day period, 
such as 21 days or 30 days. The Board believes that a shorter period of 
time may provide better protection for investors than a longer period: 
it could permit acceleration of PCAOB inspections and provide the 
strongest incentives for

[[Page 49766]]

firms to implement operating efficiencies that may ultimately improve 
audit quality. Thus, in principle, a shorter documentation completion 
date could achieve more benefits than a longer period. The Board's 
assessment of existing firm practice as described above led it to 
believe that 14 days is feasible for firms and that a longer period 
could therefore be unnecessary and would erode the benefits that would 
otherwise be achieved.
    Investor-related groups suggested the documentation completion date 
should be reduced to two days for all firms. The Board continues to 
believe 14 days is feasible for all firms while not being too 
restrictive for firms that may require more time. Another commenter 
asserted that the economic analysis did not adequately consider 
alternatives other than 14 days and that the analysis did not offer any 
alternatives to begin inspections earlier other than accelerating the 
documentation completion date. As noted above, the Board considered a 
length of time between the current 45-day period and the 14-day period. 
Moreover, the need to accelerate the documentation completion date is 
based on other considerations in addition to cases where the PCAOB 
would like to initiate inspections earlier. Another commenter asserted 
that firms' operating efficiencies are not the purview of the PCAOB. 
However, the need for the amendment is not based on operating 
efficiencies but may result in operating efficiencies that improve 
audit quality.
    The Board also considered whether to specify different 
documentation completion dates for different classes of firms, based on 
specific firm characteristics that may make compliance with an 
accelerated documentation completion date especially challenging 
because of some practical obstacle or because of expenses that are 
common to that class of firms. For example, the Board considered 
specifying a longer documentation completion date for NAFs than for 
GNFs. However, as noted above, the Board believes that the 14-day 
period is a feasible period for all firms; the Board is not aware of 
any practical obstacle or expenses that will make compliance with a 14-
day period especially challenging for all firms within a particular 
class. In contrast, a uniform and consistent archiving period for all 
firms would facilitate implementation and compliance, especially for 
audits that involve multiple firms that could be subject to different 
archiving periods. Finally, having a unified archiving date will enable 
earlier PCAOB inspections across all registered firms.\167\
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    \167\ While the Board has not specified different documentation 
completion dates for different classes of firms, the extended 
effective date of the 14-day requirement for firms that issued audit 
reports with respect to 100 or fewer issuers during the calendar 
year ending December 31, 2024, will allow those firms more time to 
implement the revised requirement.
---------------------------------------------------------------------------

Special Considerations for Audits of Emerging Growth Companies

    Pursuant to Section 104 of the Jumpstart Our Business Startups 
(``JOBS'') Act, rules adopted by the Board subsequent to April 5, 2012, 
generally do not apply to the audits of emerging growth companies 
(``EGCs''), as defined in Section 3(a)(80) of the Exchange Act, 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.'' \168\ As a 
result of the JOBS Act, the rules and related amendments to PCAOB 
standards that the Board adopts are generally subject to a separate 
determination by the SEC regarding their applicability to audits of 
EGCs.\169\
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    \168\ See Public Law 112-106 (Apr. 5, 2012). Section 
103(a)(3)(C) of Sarbanes-Oxley, as added by Section 104 of the JOBS 
Act, also provides that any rules of the Board requiring (1) 
mandatory audit firm rotation or (2) a supplement to the auditor's 
report in which the auditor would be required to provide additional 
information about the audit and the financial statements of the 
issuer (auditor discussion and analysis) shall not apply to an audit 
of an EGC. The new standard does not fall within either of these two 
categories.
    \169\ The Board provided this analysis of the impact on EGCs to 
assist the SEC in making the determination required under Section 
104 to the extent that the requirements apply to ``the audit of any 
emerging growth company'' within the meaning of Section 104 of the 
JOBS Act.
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    To inform consideration of the application of auditing standards to 
audits of EGCs, PCAOB staff prepares a white paper annually that 
provides general information about characteristics of EGCs.\170\ As of 
the November 15, 2022 measurement date, there were 3,031 companies 
\171\ that self-identified as EGCs and filed audited financial 
statements with the SEC between May 16, 2021, and November 15, 2022, 
that included an audit report signed by a firm.\172\
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    \170\ See PCAOB, Characteristics of Emerging Growth Companies 
and Their Audit Firms at November 15, 2022 (Feb. 20, 2024) (``EGC 
White Paper''), available at https://assets.pcaobus.org/pcaob-dev/docs/default-source/economicandriskanalysis/projectsother/documents/white-paper-on-characteristics-of-emerging-growth-companies-as-of-nov-15-2022.pdf?sfvrsn=a8294f3_2.
    \171\ The EGC White Paper uses a lagging 18-month window to 
identify companies as EGCs. Please refer to the ``Current 
Methodology'' section in the EGC White Paper for details. Using an 
18-month window enables staff to analyze the characteristics of a 
fuller population in the EGC White Paper but may tend to result in a 
larger number of EGCs being included for purposes of the present EGC 
analysis than would alternative methodologies. For example, an 
estimate using a lagging 12-month window would exclude some EGCs 
that are delinquent in making periodic filings. An estimate as of 
the measurement date would exclude EGCs that have terminated their 
registration or that have exceeded the eligibility or time limits.
    \172\ See EGC White Paper 17. Based on staff analysis as of the 
Nov. 15, 2022 measurement date, 86 percent of the 263 firms that 
issued audit reports for EGCs performed audits for both EGC and non-
EGC issuers while 14 percent performed issuer audits only for EGCs.
---------------------------------------------------------------------------

    As discussed in the proposal, the economic impacts of the standard 
and related amendments are generally applicable to audits of EGCs.\173\ 
The amendment to accelerate the documentation completion date by 
reducing the maximum period for the auditor to assemble a complete and 
final set of audit documentation from 45 days to 14 days could impact 
the audits of EGCs more than the audits of non-EGCs to the extent that 
EGCs are more likely than non-EGCs to be audited by NAFs.\174\ As 
discussed above, NAFs are expected to require more changes than GNFs in 
their sequencing of work, allocation of resources, and other operating 
practices to comply with the accelerated documentation completion date. 
Therefore, all else equal, both the benefits and costs of the 
amendments, including the amendment to accelerate the documentation 
completion date, may be higher for EGC audits than for non-EGC audits.
---------------------------------------------------------------------------

    \173\ See PCAOB Rel. No. 2023-001, at 52-54.
    \174\ PCAOB staff analysis indicates that, compared to exchange-
listed non-EGCs, exchange-listed EGCs are approximately 2.6 times as 
likely to be audited by an NAF (source: EGC White Paper and Standard 
& Poor's).
---------------------------------------------------------------------------

    While both the benefits and costs of the amendment to accelerate 
the documentation completion date may be higher for EGC audits, the 
costs may be mitigated based on certain characteristics of EGCs. For 
example, to the extent that EGCs are smaller than non-EGCs, EGC audits 
may be less complex, which potentially facilitates expeditious assembly 
of the final workpapers.\175\ In addition, to the extent that EGCs are 
audited by firms that issued audit reports with respect to 100 or fewer 
issuers during the calendar year ending December 31, 2024, the extended 
effective date of the amendment to accelerate the documentation 
completion date will allow those firms more time to

[[Page 49767]]

implement the accelerated documentation completion date.\176\ Moreover, 
as EGCs are not large accelerated filers (``LAFs''), the SEC Form 10-K 
filing deadline for EGCs is either 75 days after the fiscal year end 
for accelerated filers or 90 days for non-accelerated filers. This 
provides firms with an additional 15 days for accelerated filers or 30 
days for non-accelerated filers, as compared to the time period for 
LAFs, to assemble the required final workpapers during a period that 
may be proportionately less busy.
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    \175\ See EGC White Paper, Figure 9 and Figure 12 (indicating 
that exchange-listed EGCs have lower market capitalization and 
revenue than exchange-listed non-EGCs).
    \176\ See EGC White Paper 22. Based on staff analysis as of the 
Nov. 15, 2022 measurement date, U.S. firms audited 2,548 EGCs, of 
which 817 were audited by firms that issued audit reports for 100 or 
fewer issuer audit clients.
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    The amendment to accelerate the documentation completion date could 
improve efficiency and capital formation for EGCs to the extent that 
the amendment reduces uncertainty about the reliability of an EGC's 
financial statements via enhanced audit quality. Investors who are 
uncertain about the reliability of an EGC's financial statements may 
require a larger risk premium that reduces the efficient allocation of 
capital or increases the cost of capital. Thus, any reduction of 
uncertainty via enhanced audit quality, including from firms' 
implementation of operating efficiencies, could improve the efficiency 
of capital allocation, lower the cost of capital, and enhance capital 
formation for those EGCs.
    The amendment to accelerate the documentation completion date could 
also impact competition in an EGC product market if any indirect costs 
to audited companies disproportionately affect EGCs relative to their 
competitors. For example, if EGCs are forced to raise prices in order 
to remain viable but their non-EGC competitors are not forced to raise 
prices, this may divert market share toward their non-EGC competitors. 
This could increase competition in markets where EGCs have a dominant 
market share and decrease competition in markets where EGCs have a less 
than dominant market share. However, the incentives for firms to pass 
costs onto EGCs may also be limited by competition for audits.
    The proposal sought comments on the applicability of the proposed 
requirements to audits of EGCs. Several commenters agreed that the 
requirements of AS 1000 should apply to the audits of EGCs. One 
commenter suggested that the audits of EGCs should be subject to 
stricter requirements because non-accelerated filers have a higher 
incidence of restatements and because small capitalization issuers have 
a higher proportion of equity owned by individual investors but less 
coverage by sell-side analysts.\177\ However, the Board continues to 
believe the same standard and related amendments should apply to audits 
of EGCs and non-EGCs to avoid the potential for confusion that could 
accompany differences within firms' policies and procedures with 
respect to audits of EGCs and non-EGCs.
---------------------------------------------------------------------------

    \177\ See, e.g., Audit Analytics, 2021 Financial Restatements: A 
Twenty-One Year Review (May 2022) and Garnet Roach, Only Small Caps 
See Minority of Shares Held by Institutions, Research Shows, IR 
Magazine (Jan. 18, 2022).
---------------------------------------------------------------------------

    Accordingly, and for the reasons explained above, the Board has 
requested that the Commission 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 the standard and related amendments to 
audits of EGCs.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Board consents, the Commission will:
    (A) By order approve or disapprove such proposed rules; or
    (B) Institute proceedings to determine whether the proposed rules 
should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed 
rules are consistent with the requirements of Title I of the Act. 
Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/pcaob); or
     Send an email to [email protected]. Please include 
PCAOB-2024-01 on the subject line.

Paper Comments

     Send paper comments in triplicate to Vanessa A. 
Countryman, Secretary, Securities and Exchange Commission, 100 F Street 
NE, Washington, DC 20549-1090.

All submissions should refer to PCAOB-2024-01. 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 website (https://www.sec.gov/rules/pcaob). 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 website viewing and printing in the Commission's 
Public Reference Room, 100 F Street NE, Washington, DC 20549, on 
official business days between the hours of 10 a.m. and 3 p.m. Copies 
of such filing will also be available for inspection and copying at the 
principal office of the PCAOB. Do not include personal identifiable 
information in submissions; you should submit only information that you 
wish to make available publicly. We may redact in part or withhold 
entirely from publication submitted material that is obscene or subject 
to copyright protection. All submissions should refer to PCAOB-2024-01 
and should be submitted on or before July 2, 2024.

    For the Commission, by the Office of the Chief Accountant.\178\
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    \178\ 17 CFR 200.30-11(b)(1) and (3).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-12691 Filed 6-10-24; 8:45 am]
BILLING CODE 8011-01-P