[Federal Register Volume 84, Number 65 (Thursday, April 4, 2019)]
[Notices]
[Pages 13442-13484]
[FR Doc No: 2019-06425]

Vol. 84

Thursday,

No. 65

April 4, 2019

Part III

Securities and Exchange Commission

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Public Company Accounting Oversight Board; Notice of Filing of Proposed
Rules on Amendments to Auditing Standards for Auditor's Use of the Work
of Specialists; Notice

Federal Register / Vol. 84 , No. 65 / Thursday, April 4, 2019 /
Notices

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85435; File No. PCAOB-2019-03]

Public Company Accounting Oversight Board; Notice of Filing of
Proposed Rules on Amendments to Auditing Standards for Auditor's Use of
the Work of Specialists

March 28, 2019.
    Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 (the
``Act'' or ``Sarbanes-Oxley Act''), notice is hereby given that on
March 20, 2019, the Public Company Accounting Oversight Board (the
``Board'' or ``PCAOB'') filed with the Securities and Exchange
Commission (the ``Commission'' or ``SEC'') the proposed rules described
in Items I and II below, which items have been prepared by the Board.
The Commission is publishing this notice to solicit comments on the
proposed rules from interested persons.

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

    On December 20, 2018, the Board adopted amendments to auditing
standards for using the work of specialists (collectively, the
``proposed rules''), including amendments to two existing auditing
standards and the retitling and replacement of a third standard with an
updated standard. 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/Rulemaking/Pages/docket-044-auditors-use-work-specialists.aspx 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, pursuant to Section
103(a)(3)(C) of the Sarbanes-Oxley Act, the Commission approve the
proposed rules for application to audits of emerging growth companies
(``EGCs'').\1\ The Board's request is set forth in section D.
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    \1\ The term ``emerging growth company'' is defined in Section
3(a)(80) of the Securities Exchange Act of 1934 (the ``Exchange
Act'') (15 U.S.C. 78c(a)(80)). See also Inflation Adjustments and
Other Technical Amendments Under Titles I and III of the JOBS Act,
Release No. 33-10332 (Mar. 31, 2017), 82 FR 17545 (Apr. 12, 2017).
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A. Board's Statement of the Purpose of, and Statutory Basis for, the
Proposed Rules

(a) Purpose
Summary
    The Board has adopted amendments to its standards for using the
work of specialists (i.e., a person or firm possessing special skill or
knowledge in a particular field other than accounting or auditing),
including amendments to two existing auditing standards and the
retitling and replacement of a third standard with an updated standard.
The amendments are intended to enhance investor protection by
strengthening the requirements for evaluating the work of a company's
specialist, whether employed or engaged by the company, and applying a
supervisory approach to both auditor-employed and auditor-engaged
specialists. The amendments are also designed to be risk-based and
scalable, so that the auditor's work effort to evaluate the
specialist's work is commensurate with the risk of material
misstatement associated with the financial statement assertion to which
the specialist's work relates and the significance of the specialist's
work to that assertion. These amendments should lead to more uniformly
rigorous practices among audit firms of all sizes and enhance audit
quality and the credibility of information provided in financial
statements.
    Companies across many industries use specialists to assist in
developing accounting estimates in their financial statements.
Companies may also use specialists to interpret laws, regulations, and
contracts or to evaluate the characteristics of certain physical
assets. Those companies may use a variety of specialists, including
actuaries, appraisers, other valuation specialists, legal specialists,
environmental engineers, and petroleum engineers. Auditors often use
the work of these companies' specialists as audit evidence.
Additionally, auditors frequently use the work of auditors' specialists
to assist in their evaluation of significant accounts and disclosures,
including accounting estimates in those accounts and disclosures.
    As financial reporting frameworks continue to evolve and require
greater use of estimates, including those based on fair value
measurements, accounting estimates have become both more prevalent and
significant. As a result, the use of the work of specialists also
continues to increase in both frequency and significance. If a
specialist's work is not properly overseen or evaluated by the auditor,
there may be a heightened risk that the auditor's work will not be
sufficient to detect a material misstatement in accounting estimates.
    To address this challenge, the Board has adopted amendments to its
auditing standards that primarily relate to auditors' use of the work
of specialists. First, AS 1105, Audit Evidence, is being amended to add
a new Appendix A that addresses using the work of a company's
specialist as audit evidence, based on the risk-based approach of the
risk assessment standards.
New Appendix A of AS 1105
     Supplements the requirements in AS 1105 for circumstances
when the auditor uses the work of the company's specialist as audit
evidence, including requirements related to:
     Obtaining an understanding of the work and report(s), or
equivalent communication, of the company's specialist(s) and related
company processes and controls;
     Obtaining an understanding of, and assessing, the
knowledge, skill, and ability of a company's specialist and the entity
that employs the specialist (if other than the company) and the
relationship to the company of the specialist and the entity that
employs the specialist (if other than the company); and
     Performing procedures to evaluate the work of a company's
specialist, including evaluating: (i) The data, significant
assumptions, and methods (which may include models) used by the
specialist, and (ii) the relevance and reliability of the specialist's
work and its relationship to the relevant assertion.
     Aligns the requirements for using the work of a company's
specialist with the risk assessment standards and the standard and
related amendments adopted by the Board on auditing accounting
estimates, including fair value measurements.
     Sets forth factors for determining the necessary evidence
to support the auditor's conclusion regarding a relevant assertion when
using the work of a company's specialist.
    Second, the Board has also amended AS 1201, Supervision of the
Audit Engagement, by adding a new Appendix C on supervising the work of
auditor-employed specialists, and retitling and replacing AS 1210,
Using the Work of a Specialist (``existing AS 1210''), with new AS
1210, Using the Work of an Auditor-Engaged Specialist (``AS 1210, as
amended''), which sets forth

requirements for using the work of auditor-engaged specialists.
New Appendix C of AS 1201
     Supplements the requirements for applying the supervisory
principles in AS 1201.05-.06 when using the work of an auditor-employed
specialist to assist the auditor in obtaining or evaluating audit
evidence, including requirements related to:
     Informing the auditor-employed specialist of the work to
be performed;
     Coordinating the work of the auditor-employed specialists
with the work of other engagement team members; and
     Reviewing and evaluating whether the work of the auditor-
employed specialist provides sufficient appropriate evidence.
Evaluating the work of the specialist includes evaluating whether the
work is in accordance with the auditor's understanding with the
specialist and whether the specialist's findings and conclusions are
consistent with, among other things, the work performed by the
specialist.
     Sets forth factors for determining the necessary extent of
supervision of the work of the auditor-employed specialist.
AS 1210, as Amended
     Establishes requirements for using the work of an auditor-
engaged specialist to assist the auditor in obtaining or evaluating
audit evidence;
     Includes requirements for reaching an understanding with
an auditor-engaged specialist on the work to be performed and reviewing
and evaluating the specialist's work that parallel the final amendments
to AS 1201 for auditor-employed specialists;
     Sets forth factors for determining the necessary extent of
review of the work of the auditor-engaged specialist;
     Amends requirements related to assessing the knowledge,
skill, ability, and objectivity of the auditor-engaged specialist; and
     Describes objectivity, for these purposes, as the auditor-
engaged specialist's ability to exercise impartial judgment on all
issues encompassed by the specialist's work related to the audit, and
specifies the auditor's obligations when the specialist or the entity
that employs the specialist has a relationship with the company that
affects the specialist's objectivity.
    The final amendments strengthen the requirements for evaluating the
work of a company's specialist and for supervising and evaluating the
work of both auditor-employed and auditor-engaged specialists. The
amendments also eliminate certain provisions of existing PCAOB
standards, under which:
     The auditor has the same responsibilities under existing
AS 1210 with respect to both a company's specialist and an auditor-
engaged specialist, even though those specialists have fundamentally
different roles (i.e., the company uses the work of its specialist in
the preparation of the financial statements); and
     Auditor-employed specialists, but not auditor-engaged
specialists, are subject to risk-based supervision, even though both
serve similar roles in helping auditors obtain and evaluate audit
evidence.
    The Board adopted the final amendments after substantial outreach,
including two rounds of public comment. In May 2015, the PCAOB issued a
staff consultation paper to solicit views on various issues, including
the potential need for standard setting. In June 2017, the Board
requested comments on proposed amendments to the standards on using the
work of specialists. The Board received comments on the staff
consultation paper and the proposal. The Board's Standing Advisory
Group (``SAG'') also discussed this issue at several meetings.
Commenters generally supported the Board's objective of improving the
quality of audits involving specialists, and suggested areas to further
improve the amendments, modify proposed requirements that would not
likely improve audit quality, and clarify the application of the
amendments. In adopting these amendments, the Board has taken into
account all of these comments and discussions, as well as observations
from PCAOB oversight activities.
    In its consideration of the final amendments, the Board is mindful
of the significant advances in technology that have occurred in recent
years, including increased use of data analysis tools and emerging
technologies. An increased use of technology-based tools, together with
future developments in the use of data and technology, could have a
fundamental impact on the audit process. The Board is actively
exploring these potential impacts through ongoing staff research and
outreach. For example, the PCAOB staff is currently researching the
effects on auditing of data analytics, artificial intelligence,
distributed ledger technology, and other emerging technology, assisted
by a task force of the SAG.\2\
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    \2\ See PCAOB, Changes in Use of Data and Technology in the
Conduct of Audits, available at https://pcaobus.org/Standards/research-standard-setting-projects/Pages/data-technology.aspx.
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    In the context of this rulemaking, the Board considered how changes
in technology could affect the use of specialists by companies, the use
of the work of companies' specialists by auditors as audit evidence,
and the use of auditor-employed and auditor-engaged specialists by
auditors to obtain and evaluate audit evidence. The Board believes that
the final amendments are sufficiently principles-based and flexible to
accommodate continued advances in the use of data and technology by
both companies and auditors. The Board will continue to monitor
advances in this area and any effect they may have on the application
of the final amendments.
    The amendments will apply to all audits conducted under PCAOB
standards. Subject to approval by the Commission, the amendments take
effect for audits for fiscal years ending on or after December 15,
2020.
(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 released the proposed rules for public comment in
Proposed Amendments to Auditing Standards for Auditor's Use of the Work
of Specialists, PCAOB Release No. 2017-003 (June 1, 2017)
(``Proposal''). The PCAOB also issued for public comment Staff
Consultation Paper No. 2015-01, The Auditor's Use of the Work of
Specialists (May 28, 2015) (``SCP''). Copies of Release No. 2017-003,
the SCP, and the comment letters received in response to the PCAOB's
requests for comment are available on the PCAOB's website at https://pcaobus.org/Rulemaking/Pages/docket-044-auditors-use-work-specialists.aspx. The PCAOB received 80 written comment letters. The
Board's response to the comments received and the changes made to the
rules in response to the comments received are discussed below.

Background

    Companies across many industries use various types of specialists
to assist in developing accounting estimates in

their financial statements.\3\ Companies may also use specialists to
interpret laws, regulations, and contracts or to evaluate the
characteristics of certain physical assets. Those companies may use a
variety of specialists, including actuaries, appraisers, other
valuation specialists, legal specialists, environmental engineers, and
petroleum engineers. Auditors often use the work of these companies'
specialists as audit evidence. In addition, auditors frequently use the
work of auditors' specialists to assist in their evaluation of
significant accounts and disclosures, including accounting estimates in
those accounts and disclosures.
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    \3\ As used in this notice, a specialist is a person (or firm)
possessing special skill or knowledge in a particular field other
than accounting or auditing.
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    The use of fair value measurements and other accounting estimates
continues to grow in financial reporting with, for example, increasing
complexity in business transactions and changes in the financial
reporting frameworks. As a result, the use of the work of specialists
continues to increase in both frequency and significance.\4\ If a
specialist's work is not properly overseen or evaluated, however, there
is heightened risk that the auditor's work will not be sufficient to
detect a material misstatement in accounting estimates.
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    \4\ See, e.g., Karin Barac, Elizabeth Gammie, Bryan Howieson,
and Marianne van Staden, The Capability and Competency Requirements
of Auditors in Today's Complex Global Business Environment, at 83
(Mar. 2016) (report commissioned by the Institute of Chartered
Accountants of Scotland and the Financial Reporting Council)
(stating that ``audit teams now include many more experts than in
the past, and for some industries, particularly financial services,
this was a welcome development.'').
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    The amendments to the standards for using the work of specialists
are intended to improve audit quality by strengthening the requirements
for evaluating the work of a company's specialist and applying a risk-
based supervisory approach to both auditor-employed and auditor-engaged
specialists. These enhancements should also lead to improvements in
practices, commensurate with the associated risk, among audit firms of
all sizes. The expected increase in audit quality should also enhance
the credibility of information provided to investors.

Rulemaking History

    The amendments to the auditing standards adopted by the Board
(``final amendments'' or ``final requirements'') reflect public
comments on both the SCP and the Proposal. In May 2015, the PCAOB
issued the SCP to solicit comments on various issues related to the
auditor's use of the work of a company's specialist and an auditor's
specialist, including possible approaches for changes to PCAOB
standards and the potential economic impacts of those alternatives.
    In June 2017, the PCAOB issued the Proposal to solicit comments on
amendments to PCAOB standards to strengthen the requirements for the
auditor's use of the work of specialists. The Proposal was informed by
comments on the SCP. The Board received 35 comment letters on the
Proposal from commenters across a range of affiliations. The final
amendments are informed by comments on the Proposal. Those comments are
discussed throughout this notice.
    In addition, the Board's approach has been informed by, among other
things: (1) Observations from PCAOB oversight activities and SEC
enforcement actions; (2) the International Auditing and Assurance
Standards Board's (``IAASB'') and the American Institute of Certified
Public Accountants' Auditing Standards Board's auditing standards and
IAASB's post-implementation review; \5\ (3) substantial outreach,
including discussions with members of the SAG; \6\ and (4) the results
of academic research.
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    \5\ See IAASB, Clarified International Standards on Auditing--
Findings from the Post-Implementation Review, at 44-45 (July 2013).
    \6\ See SAG meeting briefing papers and webcast archives (Nov.
29-30, 2017, Nov. 30-Dec. 1, 2016, Nov. 12-13, 2015, June 18, 2015,
Oct. 14-15, 2009, and Feb. 9, 2006), available on the Board's
website.
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Overview of Existing Requirements

    The primary standard that applies when auditors use the work of
auditor-engaged specialists or company specialists is existing AS 1210.
The primary standard that applies when auditors use the work of
auditor-employed specialists in an audit is AS 1201. Existing AS 1210
was adopted by the Board in 2003 shortly after the PCAOB's
inception.\7\ AS 1201 was one of eight risk assessment standards
adopted by the Board in 2010.\8\
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    \7\ See Establishment of Interim Professional Auditing
Standards, PCAOB Release No. 2003-006 (Apr. 18, 2003). AS 1210 was
originally adopted by the PCAOB as AU sec. 336. The PCAOB renumbered
AU sec. 336 as AS 1210 when it reorganized its auditing standards.
See Reorganization of PCAOB Auditing Standards and Related
Amendments to PCAOB Standards and Rules, PCAOB Release No. 2015-002
(Mar. 31, 2015).
    \8\ See Auditing Standards Related to the Auditor's Assessment
of and Response to Risk and Related Amendments to PCAOB Standards,
PCAOB Release No. 2010-004 (Aug. 5, 2010). Prior to 2010, auditors
supervised employed specialists under AU sec. 311, Planning and
Supervision. Additionally, paragraph .16 of AS 2101, Audit Planning,
requires the auditor to determine whether specialized skill or
knowledge is needed to perform appropriate risk assessments, plan or
perform audit procedures, or evaluate audit results.
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    Existing AS 1210 provides that a specialist is ``a person (or firm)
possessing special skill or knowledge in a particular field other than
accounting or auditing.'' \9\ Existing AS 1210 also states that income
taxes and information technology (``IT'') are specialized areas of
accounting and auditing, and therefore are outside the scope of the
standard.\10\ Existing AS 1210 applies when (1) a company engages or
employs a specialist and the auditor uses that specialist's work as
evidence in performing substantive tests to evaluate material financial
statement assertions or (2) an auditor engages a specialist and uses
that specialist's work as evidence in performing substantive tests to
evaluate material financial statement assertions.\11\
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    \9\ See existing AS 1210.01.
    \10\ See footnote 1 of existing AS 1210.
    \11\ See existing AS 1210.03.
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    AS 1201 establishes requirements for the supervision of the audit
engagement, including supervising the work of engagement team
members.\12\ The auditor supervises a specialist employed by the
auditor's firm who participates in the audit under AS 1201.\13\ As
members of the engagement team under PCAOB auditing standards, auditor-
employed specialists are to be assigned based on their knowledge,
skill, and ability.\14\ AS 1201 also applies in situations in which
persons with specialized skill or knowledge in IT or income taxes
participate in the audit, regardless of whether they are employed or
engaged by the auditor's firm.\15\
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    \12\ See AS 1201.01.
    \13\ See AS 1201.05-.06.
    \14\ See paragraph .05a of AS 2301, The Auditor's Responses to
the Risks of Material Misstatement, and paragraph .06 of AS 1015,
Due Professional Care in the Performance of Work. In addition, the
requirements in PCAOB auditing standards for determining compliance
with independence and ethics requirements also include assessing the
independence of auditor-employed specialists. See AS 2101.06b.
    \15\ See footnote 1 of existing AS 1210.
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    Using the work of a company's specialist and an auditor-engaged
specialist under existing AS 1210. Existing AS 1210 requires that the
auditor perform the following procedures when using the work of a
company's specialist or an auditor-engaged specialist:
     Evaluate the professional qualifications of the
specialist; \16\
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    \16\ See existing AS 1210.08.
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     Obtain an understanding of the nature of the specialist's
work; \17\
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    \17\ See existing AS 1210.09.
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     Evaluate the relationship of the specialist to the
company, including circumstances that might impair the specialist's
objectivity; \18\ and
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    \18\ See existing AS 1210.10-.11.

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     In using the findings of the specialist: \19\
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    \19\ See existing AS 1210.12.
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     Obtain an understanding of the methods and assumptions
used by the specialist;
     Make appropriate tests of data provided to the specialist;
and
     Evaluate whether the specialist's findings support the
financial statement assertions.
    Using the work of a company's specialist when auditing fair value
measurements under AS 2502.\20\ In circumstances when a company's
specialist develops assumptions used in a fair value measurement and
the auditor tests the company's process, the auditor is required to
evaluate the reasonableness of those assumptions as if the assumptions
were developed by the company,\21\ as well as to comply with the
requirements of existing AS 1210.
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    \20\ AS 2502, Auditing Fair Value Measurements and Disclosures,
is being superseded in a separate PCAOB release. See Auditing
Accounting Estimates, Including Fair Value Measurements and
Amendments to PCAOB Auditing Standards, PCAOB Release No. 2018-005
(Dec. 20, 2018) (``Estimates Release'').
    \21\ See footnote 2 of AS 2502.
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    Supervising the work of auditor-employed specialists under AS 1201.
This standard establishes requirements regarding the auditor's
supervision of an audit engagement, including supervising the work of
auditor-employed specialists and other members of the engagement team.
AS 1201, as it relates to the supervision of auditor-employed
specialists, provides that:
    (1) The engagement partner and others who assist the engagement
partner in supervising the audit should:
     Inform engagement team members of their responsibilities;
     Direct engagement team members to bring significant
accounting and auditing issues arising during the audit to the
attention of the engagement partner or other engagement team members
performing supervisory activities; and
     Review the work of engagement team members to evaluate
whether:
     The work was performed and documented;
     The objectives of the procedures were achieved; and
     The results of the work support the conclusions
reached.\22\
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    \22\ See AS 1201.05.
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    (2) The necessary extent of supervision depends on, for example,
the nature of the work performed, the associated risks of material
misstatement, and the knowledge, skill, and ability of those being
supervised.\23\
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    \23\ See AS 1201.06.
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Existing Practice
    The PCAOB's understanding of audit practice at both larger audit
firms \24\ and smaller audit firms \25\ under existing PCAOB standards
has been informed by, among other things, the collective experience of
PCAOB staff, observations from oversight activities of the Board,
enforcement actions of the SEC, comments received on the Proposal, and
discussions with the SAG, audit firms, and specialist entities.
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    \24\ Unless otherwise indicated, the term ``larger audit firms''
refers to U.S. audit firms that are registered with the PCAOB and
issue audit reports for more than 100 issuers (and are therefore
annually inspected by the PCAOB). This term also refers to non-U.S.
audit firms that are registered with the PCAOB and affiliated with
one of the six largest global networks, based on information on
network affiliations reported by non-US. audit firms on Form 2 in
2017 and identified on the ``Global Network'' overview page,
available on the Board's website.
    \25\ Unless otherwise indicated, the term ``smaller audit
firms'' refers to PCAOB-registered audit firms that do not meet the
definition of a ``larger audit firm'' as provided in footnote 24.
These firms generally consist of firms that issued audit reports for
100 or fewer issuers and are not affiliated with any of the six
largest global networks identified on the ``Global Network''
overview page, available on the Board's website.
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    These discussions have included outreach by the PCAOB staff to
audit firms and specialist entities to obtain information on: (1) How
auditors evaluate the competence and objectivity of auditor-engaged
specialists and company specialists; (2) how auditors evaluate the work
performed by an auditor-employed specialist, an auditor-engaged
specialist, and a company's specialist; and (3) economic and
demographic considerations relating to the market for services provided
by specialists. The outreach has informed the PCAOB's understanding of
existing practice at both larger and smaller audit firms. Most
commenters who addressed the topic agreed that the Proposal accurately
described existing audit practices regarding the use of the work of
specialists. Commenters also generally supported the PCAOB's assessment
that the use and importance of specialists has increased due to
increasing complexity in business transactions and financial reporting
requirements.
Overview of Existing Practice
    When existing AS 1210 was originally issued in the early 1970s, the
use of the work of specialists was largely confined to pension
obligations, insurance reserves, and extractive industry reserves.
Since then, the use of the work of specialists has increased in both
frequency and significance.
    Companies across many industries use the work of specialists to:
(1) Assist them in developing accounting estimates, including fair
value measurements presented in the companies' financial statements;
(2) interpret laws, regulations, and contracts; or (3) evaluate
characteristics of physical assets, as shown in Figure 1 below. In
those circumstances, the reliability of a company's financial
statements may depend in part on the quality of the work of a company's
specialist.

  Figure 1: Examples of Activities That Involve the Work of Specialists
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Valuation:
    Assets acquired and liabilities assumed in business combinations
    Environmental remediation contingencies
    Goodwill impairments
    Insurance reserves
    Intangible assets
    Pension and other post-employment obligations
    Impairment of real estate or other long-term assets
    Financial instruments
Legal interpretations:
    Legal title to property
    Laws, regulations, or contracts
Evaluation of physical and other characteristics:
    Materials stored in stockpiles
    Mineral reserves and condition
    Oil and gas reserves
    Property, plant, and equipment useful lives and salvage values
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    Auditors also increasingly use the work of specialists in their
audits. Auditors may:
     Use the work of a company's specialist--employed or
engaged--as audit evidence; or
     Use the work of an auditor's specialist--employed or
engaged--to assist the auditor in obtaining and evaluating audit
evidence.
    Figure 2 illustrates potential ways that auditors use specialists
in an audit.
[GRAPHIC] [TIFF OMITTED] TN04AP3.002

    The company's specialist (A and B above) is employed or engaged by
the company to perform work that the company uses in preparing its
financial statements, which the auditor may use as audit evidence with
respect to auditing significant accounts and disclosures. The auditor's
specialist (C and D above) performs work to assist the auditor in
obtaining and evaluating audit evidence with respect to a relevant
assertion of a significant account or disclosure.
    The PCAOB understands that audit practices under existing PCAOB
standards vary among smaller and larger audit firms when auditors use
the work of a specialist in an audit.\26\ For example, smaller audit
firms are more likely to use the work of a company's specialist than to
employ or engage their own specialist. Larger audit firms generally
require their engagement teams to evaluate the work of the company's
specialist, including the specialist's methods and assumptions, and
often employ specialists to assist their audit personnel in evaluating
that work.\27\ The following paragraphs discuss in more detail the
practices of smaller firms and larger firms in audits of issuers,
brokers, and dealers under existing PCAOB standards.
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    \26\ As discussed in section D, an analysis of inspection data
by PCAOB staff suggests that larger audit firms generally use the
work of specialists more often than smaller audit firms do.
    \27\ An analysis by PCAOB staff indicates that smaller firms
predominantly use the work of an auditor's specialist in valuation
areas, and seldom use the work of an auditor's specialist in other
areas, whereas larger firms tend to use the work of an auditor's
specialist in a wider range of audit areas, even though they also
primarily use the work of specialists in valuation areas.
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    Smaller firm practices. Smaller firm practices generally are based
on the required procedures in existing PCAOB standards, primarily
existing AS 1210. Smaller firms typically evaluate the

competence, relationships to the company, and work of the company's
specialist through inquiries of the company's specialist. For example,
smaller firms may send a company's specialist a questionnaire to obtain
information regarding the specialist's professional qualifications and
the existence of relationships with the company that could impair the
specialist's objectivity. Further, smaller firms typically do not
evaluate the appropriateness of a specialist's methods (it is not
required by existing AS 1210), and any evaluation by smaller firms of
the assumptions of a company's specialist is generally confined to
circumstances when the specialist develops assumptions used in a fair
value measurement covered by AS 2502.
    In circumstances when smaller firms engage an auditor's specialist,
some firms perform the procedures specified in existing AS 1210. Other
firms perform procedures similar to those in AS 1201 for supervising
members of the engagement team. For example, some firms evaluate
whether the auditor-engaged specialist's work supports the financial
statement assertions, while other firms go further by also evaluating
whether (1) the specialist's work was performed and documented, (2) the
objectives of the specialist's procedures were achieved, and (3) the
results of the specialist's work support the conclusions reached. One
commenter noted that smaller firms may also use an auditor's specialist
in evaluating the work of a company's specialist.
    Larger firm practices. Some larger audit firms evaluate the methods
and assumptions used by company specialists when they test the
company's process for developing accounting estimates, even though this
evaluation is currently required only for significant assumptions
developed by the company's specialist in conjunction with fair value
measurements and disclosures.\28\ Many larger firms employ their own
specialists, who serve on engagement teams and assist with the
evaluation of the work of company specialists.
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    \28\ See footnote 2 of AS 2502.
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    Auditor-employed specialists at larger firms are generally involved
early in the audit, usually during planning meetings with other members
of the engagement team. Also, in planning the audit, auditors generally
reach an understanding with auditor-employed specialists, documented in
a memorandum, regarding the scope of work to be performed and the
respective responsibilities of the auditor and the specialist. The
items covered in that memorandum typically include: (1) The nature,
scope, and objectives of the specialist's work; \29\ (2) the role and
responsibilities of the auditor and the specialist; \30\ and (3) the
nature, timing, and extent of communication between the auditor and the
specialist.\31\ The auditor communicates with the specialist as the
work progresses to become aware of issues as they arise. When the
specialist completes his or her work, the auditor reviews the
specialist's work, which is typically documented in a separate report
or memorandum.
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    \29\ Examples include whether the specialist is testing (or
assisting in testing) the company's process for developing an
accounting estimate or developing (or assisting in developing) an
independent expectation of the estimate.
    \30\ For example, the documentation might identify the
respective responsibilities of the auditor and the specialist for
evaluating data, significant assumptions, and methods used by the
company or the company's specialist.
    \31\ Examples include administrative matters, such as the
timing, budget, and other staffing-related issues relevant to the
specialist's work, or the protocols for discussing and resolving
findings or issues identified by the specialist.
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    In some instances, larger firms may use the work of a company's
specialist without involving an auditor's specialist, particularly when
the risk of material misstatement is low or the firm does not employ a
specialist with expertise in the particular field. Alternatively,
although infrequently, larger firms may engage a specialist with
expertise in the particular field. When larger firms engage
specialists, some firms perform the procedures specified in existing AS
1210 described above. Other firms perform procedures in such situations
that are similar to the procedures for supervising the work of auditor-
employed specialists under AS 1201.

Observations From Audit Inspections and Enforcement Cases

    The Board's understanding of audit practice under existing PCAOB
standards has been informed in part by observations from PCAOB
oversight activities and SEC enforcement actions, including (1) audit
deficiencies of both larger and smaller firms, and related remedial
actions to address the deficiencies and (2) enforcement actions where
the work of a specialist was used in the audit.
    Inspections observations. Over the past several years, the
observations from PCAOB inspections have included instances in which
the auditor used the work of a company's specialist without performing
the procedures required by existing PCAOB standards.\32\ Recent
findings include instances in which auditors did not: (1) Evaluate the
reasonableness of assumptions used by a company's specialist in
developing fair value measurements; (2) obtain an understanding of
methods or assumptions used by the company's specialist; (3) test the
accuracy and completeness of company-provided data used by the
company's specialist; or (4) evaluate the professional qualifications
of the company's specialist.
---------------------------------------------------------------------------

    \32\ See existing AS 1210 and AS 2502.
---------------------------------------------------------------------------

    Over the past several years, the observations from PCAOB
inspections also have indicated that auditors, at times, did not
fulfill their responsibilities under existing standards when using the
work of an auditor's specialist. These findings were more common than
those related to using the work of a company's specialist over the same
period. The observations included instances in which auditors did not:
(1) Reach an understanding with the specialist regarding his or her
responsibilities; (2) adequately evaluate the work performed by the
specialist; or (3) consider contradictory evidence identified by the
specialist or resolve discrepancies or other concerns that the
specialist identified. More recently, PCAOB inspection staff have
observed a decline in the number of instances by some firms in which
auditors did not perform sufficient procedures related to the work of
an auditor's specialist.
    There are indications that some firms have undertaken remedial
actions in response to the findings related to the auditor's use of the
work of an auditor's specialist. In most cases, such actions included
enhancements to firm methodologies to improve coordination between the
auditor and the auditor's specialist through earlier and more frequent
communications. These enhancements may have contributed, at least in
part, to the decline in findings described above. Not all firms,
however, have changed their methodologies, resulting in inconsistent
practices in this area. In addition, unlike the findings related to the
auditor's use of the work of an auditor's specialist, PCAOB inspections
staff have not observed a similar change in the frequency of findings
related to the auditor's use of the work of a company's specialist.

    Enforcement actions. Both the SEC \33\ and the PCAOB \34\ have
brought enforcement actions involving situations where auditors
allegedly failed to comply with auditing standards when using the work
of specialists. For example, such proceedings have involved allegations
that auditors failed to (1) perform audit procedures to address the
risks of material misstatements in a company's financial statements
that were prepared in part based on the work of a company's specialist
\35\ or (2) comply with certain requirements of existing AS 1210 when
using the work of a company's specialist (for example, requirements to
evaluate the professional qualifications of the specialist, obtain an
understanding of the methods and assumptions used by the specialist,
evaluate the relationship of the specialist to the company, and apply
additional procedures to address a material difference between the
specialist's findings and the assertions in the financial
statements).\36\ Several of those proceedings were brought in recent
years, suggesting that problems persist in this area.
---------------------------------------------------------------------------

    \33\ See, e.g., KPMG LLP and John Riordan, CPA, SEC Accounting
and Auditing Enforcement Release (``AAER'') No. 3888 (Aug. 15,
2017); Miller Energy Resources, Inc., Paul W. Boyd, CPA, David M.
Hall, and Carlton W. Vogt, III, CPA, AAER No. 3673 (Aug. 6, 2015);
Troy F. Nilson, CPA, SEC AAER No. 3264 (Apr. 8, 2011); and
Accounting Consultants, Inc., and Carol L. McAtee, CPA, SEC AAER No.
2447 (June 27, 2006).
    \34\ See, e.g., Tarvaran Askelson & Company, LLP, Eric Askelson,
and Patrick Tarvaran, PCAOB Release No. 105-2018-001 (Feb. 27,
2018); Grant Thornton LLP, PCAOB Release No. 105-2017-054 (Dec. 19,
2017); KAP Purwantono, Sungkoro & Surja, Roy Iman Wirahardja, and
James Randall Leali, PCAOB Release No. 105-2017-002 (Feb. 9, 2017);
Arturo Vargas Arellano, CPC, PCAOB Release No. 105-2016-045 (Dec. 5,
2016); Gordon Brad Beckstead, CPA, PCAOB Release No. 105-2015-007
(Apr. 1, 2015); and Chisholm, Bierwolf, Nilson & Morrill, LLC, Todd
D. Chisholm, CPA, and Troy F. Nilson, CPA, PCAOB Release No. 105-
2011-003 (Apr. 8, 2011).
    \35\ See, e.g., Gordon Brad Beckstead, CPA, PCAOB Release No.
105-2015-007.
    \36\ See, e.g., Grant Thornton LLP, PCAOB Release No. 105-2017-
054; KAP Purwantono, Sungkoro & Surja, PCAOB Release No. 105-2017-
002; Arturo Vargas Arellano, CPC, PCAOB Release No. 105-2016-045;
Chisholm, Bierwolf, Nilson & Morrill, LLC, PCAOB Release No. 105-
2011-003; and Miller Energy Resources, Inc., SEC AAER No. 3673.
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Reasons To Improve Auditing Standards

    The improvements to PCAOB standards are intended to direct auditors
to devote more attention to the work of a company's specialist and
enhance the coordination between an auditor and the auditor's
specialist--employed or engaged. The final amendments also align with
the Board's risk assessment standards and acknowledge more clearly the
different roles of a company's specialist, an auditor-employed
specialist, and an auditor-engaged specialist. The Board believes that
these improvements will enhance both audit quality and the credibility
of the information provided in a company's financial statements.

Areas of Improvement

    The Board has identified two important areas where improvements are
warranted to existing standards, discussed below: (1) Strengthening the
requirements for evaluating the work of a company's specialist and (2)
applying a risk-based supervisory approach to auditor-employed and
auditor-engaged specialists.
Strengthening the Requirements for Evaluating the Work of a Company's
Specialist
    Existing AS 1210 is the primary standard that applies when auditors
use the work of an auditor-engaged specialist or a company's
specialist. By its terms, existing AS 1210 applies when (1) a company
engages or employs a specialist and the auditor uses that specialist's
work as evidence in performing substantive tests to evaluate material
financial statement assertions or (2) an auditor engages a specialist
and uses that specialist's work as evidence in performing substantive
tests to evaluate material financial statement assertions.
    In practice, however, a company's specialist and an auditor-engaged
specialist have fundamentally different roles: The company uses the
work of a specialist in the preparation of its financial statements,
whereas an auditor's specialist performs work to assist the auditor in
obtaining and evaluating audit evidence. By imposing the same
requirements for using the work of a company's specialist and an
auditor-engaged specialist, existing AS 1210 does not clearly reflect
the different roles of such specialists.
    In addition, existing AS 1210 does not expressly require an auditor
to evaluate the appropriateness of a company specialist's methods and
assumptions.\37\ Instead, it requires the auditor to obtain an
understanding of the methods and assumptions used by the specialist, a
less rigorous procedure. Existing AS 1210 also includes certain
provisions that circumscribe the auditor's responsibilities related to
the work of a specialist, including statements that: (1) The
appropriateness and reasonableness of methods and assumptions used, and
their application, are the responsibility of the specialist; (2) the
auditor ordinarily would use the work of the specialist unless the
auditor's procedures lead him or her to believe the findings are
unreasonable in the circumstances; and (3) if the auditor determines
that the specialist's findings support the related assertions in the
financial statements, he or she reasonably may conclude that sufficient
appropriate evidential matter has been obtained.\38\
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    \37\ The evaluation of the reasonableness of assumptions
developed by a company's specialist is required only in
circumstances when the specialist develops assumptions used in a
fair value measurement in accordance with AS 2502. AS 2502 is being
superseded in a separate PCAOB release. See Estimates Release, supra
note 20.
    \38\ See existing AS 1210.12-.13.
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    When an auditor uses the work of a company's specialist, the
requirements in existing AS 1210 allow the auditor to plan and perform
audit procedures that may not be commensurate with the risk of material
misstatement inherent in the work of the specialist, thereby allowing
the auditor to use the work and conclusions of a company's specialist
without performing procedures to evaluate that specialist's work. Some
audit firms, primarily larger firms, go beyond the requirements in
existing AS 1210 and generally require their engagement teams to
evaluate the work of a company's specialist, including the specialist's
methods and assumptions, and often employ specialists to assist their
audit personnel in evaluating that work. Existing audit practices in
this regard, however, vary among firms.
    The foregoing factors indicate that improvements to PCAOB standards
for using the work of a company's specialists are needed and that
increasing auditors' attention to the work of a company's specialists
with respect to significant accounts and disclosures will enhance
investor protection. In the Board's view, investor protection will be
enhanced by requiring auditors to do more than merely obtain an
understanding of the methods and significant assumptions used by the
specialist.
Applying a Risk-Based Supervisory Approach to Both Auditor-Employed and
Auditor-Engaged Specialists
    The primary standard that applies when auditors use the work of an
auditor-employed specialist in an audit is AS 1201. That standard
establishes requirements regarding the auditor's supervision of the
audit engagement, including supervision of a specialist employed by the
auditor's firm who participates in the audit. While AS 1201 is risk-
based and scalable, it does not specifically address how to apply its
supervisory procedures to promote

effective coordination between an auditor and a specialist and
evaluation by the auditor of the work of an auditor-employed
specialist.
    The primary standard that applies when auditors use the work of an
auditor-engaged specialist in an audit is existing AS 1210. The
requirements in this standard differ from and are less rigorous than
the requirements that apply when using auditor-employed specialists,
even though auditor-employed and auditor-engaged specialists serve
similar roles in helping auditors to obtain and evaluate audit
evidence. For example, existing AS 1210 provides that the auditor
should ``obtain an understanding'' of the nature of the work performed
by an auditor-engaged specialist, including the objectives and scope of
the specialist's work, whereas AS 1201 requires the auditor to review
the work of an auditor-employed specialist to ``evaluate'' whether the
work was performed and documented, the objectives of the procedures
were achieved, and the results of the work support the conclusions
reached.
    The PCAOB's observations regarding existing audit practices in this
area also reveal differences in the application of the auditing
standards regarding the use of the work of auditor-employed and
auditor-engaged specialists. For example, in circumstances when audit
firms engage specialists, some firms perform the procedures specified
in existing AS 1210, while other firms perform procedures that are
similar to the procedures for supervising the work of auditor-employed
specialists under AS 1201.
    These factors indicate that investor protection can be enhanced by
improving PCAOB standards for applying a risk-based supervisory
approach to auditor-employed specialists, and extending those
requirements to auditor-engaged specialists. This should promote a more
uniform approach to the supervision of an auditor's specialists,
whether employed or engaged, reflecting their similar roles.
Specifically, investor protection can be enhanced by supplementing the
existing supervision requirements under PCAOB standards with more
specific direction on applying those principles when supervising the
work of auditor-employed and auditor-engaged specialists. This
includes, among other things, additional direction on reaching an
understanding with auditor-employed and auditor-engaged specialists on
the work to be performed and on reviewing and evaluating their work.

Comments on the Reasons for Standard Setting

    Many commenters on the Proposal broadly expressed support for
revisions to the Board's standards for using the work of specialists or
stated that the Proposal would lead to improvements in audit quality.
For example, some commenters agreed with statements in the Proposal
that the increasing use of specialists, due in part to the increasing
use of fair value measurements in financial reporting frameworks and
increasing complexity of business transactions, warranted strengthening
existing requirements. A number of commenters also indicated that the
requirements for using specialists should be risk-based and more
closely aligned with the Board's risk assessment standards than
existing standards. One of these commenters stated that the Board
should be proactive in addressing issues relating to auditors' use of
the work of specialists through standard setting as an alternative to
devoting additional resources to inspections and enforcement based on
existing standards.
    In addition, a number of commenters generally agreed with
developing separate standards for using the work of a company's
specialist, an auditor-employed specialist, and an auditor-engaged
specialist. One commenter noted that separating these requirements
could lead to better application in practice, especially among smaller
CPA firms, while another commenter indicated that providing separate
guidance for using the work of company specialists, auditor-employed
specialists, and auditor-engaged specialists would be an improvement
over existing standards. One commenter stated that inspections of
audits involving the use of specialists had shown a need for
improvement, and that the rationalization and enhancement of existing
requirements would improve the efficiency and quality of audits.
    A few commenters on the Proposal questioned the reasons for
revisions to PCAOB auditing standards relating to the use of the work
of specialists.\39\ One commenter stated that the Proposal presented no
clear evidence that audit deficiencies found by the PCAOB relating to
the use of specialists resulted from deficiencies in the auditing
standards. Another commenter stated that inspection findings did not
necessarily warrant revisions to auditing standards and that it
continued to question whether a fundamental change in audit standards
was necessary. A third commenter stated that it did not believe that
the case had been made for having separate standards for the use of
auditor-employed and auditor-engaged specialists. Finally, a fourth
commenter suggested that the Board should develop additional
information on potential costs before proposing or adopting revisions
to existing auditing standards, including through field testing of
potential changes.\40\
---------------------------------------------------------------------------

    \39\ Some commenters provided comments or expressed concerns
about specific aspects of the proposed revisions to the Board's
existing standards for using the work of specialists. The Board's
consideration of these comments is discussed further below.
    \40\ See below for a more detailed discussion of the final
amendments and clarifications of certain aspects of the proposed
amendments, as set forth in the Proposal.
---------------------------------------------------------------------------

    The SAG has discussed specialist-related issues at a number of
meetings.\41\ Many SAG members expressed support for: (1) Greater
auditor responsibility for evaluating the work performed by a company's
specialists; (2) similar responsibilities when auditors use the work of
auditor-employed specialists and auditor-engaged specialists; and (3)
better communication between auditors and their specialists, whether
employed or engaged. Some SAG members, however, questioned the need for
changes to the existing standards, asserting that auditors may not
always have the necessary level of expertise to evaluate the work of
certain specialists and, as a result, may need to rely on the work of
specialists.
---------------------------------------------------------------------------

    \41\ See SAG meeting briefing papers and webcast archives (Nov.
29-30, 2017, Nov. 30-Dec. 1, 2016, Nov. 12-13, 2015, June 18, 2015,
Oct. 14-15, 2009, and Feb. 9, 2006), available on the Board's
website.
---------------------------------------------------------------------------

    In adopting the final amendments, the Board has taken into account
the comments received on the Proposal, as well as its other outreach
activities. The information available to the Board--including the
current regulatory baseline, observations from the Board's oversight
activities, and substantial outreach--suggests that investors would
benefit from strengthened and clarified standards for auditors in this
area. The Board notes that aspects of the required procedures in the
final amendments are similar to current auditing practices by some
larger and smaller audit firms. While the Board does not expect that
the final amendments will eliminate inspection deficiencies observed in
practice, the final amendments are intended to clarify the auditor's
responsibilities and align the requirements for using the work of
specialists more closely with the Board's risk assessment standards.
The final amendments also reflect a number of changes that were made
after the Board's consideration of comments

received on the Proposal about the potential impact of the proposed
requirements on auditors, issuers, and specialists.\42\
---------------------------------------------------------------------------

    \42\ See below for a more detailed discussion of changes
reflected in the final amendments and section D for a more detailed
discussion of economic considerations related to the adoption of the
final amendments.
---------------------------------------------------------------------------

Overview of Final Rules

    The final amendments: (1) Add an appendix to AS 1105 with
supplemental requirements for using the work of a company's specialist
as audit evidence; (2) add an appendix to AS 1201 with supplemental
requirements for supervising an auditor-employed specialist; and (3)
replace existing AS 1210 with an updated standard for using the work of
an auditor-engaged specialist. The key aspects of these amendments,
which are intended to enhance the requirements in existing standards
for using the work of a company's specialist, an auditor-employed
specialist, and an auditor-engaged specialist, are discussed in this
section. The ways in which the final amendments address the need for
change from an economic perspective are discussed in section D.
    The final amendments have been informed by the Board's outreach
activities. They are aligned with the Board's risk assessment
standards, so that the necessary audit effort is commensurate with,
among other things, the significance of the specialist's work to the
auditor's conclusion regarding the relevant assertion and the
associated risk. Many commenters on the Proposal supported aligning any
new standards on using the work of specialists with any new standards
related to auditing accounting estimates, including fair value
measurements. The final amendments are aligned with the Estimates
Release.
    Figure 3 summarizes the auditor's responsibilities and primary
PCAOB standards for using the work of specialists applicable before and
after the effective date of the final amendments.
[GRAPHIC] [TIFF OMITTED] TN04AP3.003

    In brief, the final amendments make the following changes to PCAOB
auditing standards:
     Amend AS 1105.
     Add a new Appendix A \43\ that supplements the
requirements in AS 1105 for circumstances when the auditor uses the
work of the company's specialist as audit evidence, related to:
---------------------------------------------------------------------------

    \43\ As proposed, these requirements would have been set forth
as Appendix B to AS 1105.
---------------------------------------------------------------------------

     Obtaining an understanding of the work and report(s), or
equivalent communication, of the company's specialist(s) and related
company processes and controls; \44\
---------------------------------------------------------------------------

    \44\ See AS 1105.A2, as adopted. Additionally, as amended, AS
2110, Identifying and Assessing Risks of Material Misstatement, sets
forth requirements for understanding company processes and controls
related to the use of specialists.
---------------------------------------------------------------------------

     Obtaining an understanding of and assessing the knowledge,
skill, and ability of a company's specialist and the entity that
employs the specialist (if other than the company) and the relationship
to the company of the specialist and the entity that employs the
specialist (if other than the company); and
     Performing procedures to evaluate the work of a company's
specialist, including evaluating: (i) The data, significant
assumptions, and methods (which may include models) used by the
specialist,\45\ and (ii) the relevance and reliability of the
specialist's work and its relationship to the relevant assertion;
---------------------------------------------------------------------------

    \45\ This evaluation is not explicitly required under the
Board's existing standards, other than under AS 2502 with respect to
the significant assumptions of a company's specialist regarding fair
value measurements and disclosures.
---------------------------------------------------------------------------

     Align the requirements for using the work of a company's
specialist with the risk assessment standards and the

standard and related amendments adopted by the Board on auditing
accounting estimates, including fair value measurements; \46\ and
---------------------------------------------------------------------------

    \46\ Certain provisions of the final amendments include
references to a new auditing standard AS 2501, Auditing Accounting
Estimates, Including Fair Value Measurements (``AS 2501, as
adopted''), which has been adopted by the Board in a separate
release. See Estimates Release, supra note 20.
---------------------------------------------------------------------------

     Set forth factors for determining the necessary evidence
to support the auditor's conclusion regarding a relevant assertion when
using the work of a company's specialist.
     Amend AS 1201.
     Add a new Appendix C that supplements the requirements for
applying the supervisory principles in AS 1201.05-.06 when using the
work of an auditor-employed specialist to assist the auditor in
obtaining or evaluating audit evidence, including requirements related
to:
     Informing the auditor-employed specialist of the work to
be performed;
     Coordinating the work of the auditor-employed specialists
with the work of other engagement team members; and
     Reviewing and evaluating whether the work of the auditor-
employed specialist provides sufficient appropriate evidence.
Evaluating the work of the specialist includes evaluating whether the
work is in accordance with the auditor's understanding with the
specialist and whether the specialist's findings and conclusions are
consistent with, among other things, the work performed by the
specialist.
     Set forth factors for determining the necessary extent of
supervision of the work of the auditor-employed specialist.
     Replace existing AS 1210.
     Replace with AS 1210, as amended, Using the Work of an
Auditor-Engaged Specialist, which establishes requirements for using
the work of an auditor-engaged specialist to assist the auditor in
obtaining or evaluating audit evidence;
     Include requirements for reaching an understanding with an
auditor-engaged specialist on the work to be performed and reviewing
and evaluating the specialist's work that parallel the final amendments
to AS 1201 for auditor-employed specialists;
     Set forth factors for determining the necessary extent of
review of the work of the auditor-engaged specialist;
     Amend requirements related to assessing the knowledge,
skill, ability, and objectivity \47\ of the auditor-engaged specialist;
and
---------------------------------------------------------------------------

    \47\ Under the final amendments, the term ``objectivity'' is
reserved for the auditor-engaged specialist and not used to describe
the relationship to the company of a company's specialist or an
auditor-employed specialist. See below for further discussion of
objectivity.
---------------------------------------------------------------------------

     Describe objectivity, for purposes of the standard, as the
auditor-engaged specialist's ability to exercise impartial judgment on
all issues encompassed by the specialist's work related to the audit;
and specify the auditor's obligations when the specialist or the entity
that employs the specialist has a relationship with the company that
affects the specialist's objectivity.
    The Board has also adopted a single standard to replace its
existing standards on auditing accounting estimates and fair value
measurements and set forth a uniform, risk-based approach designed to
strengthen and enhance the requirements for auditing accounting
estimates.\48\ Certain provisions of the final amendments in this
notice include references to AS 2501, as adopted.
---------------------------------------------------------------------------

    \48\ As discussed in the Estimates Release, supra note 20, the
Board is retitling and replacing existing AS 2501, Auditing
Accounting Estimates, and superseding AS 2502 and AS 2503, Auditing
Derivative Instruments, Hedging Activities, and Investments in
Securities. AS 2501, as adopted, also includes a special topics
appendix that addresses certain matters relevant to auditing the
fair value of financial instruments, including the use of pricing
information from third parties as audit evidence.
---------------------------------------------------------------------------

    Most of those who commented on the proposed requirements regarding
the use of the company's specialist expressed support for strengthening
the requirements for evaluating the work of a company's specialist and
aligning them with the Board's risk assessment standards. For example,
one commenter stated that it agreed with statements in the Proposal
that the proposed requirements may result in some auditors gaining a
better understanding of a company's critical accounting estimates
related to relevant financial statements and disclosures. Another
commenter stated that the application of a risk-based approach to the
testing and evaluation of the work of a company's specialist would
reduce the risk of an auditor failing to sufficiently address the risks
of material misstatement.
    A few commenters disagreed with the approach, or aspects of the
approach, for evaluating the work of a company's specialist as
described in the Proposal. One commenter asserted that additional
clarification for using the work of a company's specialist was needed
to address practicability issues and avoid unnecessary costs. Another
commenter suggested that the amendments should place greater weight on
the professional requirements and certifications for certain company
specialists.
    The Board recognizes that the auditor does not have the same
expertise as a person trained or qualified to engage in the practice of
another profession. At the same time, establishing a uniform, risk-
based approach for using the work of a company's specialist more
clearly acknowledges the different roles of a company's specialist and
an auditor's specialist and builds upon improvements observed in the
practices of certain firms. The final amendments also clarify aspects
of the proposed amendments, including the procedures for evaluating the
work of a company's specialist, so that the required procedures are
both practical and risk-based, and reasonably designed to lead to
improvements in audit quality.\49\
---------------------------------------------------------------------------

    \49\ See below for a more detailed discussion of the final
amendments and clarifications regarding using the work of a
company's specialist.
---------------------------------------------------------------------------

    Commenters on the proposed requirements for using an auditor's
specialist generally agreed with a risk-based supervisory approach for
both auditor-employed and auditor-engaged specialists. For example, one
commenter agreed that this approach would promote an improved, more
uniform approach to the supervision of an auditor's specialists.
Consistent with the view of these commenters, the final amendments
apply a risk-based supervisory approach to both auditor-employed and
auditor-engaged specialists, which should enhance investor protection.
    The subsections that follow discuss in more detail the final
amendments. The subsections also include a comparison of the final
requirements with the analogous requirements of the following standards
issued by the IAASB and the Auditing Standards Board (``ASB'') of the
American Institute of Certified Public Accountants:
IAASB Standards
     International Standard on Auditing 500, Audit Evidence
(``ISA 500''); and
     International Standard on Auditing 620, Using the Work of
an Auditor's Expert (``ISA 620'').
ASB Standards
     AU-C Section 500, Audit Evidence (``AU-C Section 500'');
and
     AU-C Section 620, Using the Work of an Auditor's
Specialist (``AU-C Section 620'').
    The comparison included in these subsections may not represent the
views of the IAASB or ASB regarding the interpretation of their
standards. The information presented in the subsections does not cover
the application and explanatory material in

the IAASB standards or ASB standards.\50\
---------------------------------------------------------------------------

    \50\ Paragraph A59 of ISA 200, Overall Objectives of the
Independent Auditor and the Conduct of an Audit in Accordance with
International Standards on Auditing, indicates that the application
and other explanatory material section of the ISAs ``does not in
itself impose a requirement'' but ``is relevant to the proper
application of the requirements of an ISA.'' Paragraph .A64 of AU-C
Section 200, Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance with Generally Accepted Auditing
Standards, states that, although application and other explanatory
material ``does not in itself impose a requirement, it is relevant
to the proper application of the requirements of an AU-C section.''
---------------------------------------------------------------------------

Scope of Final Amendments

    The final amendments apply when an auditor uses the work of a
``specialist.'' Thus, the scope of the requirements hinges largely on
the meaning of the term ``specialist.'' As described in the Proposal,
the Board sought to carry forward the meaning of the term
``specialist'' from existing AS 1210, that is, a specialist is a person
(or firm) possessing special skill or knowledge in a particular field
other than accounting or auditing. The Board also sought to carry
forward the concept from existing AS 1210 that income taxes and IT are
specialized areas of accounting and auditing and thus are outside the
scope of the final amendments.\51\ As discussed below, the final
amendments retain, as proposed, the meaning of the term ``specialist,''
including the concept regarding income taxes and IT.
---------------------------------------------------------------------------

    \51\ See footnote 1 of existing AS 1210.
---------------------------------------------------------------------------

    Some commenters on the Proposal agreed with retaining the existing
meaning of the term ``specialist.'' Other commenters suggested that the
Board extend the scope of the Proposal to include persons with
specialized skill or knowledge in certain areas of income taxes and IT
(e.g., unusual or complex tax matters, artificial intelligence, and
blockchain). One of these commenters also asserted that income tax and
IT professionals often support both audit and consulting practices and,
as a practical matter, are treated as specialists by auditors. One
commenter requested guidance for applying the proposed requirements
when a legal specialist is involved, while another commenter suggested
that the Board explain in the final amendments that an individual who
specializes in complex taxation law would be a legal specialist.
    One commenter suggested eliminating the distinction between
expertise ``inside'' or ``outside'' the field of accounting and
auditing with respect to an auditor's specialist because, in its view,
determining when fields of expertise are outside of accounting and
auditing is becoming more difficult. Another commenter stated that, in
practice, it can be less than straightforward to differentiate between
expertise in auditing and accounting and other areas. Other commenters,
however, asserted that the Board should retain the concept in existing
AS 1210 that an auditor is not expected to have the expertise of a
person trained or qualified to engage in the practice of another
profession or occupation.
    As used today, the term ``specialist'' is generally understood by
auditors, and observations from PCAOB oversight activities do not
indicate that there is significant confusion over the meaning of the
terms ``specialist'' and ``specialized area of accounting and
auditing,'' as they have been used in the standards. After considering
the comments received on the Proposal, however, the final amendments
retain the meaning of the term ``specialist'' as proposed, with certain
clarifications discussed below.
    Specifically, the Board included a note to clarify when the final
amendments apply to the work of an attorney used by the company.\52\ As
under existing AS 1210, specialists under the final amendments include
attorneys engaged by a company as specialists, such as attorneys
engaged by the company to interpret contractual terms or provide a
legal opinion. The final amendments apply when an auditor uses the work
of a company's attorney as audit evidence in other matters relating to
legal expertise, such as when a legal interpretation of a contractual
provision or a legal opinion regarding isolation of transferred
financial assets is necessary to determine appropriate accounting or
disclosure under the applicable financial reporting framework. The
final amendments also clarify that the scope of these amendments does
not apply to information provided by a company's attorney concerning
litigation, claims, or assessments that is used by the auditor pursuant
to AS 2505, Inquiry of a Client's Lawyer Concerning Litigation, Claims,
and Assessments.
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    \52\ See second note to AS 1105.A1, as adopted.
---------------------------------------------------------------------------

    Consistent with existing AS 1210, income taxes and IT are outside
the scope of the final amendments because they are specialized areas of
accounting and auditing. For example, while specialized areas of income
tax law involve legal specialists, accounting for income taxes remains
an area of accounting and auditing. The Board added a footnote to
Appendix A of AS 1105 that references AS 2505.08, as amended.\53\ A
note to AS 2505.08, as amended, clarifies the auditor's responsibility
regarding the use of the written advice or opinion of a company's tax
advisor or a company's tax legal counsel as audit evidence.\54\ Also,
to the extent that IT is used in information systems, auditors will
still need to maintain sufficient technical knowledge to identify and
assess risks and design procedures to respond to those risks and
evaluate the audit evidence obtained. Accordingly, the Board does not
believe that the need exists at this time to change the approach
reflected in existing AS 1210 and designate particular areas of either
income taxes or IT as outside the field of ``accounting and auditing.''
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    \53\ See footnote 1 to AS 1105.A1, as adopted.
    \54\ See note to AS 2505.08, as amended.
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Comparison With Standards of Other Standard Setters

    ISA 620 uses the terms ``auditor's expert'' and ``management's
expert'' in a manner analogous to the term ``specialist'' in the final
amendments. ISA 620, however, does not address whether IT is a
specialized field outside of accounting and auditing. The term
``management's expert'' is also defined in ISA 500.
    AU-C Section 620 and AU-C Section 500 use the word ``specialist''
instead of ``expert.''

Amendments Related to Using the Work of a Company's Specialist

    The final amendments set forth requirements for using the work of a
company's specialist as audit evidence. The amendments, which
supplement the existing requirements of AS 1105, include:
     Obtaining an understanding of the work and report(s), or
equivalent communication, of the company's specialist(s) and related
company processes and controls;
     Obtaining an understanding of and assessing the knowledge,
skill, and ability of the specialist and the entity that employs the
specialist (if other than the company), and the relationship to the
company of the specialist and the entity that employs the specialist
(if other than the company); and
     Performing procedures to evaluate the work of a company's
specialist, including evaluating: (1) The data, significant
assumptions, and methods (which may include models) used by the
specialist; and (2) the relevance and reliability of the specialist's
work and its relationship to the relevant assertion.\55\
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    \55\ Key principles from Auditing Interpretation AI 11, Using
the Work of a Specialist: Auditing Interpretations of AS 1210, and
Auditing Interpretation AI 28, Evidential Matter Relating to Income
Tax Accruals: Auditing Interpretations, related to the auditor's use
of the work of a company's attorney and the use of written tax
advice or opinions as audit evidence have been incorporated in AS
1105.A1, as adopted, and a note added to AS 2505.08, as amended.

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    Commenters on the Proposal generally supported a risk-based
approach for using the work of a company's specialist, as set forth in
the proposed amendments. Many commenters also stated that there was a
need to establish a separate standard for using the work of a company's
specialist. However, a number of commenters questioned various aspects
of the amendments, including the need for revisions to existing AS 1210
relating to the use of the work of a company's specialist.
Additionally, some commenters requested clarifications or suggested
changes to the proposed requirements. These and other comments are
discussed below. A number of these comments resulted in revisions and
clarifications to the final amendments.

Obtaining an Understanding of the Work of the Company's Specialist

See AS 1105.A2, as Adopted, and AS 2110.28A, as Adopted
    The proposed amendments to AS 1105 provided that obtaining an
understanding of the company's information system relevant to financial
reporting would encompass obtaining an understanding of the work and
report(s) of the company's specialist(s) and related company processes
and controls.\56\
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    \56\ See proposed AS 1105.B2.
---------------------------------------------------------------------------

    Some commenters supported the proposed requirement because, in
their view, an understanding of the company's processes for using the
work of company specialists is integral to the auditor's understanding
of the information system relevant to financial reporting. Two
commenters asserted that such controls are important for the auditor to
consider when evaluating the work of a company's specialist and
determining the necessary audit procedures. One commenter expressed
concern that the proposed requirement was too broad and suggested that
the auditor's understanding should instead be part of the evaluation of
the specialist's objectivity. In addition, two commenters questioned
whether the Board intended to require the auditor to evaluate the
design of controls over the use of company specialists, even if the
auditor was not performing an audit of internal control over financial
reporting or planning to rely on controls for the related assertions.
These commenters and others suggested that placing the proposed
requirement for obtaining an understanding of the specialist's work in
AS 2110 would better link the requirement to the auditor's risk
assessment procedures, thereby reducing the likelihood that auditors
would consider only the factors in proposed AS 1105.B2 and fail to
consider other relevant factors set forth in AS 2110.
    The Board considered these comments and is adopting the requirement
substantially as proposed, but relocating the requirement to AS 2110 as
suggested by certain commenters.\57\ The procedure builds upon a
requirement in existing AS 1210 that the auditor obtain an
understanding of the nature of the work performed or to be performed by
a specialist,\58\ but is more closely aligned with the required risk
assessment procedures in AS 2110. The required procedure is important
because it informs the auditor's evaluation of the work of the
company's specialist, and not merely the assessment of the specialist's
objectivity.
---------------------------------------------------------------------------

    \57\ Specifically, the requirements are located in AS 2110.28A,
as adopted.
    \58\ See existing AS 1210.09.
---------------------------------------------------------------------------

    Placing the requirement for obtaining an understanding of the
specialist's work and report(s), or equivalent communication, in AS
2110, and framing the required procedure as a risk assessment
procedure, provides better direction regarding the necessary audit
effort for the procedure. The necessary audit effort for performing
this procedure is governed primarily by the general requirements in AS
2110 for obtaining a sufficient understanding of the company's internal
control over financial reporting.\59\ This includes consideration of
whether the auditor plans to use the specialist's work as audit
evidence.
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    \59\ See AS 2110.18, which provides that the auditor should
obtain a sufficient understanding of each component of internal
control over financial reporting to: (1) Identify the types of
potential misstatements, (2) assess the factors that affect the
risks of material misstatement, and (3) design further audit
procedures. See also AS 2110.19, which further provides that the
nature, timing, and extent of procedures that are necessary to
obtain an understanding of internal control depend on the size and
complexity of the company; the auditor's existing knowledge of the
company's internal control over financial reporting; the nature of
the company's controls, including the company's use of IT; the
nature and extent of changes in systems and operations; and the
nature of the company's documentation of its internal control over
financial reporting. In addition, AS 2110.20 provides that obtaining
an understanding of internal control includes evaluating the design
of controls that are relevant to the audit and determining whether
the controls have been implemented.
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    While the requirement, as adopted, likely will not represent a
major change in practice, particularly for those firms whose practices
already go beyond existing PCAOB standards, it should prompt auditors
to appropriately consider the interaction of the specialist's work and
the company's related processes and controls. For example, under the
final amendments, the auditor should obtain an understanding of
controls for using the work of specialists that are relevant to the
audit, including evaluating the design of those controls and
determining whether those controls have been implemented.\60\
---------------------------------------------------------------------------

    \60\ AS 2110.34 provides additional direction for determining
controls relevant to the audit.
---------------------------------------------------------------------------

Comparison With Standards of Other Standard Setters

    The requirements in ISA 500 and AU-C 500 have some commonality with
the requirements in the final amendments. Paragraph 8(b) of ISA 500
states that, if information to be used as audit evidence has been
prepared using the work of a management's expert, the auditor shall, to
the extent necessary and having regard to the significance of that
expert's work for the auditor's purposes, obtain an understanding of
the work of that expert.
    AU-C Section 500 contains requirements that are similar to those in
ISA 500.

Assessing the Knowledge, Skill, and Ability of the Company's Specialist
and the Specialist's Relationship to the Company

See AS 1105.A3-.A5, as Adopted
    The final amendments set forth requirements similar to existing AS
1210 for evaluating the knowledge, skill, and ability of the specialist
and the relationship of the specialist to the company.\61\
---------------------------------------------------------------------------

    \61\ Existing AS 1210.08 and AS 1210.10-.11 require the auditor
to evaluate the professional qualifications of a specialist and the
relationship of a specialist to the company.
---------------------------------------------------------------------------

Knowledge, Skill, and Ability

    The Proposal set forth a requirement similar to that in existing AS
1210 for evaluating the professional qualifications of the specialist
and generally provided the same factors for the auditor's assessment of
the specialist's knowledge, skill, and ability.\62\
---------------------------------------------------------------------------

    \62\ Existing AS 1210.08 provides that the auditor should
consider certain information in evaluating the professional
qualifications of the specialist to determine that the specialist
possesses the necessary skill or knowledge in the particular field.
The information to be considered in that evaluation is: (1) The
professional certification, license, or other recognition of the
competence of the specialist in his or her field, as appropriate;
(2) the reputation and standing of the specialist in the views of
peers and others familiar with the specialist's capability or
performance; and (3) the specialist's experience in the type of work
under consideration.

---------------------------------------------------------------------------

    The Proposal differed from existing AS 1210, however, in certain
respects. First, the Proposal extended the required understanding to
expressly include the entity that employs the specialist, if the
specialist is not employed by the company. Second, the Proposal
expressly referred to the specialist's ``level'' of knowledge, skill,
and ability. As with the auditor's assessment of competence under AS
2605, Consideration of the Internal Audit Function, this approach
recognized that specialists may possess varying degrees of knowledge,
skill, and ability. Third, the Proposal provided that the necessary
evidence to assess the level of knowledge, skill, and ability of the
company's specialist would depend on (1) the significance of the
specialist's work to the auditor's conclusion regarding the relevant
assertion and (2) the risk of material misstatement of the relevant
assertion. Under this approach, the persuasiveness of the evidence the
auditor would need to obtain increases as the significance of the
specialist's work to the auditor's conclusion or the risk of material
misstatement of the relevant assertion increases.\63\
---------------------------------------------------------------------------

    \63\ Illustrative examples on the application of these factors
when testing and evaluating the work of a company's specialist
appear in the discussion on determining the necessary audit effort
under AS 1105.A7, as provided below.
---------------------------------------------------------------------------

    The Board is adopting the requirement for evaluating the
professional qualifications of the specialist as proposed. Most
commenters on this aspect of the Proposal acknowledged the need for the
auditor to obtain an understanding of and assess the knowledge, skill,
and ability of a company's specialist. One commenter asserted that the
proposed requirement was not well-suited to assessing the
qualifications of the entity that employs the specialist. The Board
considered this comment and notes that the final requirement retains
the concept in existing AS 1210 that a specialist may be an individual
or an entity. Accordingly, auditors should be familiar with assessing
the qualifications of entities that are specialists or employ
specialists. Furthermore, a strong reputation and standing of the
specialist's employer in the specialized field can be a signal that the
employer maintains qualified staff. On the other hand, an employer with
a poor reputation or little expertise in the specialized field can
indicate that more scrutiny of the qualifications of the individual
specialist is warranted.
    Some commenters asked for more direction on how to obtain an
understanding of the professional qualifications of the company's
specialist and the entity that employs the specialist (for example, by
including in the rule text the discussion from the proposing release of
potential sources of information about a specialist's qualifications).
One of these commenters asserted that there are practical limits on
obtaining evidence related to a company-engaged specialist's
competence.
    The Board considered these comments, but notes that the final
requirement is similar to a requirement in existing AS 1210. Outreach
to audit firms suggests that firms have policies and procedures for
evaluating the qualifications of specialists, whether individuals or
entities. Auditors should therefore be familiar with the process of
assessing the knowledge, skill, and ability of entities that employ
specialists.
    As with existing AS 1210, the final amendments do not set forth
specific steps to perform in assessing the specialist's knowledge,
skill, and ability. It is not practicable to provide detailed direction
in this area because of the variety of types of specialists that may be
encountered. Examples of potential sources of information that, if
available, could be relevant to the auditor's evaluation include:
     Information contained within the audit firm related to the
professional qualifications and reputation of the specialist or the
entity that employs the specialist (if other than the company) in the
relevant field and experience with previous work of the specialist;
     Professional or industry associations and organizations,
which may provide information regarding: (1) Qualification
requirements, technical performance standards, and continuing
professional education requirements that govern their members; (2) the
specialist's education and experience, certification, and license to
practice; and (3) recognition of, or disciplinary actions taken
against, the specialist;
     Discussions with the specialist, through the company,
about matters such as the specialist's understanding of the financial
reporting framework, the specialist's experience in performing similar
work, and the methods and assumptions used in the specialist's work the
auditor plans to evaluate;
     Information obtained as part of audit planning, when
obtaining an understanding of the company's processes and identifying
controls for testing;
     Information included in the specialist's report about the
specialist's professional qualifications (e.g., a biography or resume);
     Responses to questionnaires provided to the specialist
regarding the specialist's professional credentials; and
     Published books or papers written by the specialist.
    Requirements applicable to a specialist pursuant to legislation or
regulation also could help inform the auditor's assessment of the
specialist's knowledge, skill, and ability.
    Some of the examples listed above may provide more persuasive
evidence than others.\64\ For example, relevant information from a
source not affiliated with the company or specialist, the auditor's
experience with previous work of the specialist, or multiple sources
generally would provide more persuasive evidence than evidence from the
specialist's uncorroborated representations about his or her
professional credentials. Additionally, the reliability (and thus
persuasiveness) of information about the specialist's credentials and
experience increases when the company has effective controls over that
information, e.g., in conjunction with controls over the selection of
qualified specialists.
---------------------------------------------------------------------------

    \64\ As previously discussed, the risk of material misstatement
of the relevant assertion and the significance of the specialist's
work to the auditor's conclusion regarding the relevant assertion
affect the persuasiveness of the evidence needed with respect to the
knowledge, skill, and ability of the company's specialist.
---------------------------------------------------------------------------

    Some commenters asked for clarification as to how the company's
controls and processes for using the work of a company's specialist
should be considered when performing the assessment of knowledge,
skill, and ability. As discussed earlier, the interaction of the
specialist's work and the company's processes should be considered by
the auditor in assessing and responding to risk in the related accounts
and disclosures, especially when the specialist's work is significant
to the auditor's conclusion regarding the relevant assertion and the
accounts or disclosures have higher risk. Therefore, the company's
controls and processes are considered in identifying and appropriately
assessing the risks of material misstatement of the relevant assertion,
which is one of the two factors that the auditor considers under AS
1105.A5, as adopted, in determining the necessary evidence for
assessing the specialist's level of knowledge, skill, and ability.

Relationship to the Company

    The Proposal provided that the auditor would assess the
relationship to the company of the specialist and the entity that
employs the specialist (if other than the company)--specifically,
whether circumstances exist that give the company the ability to
significantly affect the specialist's judgments about the work
performed, conclusions, or findings (e.g., through employment,
financial, ownership, or other business relationships, contractual
rights, family relationships, or otherwise). The proposed requirement
was similar to existing AS 1210.10, but expanded the list of matters
that the auditor should consider to include financial and business
relationships with the company.
    The Board is adopting this requirement substantially as proposed,
with the addition of a note that sets forth examples of potential
sources of information that could be relevant to the auditor's
assessment.
    Some commenters supported the proposed requirement for the auditor
to assess the specialist's relationship to the company and stated that
it was appropriate. Two commenters, however, asserted that there could
be practical challenges to assessing the relationship to the company of
the entity that employs the specialist (e.g., if the entity that
employs the specialist lacks systems to track such relationships or the
auditor does not have access to those systems). The Board considered
these comments, but notes that existing AS 1210 already requires an
evaluation of the relationship of the specialist, whether an individual
or an entity, to the client. Outreach to audit firms suggests that
firms have policies and procedures for evaluating the objectivity of
specialists, whether individuals or entities. Therefore, auditors
should be familiar with assessing the qualifications of entities that
are specialists or employ specialists.
    Other commenters asked for additional direction regarding the
necessary effort to obtain information regarding the specialist's
relationship to the company. One commenter also emphasized the
importance of considering ethical and performance requirements
promulgated by a specialist's profession or by legislation or
regulation governing the specialist. The final amendments do not
prescribe specific steps to perform in assessing the specialist's
relationship to the company, because additional specificity would make
the requirements unnecessarily prescriptive. The Board has added a note
to the final requirement, however, that includes non-exclusive examples
of potential sources of information that could be relevant to the
auditor's assessment of the relationship to the company of both the
specialist and the specialist's employer (if other than the
company).\65\ These examples include disclosures by the specialist
about relationships with the company in the specialist's report, or
equivalent communication, pursuant to requirements promulgated by the
specialist's profession or by legislation governing the specialist.\66\
As with the auditor's assessment of a specialist's knowledge, skill,
and ability, certain sources of information may provide more persuasive
evidence than others. In situations where more persuasive evidence is
required under these requirements, it may be appropriate to perform
procedures to obtain evidence from multiple sources.
---------------------------------------------------------------------------

    \65\ See note to AS 1105.A4, as adopted. These examples were
based on examples set forth in the Proposal, but have been refined
to better reflect their application in practice.
    \66\ While the Proposal had suggested that information regarding
such requirements could be relevant to the auditor's evaluation of
the specialist's relationships to the company, disclosures about
relationships pursuant to such requirements are more relevant to the
auditor's assessment than merely information about the legal or
professional requirements.
---------------------------------------------------------------------------

    Some commenters also expressed a preference for retaining the term
``objectivity'' with respect to a company's specialist and further
acknowledging that objectivity may exist along a spectrum. Similar to
the Proposal, the final amendments reserve the term ``objectivity'' for
specialists engaged by the auditor to assist in obtaining and
evaluating audit evidence. The work of a company's specialist is
different in nature from the work of an auditor's specialist, since a
company's specialist performs work that the company frequently uses as
source material for one or more financial statement accounts or
disclosures, including accounting estimates. With respect to the
existence of objectivity along a spectrum, the final amendments
recognize that a company's ability to significantly affect a
specialist's judgment may vary and, as discussed below, provide a
spectrum for evaluating the company's ability to significantly affect
the specialist's judgments.
    As was proposed, the final amendments provide that, if the auditor
identifies relationships between the company and the specialist (or the
specialist's employer, if other than the company), the auditor has a
responsibility to assess whether the company has the ability to
significantly affect the specialist's judgments about the work
performed, conclusions, or findings.\67\ Examples of the types of
circumstances that might give the company the ability to affect the
specialist's judgments include, but are not limited to:
---------------------------------------------------------------------------

    \67\ See AS 1105.A4, as adopted.
---------------------------------------------------------------------------

     The reporting relationship of a company-employed
specialist within the company;
     Compensation of a company's specialist based, in part, on
the outcome of the work performed;
     Relationships a company-engaged specialist has with
entities acting as an agent of the company;
     Personal relationships, including family relationships,
between the company's specialist and others within company management;
     Financial interests, including stock holdings, company
specialists have in the company; and
     Ownership, business relationships, or other financial
interests the employer of a company-engaged specialist has with respect
to the company.
    The auditor's assessment that the company has the ability to
influence the specialist, however, does not preclude the auditor from
using the work of a company's specialist, whether employed or engaged,
as audit evidence. Rather, consistent with existing AS 1210, it is a
factor in determining the necessary audit effort to evaluate that
specialist's work.\68\ In general, the necessary audit effort increases
as the company's ability to affect the specialist's judgments
increases.
---------------------------------------------------------------------------

    \68\ See AS 1105.A7-.A10, as adopted. Examples that illustrate
how relationships between the company and the company's specialist
can affect the necessary audit effort in evaluating the work of a
company's specialist under the final amendments appear in the
discussion on determining the necessary evidence, as provided below.
---------------------------------------------------------------------------

Determining the Necessary Evidence

    The Proposal differed from existing AS 1210 in that it set forth
scalable requirements for determining the necessary evidence for
evaluating both the knowledge, skill, and ability of the specialist and
the relationship of the specialist to the company. The Board is
adopting these requirements as proposed. Under the final amendments,
the necessary evidence to assess the level of knowledge, skill, and
ability of the company's specialist and the specialist's relationship
to the company depends on (1) the significance of the specialist's work
to the auditor's conclusion regarding the relevant assertion and (2)
the risk of material misstatement of the relevant assertion. As the
significance of the specialist's

work and risk of material misstatement increases, the persuasiveness of
the evidence the auditor should obtain for those assessments also
increases.\69\
---------------------------------------------------------------------------

    \69\ See AS 1105.A5, as adopted.
---------------------------------------------------------------------------

    No commenters opposed the proposed framework for determining the
necessary evidence. A number of commenters, however, asked for
clarification on the application of the requirement when performing the
relevant evaluations. The Board's analysis of these comments is
discussed above in connection with the required evaluations of the
specialist's knowledge, skill, and ability, and the relationship of the
specialist to the company.

Comparison With Standards of Other Standard Setters

    Paragraph 8(a) of ISA 500 provides that, if information to be used
as audit evidence has been prepared using the work of a management's
expert, the auditor shall, to the extent necessary and having regard to
the significance of that expert's work for the auditor's purposes,
evaluate the competence, capabilities, and objectivity of that expert.
    AU-C Section 500 contains requirements that are similar to those in
ISA 500.

Evaluating the Work of the Company's Specialist

See AS 1105.A6-.A10, as Adopted
    In general, a specialist's work involves using data, assumptions,
and methods. The auditor's responsibilities under existing AS 1210 with
respect to the data, assumptions, and methods used by the specialist
are limited to (a) obtaining an understanding of the methods and
assumptions used by the specialist and (b) making appropriate tests of
data provided to the specialist.\70\ In addition, the auditor should
evaluate whether the specialist's findings support the related
assertions in the financial statements.\71\ Ordinarily, the auditor
would use the work of the specialist unless the auditor's procedures
lead the auditor to believe the findings are unreasonable in the
circumstances.\72\ If the auditor believes the specialist's findings
are unreasonable, he or she is required to apply additional procedures,
which may include potentially obtaining the opinion of another
specialist.\73\ Notably, before the final amendments, PCAOB standards
have not expressly addressed how to determine the necessary audit
effort to be applied in performing those procedures.
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    \70\ For fair value measurements, however, another standard
requires the auditor to evaluate the reasonableness of significant
assumptions of the specialist. See footnote 2 of AS 2502. This
standard is being superseded in the Estimates Release, supra note
20.
    \71\ See existing AS 1210.12.
    \72\ Id.
    \73\ Id.
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    The Proposal sought to enhance the requirements for testing and
evaluating the work of the company's specialist by:
     Extending the auditor's responsibilities for evaluating
the specialist's assumptions to include all significant assumptions
used by the specialist (not just those used in fair value
measurements);
     Expanding the auditor's responsibilities with respect to
data to include evaluating external data used by the specialist (not
just data provided by the company to the specialist);
     Adding a requirement for the auditor to evaluate the
appropriateness of the methods used by the specialist, including
whether the data was appropriately applied;
     Setting forth a requirement for the auditor to comply with
the Board's proposed estimates standard \74\ when the auditor tests
management's process for developing an estimate and a company's
specialist was used; and
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    \74\ See Proposed Auditing Standard--Auditing Accounting
Estimates, Including Fair Value Measurements and Proposed Amendments
to PCAOB Auditing Standards, PCAOB Release No. 2017-002 (June 1,
2017).
---------------------------------------------------------------------------

     Providing direction for determining the necessary audit
effort for testing and evaluating the specialist's work, based on the
risk of material misstatement and other factors set forth in the
standard.
    Commenters expressed mixed views on the premise underlying the
Proposal that the auditor should test and evaluate the work of a
company's specialist. While a number of commenters supported that
premise, other commenters opposed expanding the auditor's
responsibilities with respect to the specialist's methods and
assumptions beyond existing AS 1210. Some of these commenters expressed
concerns that the auditor may not be qualified to evaluate the work of
a specialist and recommended retaining the more limited audit approach
reflected in existing AS 1210, including the statement that ``the
auditor is not expected to have the expertise of a person trained for
or qualified to engage in practice of another profession or
occupation.''
    A number of commenters also addressed specific aspects of the
proposed requirements for testing and evaluating the work of company
specialists. Some commenters questioned the proposal's general use of
the term ``test'' in describing the auditor's responsibilities, as well
as the proposed requirement to also comply with the proposed estimates
standard in circumstances where the auditor tests management's process
for developing an estimate and a company's specialist was also used.
Those commenters asserted that the expected audit effort was unclear.
Two commenters stated that the proposed requirements in this area could
be interpreted as requiring reperformance of the specialist's work,
which one of these commenters asserted would be beyond the expertise of
most auditors and thus require auditors to use an auditor's specialist.
    In addition, some commenters requested clarification on the
expectations for evaluating a specialist's models, especially in
situations where auditors are unable to gain access to proprietary
models used by company-engaged specialists. Some commenters also
expressed concern about the proposed requirement to evaluate whether
data was appropriately used by the specialist. Some of these commenters
asserted that this requirement appeared to require auditors to
reperform the specialist's work and suggested clarifying or eliminating
that requirement. Additionally, some commenters suggested allowing
auditors to rely on the issuer's controls over the use of specialists
in determining the necessary procedures for evaluating the specialist's
work.
    A number of commenters acknowledged that the proposed requirements
were intended to be scalable. However, some commenters questioned
whether they would be scalable in practice. Other commenters asked for
guidance on tailoring audit procedures based on risk and the other
factors set forth in the Proposal, especially procedures under the
proposed requirement to also comply with the proposed estimates
standard. Also, some commenters asserted that the requirements did not
adequately distinguish the audit effort based on whether the specialist
was engaged or employed by the company.
    After considering the comments on the Proposal, the Board is
retaining the fundamental approach in the Proposal--under which the
auditor evaluates the data, significant assumptions, and methods used
by the specialist. This approach is intended to increase audit
attention on the work of a company's specialist, particularly when that
work is significant in areas of higher risk, to increase the likelihood
that the auditor would detect material financial

statement misstatements related to that work.
    Taking into account comments on specific aspects of the proposed
requirements, however, the final amendments reflect a number of
clarifying revisions to eliminate or revise certain proposed
requirements that may have been perceived by commenters as
unnecessarily complex or prescriptive. The revisions address concerns
expressed by certain commenters, while preserving the intended benefits
of the final amendments, and include:
     Removing the word ``test'' from the requirements to
evaluate the work of the company's specialist, except in relation to
company-produced data; and
     Reframing the requirements for evaluating the data,
significant assumptions, and methods used by the specialist to describe
the key considerations in making those evaluations.
    In addition, the final amendments clarify the applicability of the
requirements in circumstances when the company's specialist is involved
in developing an accounting estimate, such as developing assumptions
and methods used in an accounting estimate. In such circumstances, the
requirements in Appendix A of AS 1105 apply to evaluating the data,
significant assumptions,\75\ and methods developed (or generated) by
the specialist, or sourced by the specialist from outside the company,
as well as to testing company-produced data. In contrast, for
significant assumptions provided by management to the specialist, the
auditor is required to look to the requirements in AS 2501, as adopted.
The final amendments are discussed in more detail below.
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    \75\ A footnote to AS 1105.A8, as adopted, refers the auditor to
AS 2501.15, as adopted, for the procedures to perform when
identifying significant assumptions. For purposes of identifying
significant assumptions, the company's assumptions include
assumptions developed by the company's specialist.
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Evaluating the Specialist's Work: Data, Significant Assumptions, and
Methods

See AS 1105.A6 and .A8, as Adopted
    The revisions reflected in the final amendments clarify the
auditor's responsibilities for evaluating the work of a company's
specialist, and are intended to avoid potential confusion that the
auditor is required to reperform the work of the company's specialist.
Among other things, the revised requirements reserve the use of the
term ``test'' for procedures applied to company-produced information
used by the specialist, consistent with its usage in AS 2501, as
adopted.\76\
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    \76\ See Estimates Release, supra note 20.
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    Notably, instead of requiring the auditor to comply with AS 2501,
as adopted, the auditor would be required to apply a set of analogous
procedures for evaluating data, significant assumptions, and methods
that are tailored to situations in which specialists are used.\77\ For
example, under the final amendments, the auditor's responsibilities
with respect to data, significant assumptions, and methods used by the
specialist generally are:
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    \77\ A note to AS 1105.A6, as adopted, emphasizes that
paragraphs .16-.17 of AS 2101 describe the auditor's
responsibilities for determining whether specialized knowledge or
skill is needed. This includes determining whether an auditor's
specialist is needed to evaluate the work of a company's specialist.
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     Company-produced data: Test the accuracy and completeness
of company-produced data used by the specialist (see AS 1105.A8a, as
adopted); \78\
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    \78\ See also AS 1105.10 for procedures when the auditor uses
information produced by the company as audit evidence.
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     Data from sources external to the company: Evaluate the
relevance and reliability of the data from sources external to the
company that are used by the specialist (see AS 1105.A8a, as adopted);
     Significant assumptions: Evaluate whether the significant
assumptions used by the specialist are reasonable:
    (1) Assumptions developed by the specialist: Taking into account
the consistency of those assumptions with relevant information (see AS
1105.A8b(1), as adopted);
    (2) Assumptions provided by company management and used by the
specialist: Looking to the requirements set forth in AS 2501.16-.18, as
adopted (see AS 1105.A8b(2), as adopted);
    (3) Assumptions based on the company's intent and ability to carry
out a particular course of action: Looking to the requirements set
forth in AS 2501.17, as adopted (see AS 1105.A8b(3), as adopted); and
     Methods: Evaluate whether the methods used by the
specialist are appropriate under the circumstances, taking into account
the requirements of the applicable financial reporting framework (see
AS 1105.A8c, as adopted).
    Under the final amendments, the focus of the auditor's evaluation
of the work of the company's specialist does not require reperforming
the specialist's work or evaluating whether the work complies with all
technical aspects in the specialist's field. Instead, the auditor's
responsibility is to evaluate whether the specialist's work provides
sufficient appropriate evidence to support a conclusion regarding
whether the corresponding accounts or disclosures in the financial
statements are in conformity with the applicable financial reporting
framework.
    With respect to the specialist's methods, the auditor's
responsibilities under PCAOB standards have historically been to
understand the method used. The final amendments extend that obligation
to encompass evaluating whether the method is appropriate under the
circumstances, taking into account the requirements of the applicable
financial reporting framework.\79\ In many cases, evaluating a method's
conformity with the applicable financial reporting requirements is the
same as evaluating its appropriateness under the circumstances (e.g.,
if the applicable accounting standard requires a particular method for
determining the estimate). However, if the applicable financial
reporting framework allows more than one method, or if the appropriate
method under the framework depends on the circumstances, evaluating
conformity with the framework involves consideration of other relevant
factors, such as, the nature of the estimate and the auditor's
understanding of the company and its environment.
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    \79\ See AS 1105.A8c, as adopted.
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    A note to the final amendments also clarifies that evaluating the
specialist's methods includes assessing whether the data and
significant assumptions are appropriately applied under the applicable
financial reporting framework.\80\ Evaluating the application of the
data encompasses, for example, whether the data is selected and
adjusted in conformity with the requirements of the applicable
financial reporting framework. Similarly, evaluating the application of
significant assumptions encompasses evaluating whether the assumptions
were selected in conformity with the requirements of the applicable
financial reporting framework.
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    \80\ See note to AS 1105.A8c, as adopted.
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    The final amendments do not require the auditor to obtain access to
proprietary models used by the specialist. Rather, the auditor's
responsibility is to obtain information to assess whether the model is
in conformity with the applicable financial reporting framework.
Depending on the model and the factors set forth in AS 1105.A7, as
adopted, this might involve, for example, obtaining an understanding of
the model, reviewing descriptions of

the model in the specialist's report or equivalent communication,
testing controls over the company's evaluation of the specialist's
work, or assessing the inputs to and output from the model (if
necessary, using an alternative model for comparison).
    With respect to the specialist's significant assumptions, auditors
have historically had an obligation under PCAOB standards to understand
the assumptions \81\ and, for fair value measurements, to evaluate the
reasonableness of the assumptions.\82\ The final amendments extend the
auditor's obligation to include evaluating the reasonableness of
significant assumptions used by the specialist. This involves comparing
the assumptions to relevant information. The note accompanying AS
1105.A8b(1), as adopted, provides examples of information that, if
relevant, should be taken into account: (1) Assumptions generally
accepted within the specialist's field; (2) supporting information
provided by the specialist; (3) industry, regulatory, and other
external factors, including economic conditions; (4) the company's
objectives, strategies, and related business risks; (5) existing market
information; (6) historical or recent experience, along with changes in
conditions and events affecting the company; and (7) significant
assumptions used in other estimates tested in the company's financial
statements. These examples--including examples (1) and (2), which were
suggested by commenters--point to information that generally would be
available to the auditor (e.g., through other procedures performed on
the audit or the auditor's knowledge or the company and its industry).
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    \81\ See existing AS 1210.09.
    \82\ See footnote 2 of AS 2502.
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    Furthermore, the final amendments provide that, if a significant
assumption is provided by company management and used by the
specialist, the auditor should look to the requirements in AS
2501.16-.18, as adopted. The final amendments also provide that, if a
significant assumption is based on the company's intent and ability to
carry out a particular course of action, the auditor should look to the
requirements set forth in AS 2501.17, as adopted. This applies
regardless of whether the significant assumption was developed by the
company or the company's specialist.

Determining the Necessary Audit Effort for Evaluating the Specialist's
Work

See AS 1105.A7, as Adopted
    Similar to the Proposal, the final amendments set forth four
factors that affect the necessary evidence from the auditor's
evaluation of the specialist's work to support a conclusion regarding a
relevant assertion. Specifically, under the final amendments, the
necessary evidence depends on the: (1) Significance of the specialist's
work to the auditor's conclusion regarding the relevant assertion; (2)
risk of material misstatement of the relevant assertion; (3) level of
knowledge, skill, and ability of the specialist; \83\ and (4) the
ability of the company to significantly affect the specialist's
judgments about the work performed, conclusions, or findings.
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    \83\ As noted previously, this factor includes consideration of
professional requirements the specialist is required to follow.
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    Some commenters asked for additional clarification or direction on
how to apply the four factors to determine the necessary audit effort
for evaluating the specialist's work. One commenter requested that the
Board elaborate upon certain terms (e.g., terms ``extensively'' and
``less extensive procedures'') that were used in two of the three
examples that were included in the Proposal to illustrate how certain
factors could affect the necessary audit effort in evaluating the work
of a company's specialist. Another commenter requested that the Board
provide additional examples of less complex scenarios.
    In addition, some commenters asserted that the Proposal did not
adequately account for differences between company-employed and
company-engaged specialists. These commenters stated that the nature
and extent of an auditor's procedures with respect to the work of a
company-engaged specialist with the necessary knowledge, skill, and
objectivity should not necessarily be the same as those for the work of
a company-employed specialist. One commenter suggested expressly
including in the list of factors performance standards that the
specialist is required to follow.
    The requirements regarding determining the necessary audit effort
for evaluating the specialist's work were adopted substantially as
proposed. The changes to the procedural requirements for evaluating the
data, significant assumptions, and methods used by the specialist
should help address concerns about the necessary level of effort under
the appendix. Also, the three examples included in the Proposal have
been revised to align with the final amendments and expanded to address
factors that lead to more or less audit attention and illustrate how
the additional attention may be directed under the circumstances.
    With respect to the distinction between company-employed and
company-engaged specialists, the Board believes that the final
amendments provide an appropriate framework for distinguishing the work
effort when using the work of such specialists. In particular, one of
the four factors related to determining the necessary audit effort is
the ability of the company to significantly affect the specialist's
judgments about the work performed, conclusions, or findings. This
factor is discussed in more detail above.
    Specifically, under the four factors set forth in the final
amendments, the auditor should obtain more persuasive evidence as the
significance of the specialist's work, the risk of material
misstatement, or the ability of the company to affect the specialist's
judgments increases, or as the level of knowledge, skill, and ability
possessed by the specialist decreases. In general, the required audit
effort when evaluating the work of a company's specialist would be
greatest when the risk of material misstatement is high; the