requirement, and the Board adopted it as proposed.
---------------------------------------------------------------------------

    \111\ See conforming amendments to AS 2201.C8, .C10, and .C11.
The terminology in these paragraphs has been updated to align with
the amendments, without changing the intent of the requirements in
these paragraphs.
---------------------------------------------------------------------------

Other Auditors' Compliance With Independence and Ethics Requirements
See Paragraphs .06D and .06F of AS 2101 112
---------------------------------------------------------------------------

    \112\ See discussion below that, in multi-tiered audits,
proposed AS 2101.06E would allow the lead auditor to seek assistance
from the first other auditor in performing the procedures described
in proposed AS 2101.06D. See also AS 1206 for requirements relating
to audits involving referred-to auditors.
---------------------------------------------------------------------------

    The amendments to AS 2101 relating to auditor independence and
ethics requirements build on the existing, overarching responsibility
of the auditor to determine compliance with independence and ethics
requirements.\113\ The amendments are designed to position the lead
auditor to identify matters that warrant further attention when
determining the other auditor's compliance with those requirements.
Commenters on the proposing releases generally agreed that the lead
auditor should perform procedures regarding other auditors' compliance
with these requirements. Several commenters, however, raised questions
about specific aspects of the provisions, which are discussed below.
---------------------------------------------------------------------------

    \113\ See AS 2101.06b (requiring the auditor to ``[d]etermine
compliance with independence and ethics requirements'' at the
beginning of the audit and to reevaluate the determination
throughout the audit). As noted above, the use of ``independence and
ethics requirements'' in this release refers to PCAOB independence
and ethics requirements and SEC independence requirements.
---------------------------------------------------------------------------

Understanding the Other Auditor's Knowledge and Experience; Obtaining
an Affirmation About Policies and Procedures, Changes in Circumstances
See Paragraphs .06Da, .06Db(1), and .06Dc(1)-(2) of AS 2101
    The Board adopted the amendments discussed in this section as they
were proposed in the 2021 SRC. The

amendments in AS 2101.06D require the lead auditor to perform certain
procedures ``in conjunction with determining compliance with''
independence and ethics requirements, to carry out its responsibilities
pursuant to the existing requirements in paragraph .06b of AS 2101.
    AS 2101.06Da requires that the lead auditor obtain an understanding
of the other auditor's knowledge of independence and ethics
requirements and its experience in applying the requirements. AS
2101.06Db(1) requires that the lead auditor obtain from the other
auditor and review a written affirmation \114\ as to whether the other
auditor has policies and procedures that provide reasonable assurance
that it maintains compliance with independence and ethics requirements.
If the other auditor does not have such policies and procedures, the
lead auditor is required to obtain from the other auditor and review a
written description of how the other auditor determines its compliance
with the independence and ethics requirements.
---------------------------------------------------------------------------

    \114\ The final amendments use the term ``affirmation'' for
certain communications within the engagement team (see, e.g., AS
2101.06Db, AS 2101.06F, and AS 2101.06Hb), to better differentiate
them from certain communications outside the engagement team, which
are described in the amendments as ``representations'' (see, e.g.,
AS 1206).
---------------------------------------------------------------------------

    The amendments require the lead auditor to (i) inform the other
auditor of changes in circumstances of which the lead auditor becomes
aware, and (ii) request that the other auditor update its affirmations
and descriptions for changes in circumstances of which the other
auditor becomes aware (including changes communicated by the lead
auditor) and provide those documents to the lead auditor upon becoming
aware of such changes.\115\ These amendments are meant to provide the
lead auditor with information necessary for it to reevaluate compliance
with independence and ethics requirements.\116\ Communications required
by the amendments also reflect policies already adopted by a number of
registered firms.
---------------------------------------------------------------------------

    \115\ See AS 2101.06Dc, which applies to all affirmations and
descriptions required by paragraph .06Db.
    \116\ See note to AS 2101.06b regarding reevaluating compliance.
---------------------------------------------------------------------------

    The Board notes that the nature and extent of the lead auditor's
procedures for obtaining an understanding under paragraph .06Da will
depend on the types of information available to the lead auditor about
the other auditor. The following are examples of types of information
that may be relevant to the lead auditor's understanding of the other
auditor's knowledge of independence and ethics requirements, and the
other auditor's experience in applying the requirements:
     The type, frequency, and substance of independence and
ethics training that the other auditor provides to its personnel who
participate in the audit;
     The other auditor's policies and procedures for ensuring
that the firm and its personnel comply with independence and ethics
requirements, including PCAOB Rule 3520, Auditor Independence; \117\
---------------------------------------------------------------------------

    \117\ See also QC 20, System of Quality Control for a CPA Firm's
Accounting and Auditing Practice.
---------------------------------------------------------------------------

     The other auditor's process for determining that the other
auditor, including the firm and its applicable personnel, does not have
financial or employment relationships that might impair the lead
auditor's independence on the audit; \118\
---------------------------------------------------------------------------

    \118\ See Rules 2-01(c)(1) and 2-01(c)(2) of Regulation S-X, 17
CFR 210.2-01(c)(1) and 17 CFR 210.2-01(c)(2).
---------------------------------------------------------------------------

     The other auditor's process for obtaining timely
information about the audit client and its affiliates from which the
other auditor firm is required to maintain independence, including an
understanding of all non-audit services initiated or about to be
initiated for the audit client by the other auditor; \119\ and
---------------------------------------------------------------------------

    \119\ PCAOB and SEC independence rules define ``affiliate of the
audit client.'' See PCAOB Rule 3501(a)(ii); Rule 2-01(f)(4) of
Regulation S-X, 17 CFR 210.2-01(f)(4). For rules regarding the
prohibition of non-audit services, see Rules 2-01(c)(4) and 2-01(b)
of Regulation S-X, 17 CFR 210.2-01(c)(4) and 17 CFR 210.2-01(b);
PCAOB Rule 3522, Tax Transactions; and PCAOB Rule 3523, Tax Services
for Persons in Financial Reporting Oversight Roles. See also PCAOB
Rule 3521, Contingent Fees.
---------------------------------------------------------------------------

     Any business relationships between the other auditor
(including the firm and its applicable personnel) and the audit client,
or persons associated with the audit client in a decision-making
capacity, such as officers, directors, or substantial
stockholders.\120\
---------------------------------------------------------------------------

    \120\ See Rule 2-01(c)(3) of Regulation S-X, 17 CFR 210.2-
01(c)(3).
---------------------------------------------------------------------------

    Sources of relevant information about the other auditor may differ
depending, for example, on whether the lead auditor and other auditor
are affiliated with the same network of accounting firms. In practice,
some networks have procedures for sharing among select personnel of
their member firms certain information about the results of internal or
external inspections of the affiliates, conducted either by the network
itself or by outside parties such as the PCAOB.
    Commenters on the 2021 SRC generally supported the modifications
made to proposed AS 2101.06D, including the requirement to obtain
written affirmations from the other auditor about whether the other
auditor's policies and procedures provide reasonable assurance of
compliance with independence and ethics, and whether the other auditor
is in compliance. However, some commenters asked the Board to modify
the requirements for the written affirmation and noted that a firm's
quality control assessment with respect to independence is done on an
annual basis. These commenters recommended that the Board align the
amendments in this rulemaking with those of the PCAOB's project
regarding quality control standards.\121\ In the view of one of these
commenters, it was not the Board's intention to require the other
auditor engagement team members to make their own conclusion about an
aspect of their firm's quality control system relative to a particular
engagement.
---------------------------------------------------------------------------

    \121\ Concept Release: Potential Approach to Revisions to PCAOB
Quality Control Standards, PCAOB Release No. 2019-003 (Dec. 17,
2019).
---------------------------------------------------------------------------

    Even in circumstances when other auditor engagement team members
rely on their firm's quality control system for independence and ethics
compliance, the Board believes it is appropriate to require the lead
auditor to request and obtain in the context of an audit an affirmation
that the other auditor's firm has the necessary policies and
procedures. In practice, audit engagement teams typically exchange
information with their own firm's quality control function relating to
compliance with certain independence and ethics requirements. However,
if an other auditor does not have policies and procedures that provide
reasonable assurance that it complies with such requirements, it is
appropriate to require that the lead auditor request and obtain a
description of how the other auditor determines its compliance with the
independence and ethics requirements. The Board believes that this
requirement is appropriate today and will remain appropriate after
firms implement the IAASB's newly adopted International Standard on
Quality Management 1 (``ISQM 1''), which will require firms that
perform audits under IAASB standards to evaluate the effectiveness of
its quality control system, or under PCAOB standards if the Board were
to adopt a similar requirement.\122\
---------------------------------------------------------------------------

    \122\ The IAASB adopted ISQM 1 in December 2020, and it will
become effective on December 15, 2022. See IAASB, ISQM 1, Quality
Management for Firms that Perform Audits or Reviews of Financial
Statements, or Other Assurance or Related Services Engagements (Dec.
17, 2020).

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

    In addition, a couple of commenters suggested requiring that the
lead auditor make the other auditor aware of PCAOB and SEC independence
requirements that are relevant to the company.
    The requirement for the lead auditor to obtain an understanding
(pursuant to paragraph .06Da) is designed to assist the lead auditor in
determining its course of action regarding the other auditor's
independence and ethics compliance. For example, other auditors with
less knowledge and experience may be less able to provide the
information the lead auditor needs to determine compliance with
independence and ethics requirements. The lead auditor may need to
communicate PCAOB and SEC independence requirements to some other
auditors (e.g., those who are less familiar with the requirements) but
not to others (e.g., those who are more familiar with the
requirements). The Board believes the amendments are sufficiently
principles-based to allow the lead auditor to adjust its procedures
according to the circumstances of the audit, including with respect to:
     Making other auditors aware of the relevant independence
and ethics requirements for the audit engagement, including affirming
compliance not only with respect to their audit client, but also with
respect to any affiliates of that audit client;
     Confirming that the other auditors understand the
requirements; and
     Considering whether additional information for other
auditors is necessary regarding the independence and ethics
requirements that are relevant to the audit engagement.
    With respect to AS 2101.06Dc(1)-(2), one commenter stated that it
is not necessary for other auditors to reaffirm in writing every update
that is communicated by the lead auditor. The Board believes that an
informative record of relevant matters is important for determining
compliance with independence and ethics requirements. Auditor
independence is critical for an effective audit; lack of independence
can compromise the effectiveness of audit procedures performed by the
other auditor. The amendments are designed to provide the lead auditor
with timely information indicating that the other auditor's
independence may be compromised, thus enabling the lead auditor to take
any necessary action during the course of the audit.
Obtaining a Written Description of the Other Auditor's Covered
Relationships
See Paragraph .06Db(2) of AS 2101
    Under the amendments, the lead auditor should obtain from the other
auditor and review a written description of all relationships between
the other auditor and the audit client or persons in financial
reporting oversight roles at the audit client \123\ that may reasonably
be thought to bear on independence pursuant to the requirements of
paragraph (b)(1) of PCAOB Rule 3526, Communication with Audit
Committees Concerning Independence.\124\ The requirement is designed to
assist the lead auditor in obtaining information for determining
compliance with SEC and PCAOB independence requirements and to
facilitate auditor communications to the audit committee under Rule
3526. The amendments do not change the applicability of Rule 3526 to
the lead auditor's representation, including with respect to
unaffiliated firms.\125\
---------------------------------------------------------------------------

    \123\ PCAOB Rule 3501, Definitions of Terms Employed in Section
3, Part 5 of the Rules, defines the terms ``audit client'' and
``financial reporting oversight role.'' The terms used in AS
2101.06Db(2) have the same meaning as defined in Rule 3501.
    \124\ Rule 3526 requires auditors to make certain communications
to the audit committee of the audit client before accepting an
initial engagement, and annually thereafter, including a
description, in writing, of ``all relationships between the
registered public accounting firm or any affiliates of the firm and
the audit client or persons in financial reporting oversight roles
at the audit client that, as of the date of the communication, may
reasonably be thought to bear on independence.'' See also Staff
Guidance, Rule 3526(b) Communications with Audit Committees
Concerning Independence (May 31, 2019), which addresses questions
that have arisen in practice regarding application of Rule 3526(b)
in certain circumstances.
    \125\ See Ethics and Independence Rule 3526, Communication with
Audit Committees Concerning Independence, PCAOB Release No. 2008-003
(Apr. 22, 2008), at 5 note 4, which states that the Board ``expects
the primary auditor's report to either include any covered
relationships of any secondary auditors not affiliated with the firm
or state that it does not do so'' (emphasis added).
---------------------------------------------------------------------------

    One commenter supported the proposed requirement, noting that PCAOB
Rule 3526 requires communication only from the lead auditor to the
audit committee. The commenter added that the proposed new
requirement--with respect to the lead auditor determining an other
auditor's compliance with independence and ethics requirements rather
than simply inquiring about it (e.g., under extant AS 1205)--aligns the
responsibility to make such determination better with the required
communication.
    No commenters opposed this requirement, and the Board adopted it as
proposed.
Obtaining a Written Affirmation About the Other Auditor's Compliance
With Independence and Ethics Requirements
See Paragraph .06Db(3) of AS 2101
    Under the amendments, the lead auditor should obtain from the other
auditor and review a written affirmation as to whether the other
auditor is in compliance with independence and ethics requirements with
respect to the audit client, and if it is not in compliance, the lead
auditor should obtain and review a written description of the nature of
the instances of non-compliance. This requirement was originally
introduced in the 2016 Proposal, to strengthen a requirement in AS
1205, which is being rescinded, to make inquiries concerning the other
auditor's independence.\126\ This provision was revised and clarified
in the amendments proposed in the 2017 and 2021 SRCs to require in
addition that the lead auditor obtain and review a description of the
nature of the instances of any non-compliance.
---------------------------------------------------------------------------

    \126\ See AS 1205.10b.
---------------------------------------------------------------------------

    One commenter on the 2021 SRC recommended that the Board modify the
proposed requirement to also include the other auditor's conclusion
regarding whether it is capable of exercising objective and impartial
judgment on all issues encompassed in its work. In response, the Board
noted that the lead auditor can determine its course of action based on
the facts and circumstances of the audit engagement, without the Board
prescribing a course of action in the amendments. Therefore, the Board
did not make additional changes to this requirement and adopted it as
proposed.
Following Up on Contrary Information
See Paragraph .06F of AS 2101
    The amendments to AS 2101 direct the lead auditor to follow up on
contrary information. The amendments provide that if the lead auditor
becomes aware of information that contradicts the other auditor's
affirmation or description (including information about changed
circumstances), the lead auditor should investigate the circumstances
and consider the reliability of the affirmation or description.
Further, if, after such investigation, or based on the other auditor's
affirmation or description, there are indications that the other
auditor is not in compliance with independence and ethics requirements,
the lead auditor should consider the implications for fulfilling its
own responsibilities under AS 2101.06b and PCAOB Rules 3520 and 3526.
    Two commenters on the 2021 SRC expressed concerns with the words
``investigate'' and ``investigation'' in the proposed amendments. The
Board notes that the terms are used in other PCAOB auditing standards
and generally refer to

taking a closer look at a matter to determine a further course of
action.\127\ After considering the comments, the Board adopted this
requirement as proposed.
---------------------------------------------------------------------------

    \127\ See, e.g., paragraphs .17, .20-.21 of AS 2305, Substantive
Analytical Procedures (investigation and evaluation of significant
differences from expectations about assertions related to the
financial statements).
---------------------------------------------------------------------------

Obtaining Information at the Individual or Firm Level
See Note to Paragraph .06D of AS 2101
    The amendments include a note to AS 2101.06D stating that
information required to be provided to the lead auditor under AS
2101.06D may cover the other auditor's firm and engagement team members
who are partners, principals, shareholders, or employees of the other
auditor firm.
    Some commenters on the proposing releases questioned the
practicability of applying the requirements to individual engagement
team members. Further, one commenter on the 2021 SRC specifically asked
for clarification regarding the level (i.e., firm, individual, or both)
at which the lead auditor is expected to apply the requirements in
paragraph .06Da (obtaining an understanding of other auditors'
knowledge and experience) and how to interpret the proposed note to
paragraph .06D.
    The definition of ``other auditor'' in the amended standards
includes both an other auditor firm and individuals at that firm. The
affirmations and descriptions required by the amendments could be
prepared and provided by the other auditor firm and address all covered
relationships. In our experience, firms typically have the necessary
information available centrally, including information about processes
for determining compliance with independence and ethics requirements,
and about individuals at the firm, including their level of experience
in applying the requirements. Obtaining from a firm a written
affirmation or description that also encompasses relevant individuals
at the firm would satisfy the requirement to obtain a written
affirmation or description ``from the other auditor'' for those persons
at that firm.
PCAOB Registration Status of Other Auditors
See Paragraph .06G of AS 2101
    PCAOB Rule 2100, Registration Requirements for Public Accounting
Firms, requires a public accounting firm to be registered with the
PCAOB \128\ if it: (a) prepares or issues any audit report with respect
to any issuer, broker, or dealer or (b) plays a substantial role in the
preparation or furnishing of an audit report with respect to any
issuer, broker, or dealer.\129\ However, there have been examples of
firms that played a substantial role but were not registered with the
PCAOB.\130\
---------------------------------------------------------------------------

    \128\ See also Section 102(a) of Sarbanes-Oxley, 15 U.S.C.
7212(a).
    \129\ An other auditor that is not registered with the PCAOB
(regardless of whether such auditor is required to be registered
with the PCAOB) is nonetheless subject to PCAOB authority when it
acts as a person associated with a registered public accounting
firm. See Section 2(a)(9) of Sarbanes-Oxley, 15 U.S.C. 7201(a)(9));
PCAOB Rule 1001(p)(i) (defining ``person associated with a public
accounting firm''); see also Sections 104(c)(1), 105(b)(1), and
105(c)(4) of Sarbanes-Oxley, 15 U.S.C. 7214(c)(1), 15 U.S.C.
7215(b)(1), and 15 U.S.C. 7215(c)(4) (articulating that PCAOB
authority extends to ``persons associated with a registered public
accounting firm'' in connection with inspections, investigations,
and sanctions, respectively).
    \130\ See, e.g., In the Matter of WWC, P.C., PCAOB Release No.
105-2022-006 (Apr. 19, 2022); BDO Canada LLP (f/k/a BDO Dunwoody
LLP), SEC AAER No. 3926 (Mar. 13, 2018); KPMG Inc., SEC AAER No.
3927 (Mar. 13, 2018).
---------------------------------------------------------------------------

    The amendments provide that the lead auditor may use the work of an
other auditor that plays a substantial role on the audit \131\ only if
the other auditor is registered with the PCAOB.\132\ The provision is
intended to promote compliance with Rule 2100 and thereby enhance audit
quality, and it does not change the rule or the related definition of
``play a substantial role'' in Rule 1001(p)(ii). Several commenters
supported the provision, and the Board adopted it as proposed.
---------------------------------------------------------------------------

    \131\ See PCAOB Rule 1001(p)(ii).
    \132\ For audits in which the lead auditor divides
responsibility for the audit with the referred-to auditor see AS
1206.06c in this document. See also discussion below.
---------------------------------------------------------------------------

    With regard to registration requirements more broadly, one
commenter suggested--as an alternative to requirements concerning
independence and ethics, and concerning knowledge, skill, and ability--
that the Board require all audit firms ``engaged in a public entit[y]
assurance engagement'' to be registered with the PCAOB. In the
commenter's view, this approach would provide a ``basis for consistent
application [of PCAOB standards] for firms registered with the PCAOB.''
The Board is not taking the commenter's suggestion because simply
requiring firms to register (beyond the current registration
requirements) would not address the need for change identified in this
rulemaking. The shortcoming of this approach is demonstrated by the
inspection deficiencies and enforcement cases described above, which
involve conduct by registered firms during audits involving other
auditors.
Knowledge, Skill, and Ability of and Communications With Other Auditors
See Paragraphs .06H and .16 of AS 2101
Knowledge, Skill, and Ability of Other Auditors
See Paragraphs .06Ha-b and .16 of AS 2101
    The amendments require that, with respect to each other auditor,
the lead auditor obtain an understanding of the knowledge, skill, and
ability of the other auditor's engagement team members who assist the
lead auditor with planning or supervision, including their: experience
in the industry in which the company operates; knowledge of the
relevant financial reporting framework, PCAOB standards and rules, and
SEC rules and regulations; and experience in applying the standards,
rules, and regulations. The amendments also require the lead auditor to
obtain a written affirmation from the other auditor that its engagement
team members possess the knowledge, skill, and ability to perform their
assigned tasks.\133\
---------------------------------------------------------------------------

    \133\ The written affirmation required by AS 2101.06Hb regarding
the other auditor's engagement team members does not need to
identify each member of the engagement team.
---------------------------------------------------------------------------

    PCAOB standards have long recognized the importance of technical
training and proficiency of the personnel performing the audit.\134\
These matters are particularly important for senior engagement
personnel because of their role in planning the audit, supervising the
work of other engagement team members, and making important
professional judgments.
---------------------------------------------------------------------------

    \134\ See, e.g., AS 1010, Training and Proficiency of the
Independent Auditor, and paragraphs .11-.12 of QC 20, System of
Quality Control for a CPA Firm's Accounting and Auditing Practice.
---------------------------------------------------------------------------

    Under existing PCAOB standards, in situations where the lead
auditor supervises an other auditor under AS 1201, the knowledge,
skill, and ability of engagement team members with significant
engagement responsibilities should be commensurate with the assessed
risks of material misstatement.\135\ In situations where the lead
auditor uses the other auditor's work and report under AS 1205, the
lead auditor \136\ is required under existing standards to make
inquiries concerning the professional reputation of the other
auditor.\137\
---------------------------------------------------------------------------

    \135\ See AS 2301.05a.
    \136\ ``Principal auditor'' is the term used in rescinded AS
1205.
    \137\ See AS 1205.10.

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

    The amendments build on and strengthen the existing provisions.
Compliance with these amendments is not limited to preliminary
engagement activities and should be reevaluated with changes in
circumstances. The amendments seek to apply a balanced and practical
approach by focusing the lead auditor's attention primarily on the
knowledge, skill, and ability of the more senior engagement team
members of the other auditor.
    Obtaining an understanding of the knowledge, skill, and ability of
the other auditor's supervisory personnel is important for determining
the extent of the lead auditor's supervision of the other auditor's
work. As a practical matter, the knowledge, skill, and ability of the
supervisory personnel include their experience in the company's
industry and jurisdiction,\138\ and knowledge of the relevant financial
reporting framework, PCAOB standards and rules, and SEC rules and
regulations. Lack of appropriate knowledge, skill, and ability by the
other auditor's supervisory personnel can have an adverse effect on the
overall quality of the audit.
---------------------------------------------------------------------------

    \138\ As discussed below, AS 2101.16 states that the auditor
should determine whether specialized skill or knowledge is needed to
perform appropriate risk assessments, plan or perform audit
procedures, or evaluate audit results, and the amendments specify
that such specialized skill or knowledge may include ``relevant
knowledge of foreign jurisdictions.''
---------------------------------------------------------------------------

    Several commenters supported the proposed requirements, including
the requirement to obtain a written affirmation from the other auditor
that its engagement team members possess the knowledge, skill, and
ability to perform their assigned tasks. One commenter asked the Board
to consider providing that the lead auditor's procedures for obtaining
an understanding of the knowledge, skill, and ability of the other
auditor be scalable based on the considerations regarding sufficiency
of participation in AS 2101.06A. The Board noted that the requirements
in AS 2101.06A serve a different purpose: to increase the likelihood
that the firm issuing the auditor's report meaningfully participates in
the audit. The requirements regarding the knowledge, skill, and ability
are designed to focus the lead auditor and other auditors on assigning
qualified personnel at all levels of the audit engagement.
    Another commenter suggested inserting a note after paragraph .06H
that indicates the lead auditor's own experience working with the other
auditor is relevant to the lead auditor's understanding of the other
auditor's knowledge, skill, and ability. The Board agrees with the
commenter that the lead auditor's own experience with the other auditor
may be a source of information about the other auditor's knowledge,
skill, and ability. However, the amendments are designed to be
principles-based to accommodate a variety of scenarios in practice,
whereby differing types of information about other auditors can be
available to the lead auditor. Therefore, beyond requiring the written
affirmation described above, the amendments do not prescribe a
particular set of procedures or sources of information for obtaining an
understanding of the other auditor's knowledge, skill, and ability. The
amendments allow the lead auditor to determine the nature and extent of
its procedures in this area. After considering the comments, the Board
adopted the requirements as proposed.
    The amendments also add an explanatory phrase, ``including relevant
knowledge of foreign jurisdictions,'' to AS 2101.16's existing
requirement that the auditor should determine whether specialized skill
or knowledge is needed to perform appropriate risk assessments, plan or
perform audit procedures, or evaluate audit results.\139\ Identifying
whether there is a need for specialized skill or knowledge is logically
a prerequisite to evaluating whether someone has that skill or
knowledge. For example, a lead auditor in its home jurisdiction may not
have a sufficient understanding of the business practices or legal
requirements of a foreign jurisdiction to be able to execute the audit
effectively. In these cases, the lead auditor may want to consider
whether to engage an other auditor (e.g., from that jurisdiction) with
relevant knowledge of the foreign jurisdiction to appropriately assess
risk, plan or perform audit procedures, or evaluate audit results.
---------------------------------------------------------------------------

    \139\ See amended paragraph .16 of AS 2101, which provides that
``[t]he auditor should determine whether specialized skill or
knowledge, including relevant knowledge of foreign jurisdictions, is
needed to perform appropriate risk assessments, plan or perform
audit procedures, or evaluate audit results.''
---------------------------------------------------------------------------

    One commenter on the 2021 SRC stated that, if added focus on
knowledge of foreign jurisdictions is needed, additional clarity should
be provided as to when this knowledge is needed and how it should be
obtained. Another commenter stated that consideration of relevant
knowledge of foreign jurisdictions may be applicable only in certain
circumstances but acknowledged the possible need for specialized
knowledge of foreign jurisdictions because of the other auditor's
knowledge of the regulatory environment.
    Similar to AS 2101.06Ha-b, the amendment in AS 2101.16 allows the
auditor to determine the nature and extent of its procedures when
determining whether specialized skill or knowledge is needed on the
audit. After considering the comments, the Board adopted the amendment
as proposed.
Communication With Other Auditors
See Paragraph .06Hc of AS 2101
    The amendments to AS 2101 require the lead auditor to determine, in
connection with using the other auditor's work, that it is able to
communicate with the other auditor and gain access to the other
auditor's audit documentation. The requirement is intended to help the
lead auditor in identifying and addressing any communication or access
issues early in the audit. For example, the lead auditor would consider
whether it can have meaningful two-way communication with the other
auditor \140\ and whether it needs to address any language differences.
In another example, the lead auditor would consider whether it can
access the other auditor's documentation remotely.
---------------------------------------------------------------------------

    \140\ See, e.g., AS 2110.49-.53 (describing discussions among
key engagement team members regarding risks of material
misstatement).
---------------------------------------------------------------------------

    The amendment also is based on the existing provisions of PCAOB
standards that require the lead auditor to have access to the other
auditor's documentation and obtain, review, and retain certain portions
of it. As with the existing requirements, the amendments allow the lead
auditor flexibility in determining the means of access (e.g., remotely
or on-site).\141\
---------------------------------------------------------------------------

    \141\ See, e.g., rescinded AS 1205.12. See also AS 1215.18-.19.
---------------------------------------------------------------------------

    If the lead auditor cannot obtain sufficient appropriate audit
evidence because of restrictions on communicating with the other
auditor or accessing its documentation, a limitation on the scope of
the audit may exist. Under PCAOB standards, these circumstances may
require the lead auditor to qualify the audit opinion or disclaim an
opinion.\142\
---------------------------------------------------------------------------

    \142\ See AS 2810.35. See also paragraphs .05-.17 of AS 3105,
Departures from Unqualified Opinions and Other Reporting
Circumstances, which contains requirements regarding audit scope
limitations.
---------------------------------------------------------------------------

    Those who commented on the proposed requirement in the 2016
Proposal and 2017 SRC viewed it as a clear requirement. Some commenters
asked for examples of acceptable modes of communication between the
lead auditor and the other auditor, and

inquired whether email communication would be acceptable. The Board
notes that the form of communication between auditors (e.g., oral or
written) depends on the circumstances of the audit and professional
requirements (e.g., PCAOB standards require that certain communications
between the lead auditor and other auditor be in writing \143\).
Although PCAOB standards do not prescribe a particular type of written
communication (e.g., print or electronic), they require that audit
documentation, in whatever form, contain sufficient information to
enable an experienced auditor, having no previous connection with the
engagement, to understand the nature, timing, extent, and results of
the procedures performed, evidence obtained, and conclusions
reached.\144\ In addition, the other auditor's audit documentation must
be accessible by the lead auditor.\145\ Further, audit documentation
should demonstrate that the engagement complied with the standards of
the PCAOB.\146\
---------------------------------------------------------------------------

    \143\ See, e.g., AS 1215.19.
    \144\ See AS 1215.06a.
    \145\ See AS 1215.18, as amended.
    \146\ See AS 1215.05a.
---------------------------------------------------------------------------

    Consistent with the above discussion, the Board adopted the
amendment as proposed.
Determining Locations or Business Units at Which Audit Procedures
Should Be Performed
See Paragraph .14 of AS 2101
    Other auditors are often involved in audits of companies with
operations in multiple locations or business units (``multi-location
engagements''). In these circumstances, existing AS 2101.11-.13 address
the determination of the locations at which audit procedures should be
performed and the nature, timing, and extent of the audit procedures.
Existing AS 2101.14 provides that, in situations in which AS 1205
applies, the auditor should perform the procedures in paragraphs
.11-.13 to determine the locations or business units where audit
procedures should be performed.
    In light of the rescission of AS 1205, the Board amended AS 2101.14
to specify that, in an audit involving other auditors or referred-to
auditors, the lead auditor should perform the procedures set forth in
AS 2101.11-.13 to determine the locations or business units at which
audit procedures should be performed. The amendment to AS 2101.14,
together with the amended supervisory requirements in AS 1201, is
intended by the Board to require that the lead auditor play the central
role in determining the scope of the audit.
    One commenter on the 2021 SRC recommended that the Board remove the
requirements in proposed AS 2101.14 with regard to referred-to auditors
because these requirements are not consistent with the principles
underlying dividing responsibility (i.e., the approach would diminish
the line between assuming and dividing responsibility). The Board noted
that the amendment to this paragraph is consistent with the relevant
requirements in existing AS 2101.14 applicable to audits that involve
divided responsibility. For audits involving referred-to auditors, new
AS 1206 describes interactions, including communication of the lead
auditor's plan to divide responsibility, and other measures to assure
the coordination of activities between the lead auditor and the
referred-to auditor when dividing responsibility.\147\
---------------------------------------------------------------------------

    \147\ See discussion below.
---------------------------------------------------------------------------

    After considering the comments, the Board adopted the amendment as
proposed.
Supervising Other Auditors
Overview of the Supervisory Approach
    The Board's amendments are intended to improve the quality of
audits that involve other auditors for whose work the lead auditor
assumes responsibility by requiring, among other things, that the lead
auditor supervise the other auditors under AS 1201, as amended.
    Currently, the risk-based supervision approach described in AS 1201
does not apply to situations in which the lead auditor uses the work
and reports of other auditors under AS 1205. AS 1205, which the Board
rescinded, requires the lead auditor \148\ to perform certain
procedures, when using the work and reports of other auditors, that are
more limited in scope than those required by the supervision standard,
AS 1201. The amendments are designed to improve the lead auditor's
oversight of other auditors by applying AS 1201 to all audits involving
other auditors for whose work the lead auditor assumes
responsibility.\149\ The amendments also supplement the general
supervisory requirements in AS 1201.05 by providing direction for
applying these requirements in an audit involving other auditors.\150\
---------------------------------------------------------------------------

    \148\ ``Principal auditor'' is the term used in AS 1205.
    \149\ For situations in which the lead auditor divides
responsibility for the audit with another accounting firm, see AS
1206. For certain audits involving investments accounted for under
the equity method of accounting whose financial statements are
audited by other auditors, see proposed rule text for changes to
Appendix B of AS 1105.
    \150\ See AS 1201.07-.15.
---------------------------------------------------------------------------

    AS 1201 currently sets forth the general framework for supervision
of engagement team members, including the nature and extent of
supervisory activities. The standard allows the engagement partner to
seek assistance in fulfilling his or her supervisory responsibilities
from appropriate engagement team members, which includes team members
from other firms involved in the audit.\151\ While AS 1201 describes
supervisory activities, it does not, however, describe supervisory
procedures or assign them to a particular member, or members, of the
engagement team. Further, the standard does not differentiate between
the supervisory responsibilities of engagement team members at the lead
auditor and at the other auditor.
---------------------------------------------------------------------------

    \151\ See AS 1201.04.
---------------------------------------------------------------------------

    Under PCAOB standards, the audit firm that issues the audit report
is responsible for making sure that sufficient appropriate audit
evidence has been obtained, and appropriately evaluated, to support the
opinion in the audit report.\152\ Because of the lead auditor's central
role in the audit, the amendments the Board adopted require that
certain supervisory procedures be performed by the lead auditor. These
procedures are designed to improve the effectiveness of the lead
auditor's supervision of the work of other auditors.
---------------------------------------------------------------------------

    \152\ See AS 2810 regarding evaluating the sufficiency and
appropriateness of audit evidence.
---------------------------------------------------------------------------

    The amendments also are designed to be scalable by applying the
existing principles in AS 1201, which are already familiar to auditors.
When designing and performing supervisory activities the lead auditor
determines the extent of supervision of the other auditors' work in
accordance with paragraph .06 of AS 1201, which describes the factors
to take into account when determining the extent of supervision
necessary.\153\ For example, the extent of the lead auditor's
supervision of the other auditors' work depends on, among other things,
the risks of material misstatement to the company's financial
statements and the knowledge, skill, and ability of the other
auditors.\154\
---------------------------------------------------------------------------

    \153\ See AS 1201.07.
    \154\ See AS 1201.06.
---------------------------------------------------------------------------

    The lead auditor may determine that the necessary extent of
supervision of the other auditor's work under AS 1201 entails
performing supervisory procedures beyond those specified in

the amendments. For procedures not assigned to the lead auditor under
the amendments, the lead auditor may seek assistance from qualified
engagement team members (including those at the other auditor) in
supervising the work.\155\ The approach to supervising other auditors
under the amendments is consistent with, and takes into account, recent
developments at some accounting firms that have been observed through
the Board's oversight activities.\156\
---------------------------------------------------------------------------

    \155\ See AS 1201.04.
    \156\ See further discussion above.
---------------------------------------------------------------------------

    Many commenters on the 2021 SRC noted that communications between
the lead auditor and other auditors are iterative throughout the audit.
In addition, some commenters stated that it was not clear to them
whether under the amendments in the 2021 SRC other auditors can provide
input to the lead auditor on certain issues.
    The Board agrees with commenters that effective supervision by the
lead auditor typically necessitates two-way communication with the
other auditor. Similar to the amendments proposed in the 2021 SRC, the
final amendments are designed to foster effective interaction by
requiring the lead auditor to, as necessary, hold discussions with and
obtain information from the other auditors to facilitate the
performance of the supervisory procedures.\157\
---------------------------------------------------------------------------

    \157\ See, e.g., note to AS 1201.08 and AS 1201.10 (requiring
the lead auditor to discuss with the other auditor any changes to
its planned audit procedures), both of which were originally
introduced in the 2016 Proposal. In addition, the amendments include
a reference to paragraphs .49-.53 of AS 2110, Identifying and
Assessing Risks of Material Misstatement (in a footnote to AS
1201.08) to remind the lead auditor of certain other required
interactions with the other auditor. See discussion below.
---------------------------------------------------------------------------

    The amendments to AS 1201 do not include the statement contained in
rescinded AS 1205.03 that ``the other auditor remains responsible for
the performance of his own work and for his own report.'' Nevertheless,
the Board believes that supervision by the lead auditor does not
relieve other auditors of their responsibilities, which include
applying due professional care and complying with PCAOB standards. To
reinforce this principle, the amendments add a statement to AS 1015,
that other auditors are responsible for performing their work with due
professional care.\158\ This statement reminds other auditors of their
responsibility to perform work in compliance with PCAOB rules and
standards.\159\ Commenters were supportive of this added statement,
noting that it was clear and appropriate. That responsibility is
further emphasized by (i) an amendment requiring an affirmation from
the other auditor about its compliance with the lead auditor's
instructions \160\ and (ii) an amendment regarding audit documentation
requirements.\161\ The overall responsibility for the audit under the
amendments remains, however, with the lead auditor, as is the case
under the existing standards.\162\
---------------------------------------------------------------------------

    \158\ See note to AS 1015.01 (``For audits that involve other
auditors, the other auditors are responsible for performing their
work with due professional care.'').
    \159\ This amendment would not, of course, establish the sole
responsibilities of other auditors. Like all auditors that
participate in an audit performed under PCAOB standards, other
auditors must comply with all applicable PCAOB standards. See, e.g.,
PCAOB Rule 3100, Compliance with Auditing and Related Professional
Practice Standards.
    \160\ See AS 1201.11, which is discussed below.
    \161\ See AS 1215.18, which is discussed below.
    \162\ To emphasize this point, the amendments add a footnote to
AS 1015.01, referring to AS 2101 and AS 1201, which set forth the
lead auditor's responsibilities for planning and supervising the
other auditor's work.
---------------------------------------------------------------------------

Supervisory Procedures To Be Performed by the Lead Auditor
    Under the amendments to AS 1201, the engagement partner remains
responsible for the engagement and its performance. Accordingly, the
engagement partner is responsible for proper supervision of the work of
engagement team members, including the work of engagement team members
outside the engagement partner's firm. In fulfilling his or her
supervisory responsibilities, the engagement partner may seek
assistance from appropriate engagement team members, including
engagement team members outside the engagement partner's firm.
Engagement team members who assist the engagement partner with
supervision should exercise their supervisory responsibilities in
accordance with AS 1201.
    With respect to the lead auditor's supervisory procedures in the
amendments, other engagement team members who both: (1) are partners,
principals, shareholders, or employees of the registered public
accounting firm issuing the auditor's report (or individuals who work
under that firm's direction and control and function as the firm's
employees); and (2) assist the engagement partner in fulfilling his or
her planning or supervisory responsibilities on the audit pursuant to
planning and supervision, are eligible to perform such procedures. In
addition, in multi-tiered audits, the lead auditor may seek assistance
from a first other auditor in performing the supervisory procedures in
the amendments.\163\
---------------------------------------------------------------------------

    \163\ See AS 1201.14.
---------------------------------------------------------------------------

    To provide more specific direction for supervising the other
auditors' work, the amendments to AS 1201 establish requirements for
the lead auditor in the following areas:
     Informing other auditors of their responsibilities;
     Obtaining and reviewing a description of the audit
procedures to be performed by other auditors;
     Obtaining and reviewing a written affirmation that other
auditors performed their work in accordance with the lead auditor's
instructions;
     Directing other auditors to provide specific documentation
regarding their work; and
     Determining whether other auditors have performed the work
assigned to them, and whether additional evidence should be obtained.
    As noted in AS 1201.07, these requirements supplement the
requirements in AS 1201.05. The requirements imposed by the amendments
are described in new paragraphs AS 1201.08-.13 and discussed in more
detail below.\164\
---------------------------------------------------------------------------

    \164\ The amendments also specify certain supervisory
responsibilities in multi-tiered audits, as discussed below.
---------------------------------------------------------------------------

Informing Other Auditors of Their Responsibilities
See Paragraph .08 of AS 1201
    AS 1201 currently requires that engagement team members be informed
of their responsibilities, including the objectives and the nature,
timing, and extent of the procedures to be performed, and other
relevant matters.\165\ For audits performed in accordance with AS 1205,
the standard does not include a specific requirement for the lead
auditor to inform other auditors of their responsibilities.\166\
---------------------------------------------------------------------------

    \165\ See AS 1201.05a.
    \166\ According to AS 1205.12, the lead auditor (or ``principal
auditor'' in its terminology) should consider, among other things,
reviewing the audit programs of the other auditor and issuing
instructions to the other auditor as to the scope of audit work.
---------------------------------------------------------------------------

    To promote effective supervision of other auditors' work by the
lead auditor, the amendments to AS 1201 specifically require the lead
auditor to inform other auditors in writing of the following matters:
     The scope of work to be performed by the other auditor
(e.g., location or business unit \167\ and the general type of

work to be performed, which could range from a few specified audit
procedures to a standalone audit); and
---------------------------------------------------------------------------

    \167\ As discussed above, in multi-location engagements that
involve other auditors, the lead auditor is required to determine
locations or business units at which audit procedures should be
performed.
---------------------------------------------------------------------------

     With respect to the work requested to be performed: the
identified risks of material misstatement,\168\ tolerable
misstatement,\169\ and the amount (if determined) below which
misstatements are clearly trivial and do not need to be
accumulated.\170\
---------------------------------------------------------------------------

    \168\ See AS 2110.49-.53 (referenced in a footnote to AS
1201.08), which requires key engagement team members (including
those in differing locations) to hold discussions regarding risks of
material misstatement due to error or fraud, which inform the
identification and assessment of risks. The Board has adopted an
additional reference reminding auditors of the requirements in AS
2110.59 regarding the auditor's responsibility to identify and
assess the risks of material misstatement at the (consolidated)
financial statement level and the assertion level.
    \169\ See AS 2105.08-.10 (referenced in a footnote to AS
1201.08), which describe determining the amount or amounts of
tolerable misstatement, including for the individual locations or
business units, where applicable. As noted above, it is common for
audits using other auditors to take place in different locations,
including different countries.
    \170\ See AS 2810.10-.11 (referenced in a footnote to AS
1201.08), which require auditors to accumulate misstatements
identified during the audit, other than those that are clearly
trivial, and provide that auditors may designate an amount below
which misstatements are trivial and do not need to be accumulated.
The requirement in the amendments indicates that the lead auditor
makes the determination of the clearly trivial threshold under AS
2810, if such a threshold is determined.
---------------------------------------------------------------------------

    Some commenters on the 2016 Proposal and the 2017 SRC interpreted
the proposed amendments as requiring the lead auditor to communicate to
other auditors all the risks of material misstatement for the location
or business unit, or even all identified risks of material misstatement
to the consolidated financial statements. Some of those commenters
(some of whom also commented on the 2021 SRC) recommended that the lead
auditor be required to communicate only the significant risks or only
risks that are relevant to the other auditors' work. Some commenters
agreed that the communication by the lead auditor to the other auditor
about the scope of work, identified risks of material misstatement, and
the amount (if determined) below which misstatements are clearly
trivial and do not need to be accumulated, should be in writing.
    In the 2021 SRC, the Board agreed with commenters who stated that
the lead auditor should communicate to other auditors those risks to
the consolidated financial statements that are relevant to the other
auditors' work. The Board therefore included in AS 1201.08b in the 2021
SRC the qualifying phrases ``[w]ith respect to the work requested to be
performed'' and ``to the consolidated financial statements that are
associated with the location or business unit.'' \171\ These phrases
remain in the final amendments. The amendments do not limit the lead
auditor's communication to significant risks (as some commenters
suggested) because doing so could lead to inadequate testing of
significant accounts and disclosures where a reasonable possibility of
material misstatement to the financial statements exists.
---------------------------------------------------------------------------

    \171\ To align with similar language in AS 2101.11, the
amendments have been revised from the 2021 SRC in AS 1201.08b(1) to
change ``the identified risks ... that are applicable to the
location or business unit'' to ``associated with the location or
business unit.''
---------------------------------------------------------------------------

    Some commenters on the proposing releases also questioned whether
the lead auditor is always best suited to assess risks of material
misstatement at locations or business units audited by other auditors.
Further, a couple of commenters to the 2021 SRC recommended that the
amendments not require the lead auditor to communicate identified risks
of material misstatements that are applicable to the location or
business unit. Instead, the commenters recommended a requirement that
focuses the lead auditor on communicating identified risks to the
consolidated financial statements and matters that would assist the
other auditor in developing a more granular view of risks specific to
the location or business unit.
    Although requiring the lead auditor to communicate to the other
auditor the relevant risks of material misstatement to the company's
financial statements is consistent with the lead auditor's
responsibilities under PCAOB standards, existing PCAOB standards also
recognize that additional risks of material misstatement to the
company's financial statements may be identified by other auditors, who
could be more familiar than the lead auditor with a particular location
or business unit where such risks may originate.\172\
---------------------------------------------------------------------------

    \172\ See AS 2110.49-53.
---------------------------------------------------------------------------

    The Board agrees with commenters that input from other auditors may
be necessary in identifying and assessing risks of material
misstatement to the company's financial statements and developing an
audit response. The amendments are designed to foster effective two-way
communication by requiring the lead auditor to, as necessary, hold
discussions with and obtain information from other auditors to
facilitate the performance of the supervisory procedures.\173\ Notably,
all key engagement team members, including those at the other auditor
firms, are already required under existing standards to discuss the
susceptibility of the company's financial statements to material
misstatement due to error or fraud, as part of performing the risk
assessment procedures.\174\ A reminder about these requirements is
included in a footnote to AS 1201.08.\175\
---------------------------------------------------------------------------

    \173\ A note to AS 1201.08 provides that the lead auditor
should, as necessary, hold discussions with and obtain information
from the other auditor to facilitate the performance of procedures
described in paragraph .08.
    \174\ See AS 2110.49-.53.
    \175\ See footnote 15 to AS 1201.08, citing AS 2110.49-.53,
which require key engagement team members (including those in
differing locations) to hold discussions regarding risks of material
misstatement due to error or fraud, which inform the identification
and assessment of risks.
---------------------------------------------------------------------------

    The Board also agrees with commenters that under the existing
requirements the lead auditor identifies and assesses the risk of
material misstatement at the level of the company's (consolidated)
financial statements. An additional reference was added to the
amendments reminding lead auditors of the existing requirements of AS
2110.59 to identify and assess the risks of material misstatement at
the financial statement level and assertion level.\176\
---------------------------------------------------------------------------

    \176\ See footnote 15 to AS 1201.08.
---------------------------------------------------------------------------

Obtaining and Reviewing a Written Description of the Audit Procedures
To Be Performed by the Other Auditors
See Paragraphs .09 and .10 of AS 1201
    Existing PCAOB standards require that the auditor develop and
document an audit plan that includes a description of, among other
things, the planned nature, timing, and extent of the risk assessment
procedures, tests of controls, and substantive procedures.\177\ In
addition, pursuant to AS 1201, the auditor is required to inform
engagement team members of their responsibilities, including the
nature, timing, and extent of procedures they are to perform.\178\ In
situations governed by AS 1205, the lead auditor is required to
consider reviewing the audit programs of the other auditor.\179\
---------------------------------------------------------------------------

    \177\ See AS 2101.10.
    \178\ See AS 1201.05a(2).
    \179\ See rescinded AS 1205.12.
---------------------------------------------------------------------------

    Similar to the proposed amendments in the 2021 SRC, the final
amendments to AS 1201 require the lead auditor to obtain and review the
other auditor's written description of audit procedures to be
performed,\180\ determine whether any changes to the other auditor's
planned audit procedures are necessary, and if so, discuss the changes
with, and communicate them in writing to, the

other auditor.\181\ Under these amendments, the lead auditor is
required to inform the other auditor of the level of detail needed in
the other auditor's written description of audit procedures to be
performed, based on the necessary extent of the lead auditor's
supervision.
---------------------------------------------------------------------------

    \180\ See AS 1201.09.
    \181\ See AS 1201.10.
---------------------------------------------------------------------------

    The amendments are intended to promote proper supervision of the
other auditor's work by the lead auditor and proper coordination of
work performed by the lead and other auditor. Importantly, the
amendments are designed to accommodate different scenarios encountered
in practice. For example, the other auditor who is more familiar than
the lead auditor with a location or business unit may be better
positioned to design detailed audit procedures for that part of the
audit (which procedures would then be subject to the lead auditor's
review and approval). Conversely, an other auditor who lacks experience
in addressing certain risks may not be best suited to plan the work or
to design detailed audit procedures in that area. The amendments
provide that as the necessary extent of supervision increases, the lead
auditor, rather than the other auditor, may need to determine the
nature, timing, and extent of procedures to be performed by the other
auditor.\182\
---------------------------------------------------------------------------

    \182\ See note to AS 1201.09.
---------------------------------------------------------------------------

    Many commenters on the 2021 SRC recommended that these requirements
for the lead auditor be more principles-based to better accommodate an
iterative process of communication between the lead auditor and other
auditors, and the use of communication technology. For example, some
commenters indicated that planned audit procedures and related changes
could be communicated through video conferencing and screen sharing
instead of in writing. These commenters encouraged the Board to revise
AS 1201.09 and .10 to make them more principles-based and to reflect
the recent technological innovations in communication. A couple of
commenters went further and recommended removing from the amendments
the requirement to ``obtain'' the information. A couple of other
commenters either recommended that the Board allow the lead auditor to
apply judgment in determining what changes should be communicated in
writing to the other auditor based on the lead auditor's extent of
supervision of the other auditor, or stated that the requirement could
cause an other auditor that is not a member of the lead auditor's
network to be concerned about the confidentiality of its audit
methodology.
    In its oversight activities, the PCAOB has seen challenges in the
coordination and communication between lead auditors and other
auditors, particularly in coordinating their responsibilities for the
planning and performance of audit procedures. Requiring that certain
communications be in writing facilitates the supervision of the
engagement by reducing the risk of miscommunication and lack of clarity
about responsibilities.
    The terms ``obtain'' and ``in writing'' do not mandate that auditor
working papers be paper-based.\183\ The Board believes that
technological advances in communication including those discussed by
commenters could improve the effectiveness and efficiency of the lead
auditor's supervision of other auditors, and the Board noted that the
amendments would not hamper the implementation of novel means of
communication, including documentation and review.
---------------------------------------------------------------------------

    \183\ See AS 1215.04 (audit documentation may be in the form of
paper, electronic files, or other media).
---------------------------------------------------------------------------

    For example, a lead auditor could meet with other auditors through
video conferencing and could view and discuss documents that are shared
by video screen. The lead auditor could also obtain documents by (i)
receiving them via electronic mail or by downloading them via an
electronic portal and could store them electronically or (ii) accessing
the other auditor's electronic working papers remotely. In any case,
audit documentation supporting the lead auditor's conclusions will need
to contain a record that the lead auditor fulfilled its
responsibilities under PCAOB standards, including reviewing the
relevant documents and meeting the requirements of other provisions and
of other standards regarding matters such as determinations related to
other auditors' work \184\ and audit documentation.\185\
---------------------------------------------------------------------------

    \184\ See, e.g., AS 1201.13 (requiring the lead auditor to make
certain determinations based on a review of the documentation
provided by the other auditor, discussions with the other auditor,
and other information obtained by the lead auditor).
    \185\ See, e.g., AS 1215.06 and AS 1215.18 as amended.
---------------------------------------------------------------------------

    As with paper-based documentation of the work of other auditors,
the necessary level of detail of the other auditors' electronic
documentation that is required to be requested, obtained, and reviewed
by the lead auditor and the lead auditor's communication to the other
auditors under the amendments will depend on the necessary extent of
supervision of the other auditors' work by the lead auditor.
    Separately, requiring the lead auditor to obtain a written
description of audit procedures to be performed from the other auditor
and communicate changes in writing to the other auditor not only allows
the Board to fulfill its mandates of inspecting and potentially
investigating the lead auditor's oversight of the other auditor's work
but it is also important for an audit firm's audit quality reviews such
as engagement quality reviews and internal inspections. For the reasons
discussed above, the Board adopted these requirements as proposed.
Obtaining and Reviewing the Other Auditor's Written Affirmation
Regarding Work Performed
See Paragraph .11 of AS 1201
    As was proposed in the 2021 SRC, under the amendments the lead
auditor is required to obtain and review a written affirmation as to
whether the other auditor performed work in accordance with the
instructions provided, as described in paragraphs AS 1201.08-.10,
including the other auditor's use of applicable PCAOB standards in
performing that work. If the other auditor has not performed the work
in accordance with the instructions provided, the lead auditor is
required to obtain and review a description of the nature of, and
explanation of the reasons for, the instances where the work was not
performed in accordance with the instructions, including (if
applicable) a description of the alternative work performed.
    This requirement is designed to provide information to the lead
auditor about whether the other auditor performed work in accordance
with the lead auditor's instructions, to inform the lead auditor of
audit areas that may require additional attention, and to emphasize the
other auditor's responsibility for properly planning and performing its
work in compliance with PCAOB standards. It is also consistent with the
existing practice of affirming in writing an other auditor's compliance
with the lead auditor's instructions (e.g., in an ``interoffice
memorandum'') at some audit firms. AS 1201.11 does not duplicate a
requirement in AS 1215.19 for the lead auditor to obtain, review, and
retain certain documents relating to the other auditor's work.
    Commenters on the 2021 SRC supported the written affirmation in AS
1201.11 as they believed it was a

necessary requirement, and the Board adopted it as proposed.
Directing the Other Auditors To Provide Specific Documentation
See Paragraph .12 of AS 1201
    Supervision under existing PCAOB standards necessarily involves
review of audit documentation.\186\ For example, under AS 1201, the
engagement partner and other engagement team members performing
supervisory activities should review the work of engagement team
members to evaluate whether the work was performed and documented. (AS
1201 does not specify the documents to be reviewed.) In addition, for
audits involving other auditors, other PCAOB standards describe certain
documentation of the other auditor's work that the lead auditor must
obtain, review, and retain prior to the report release date.\187\
---------------------------------------------------------------------------

    \186\ See, e.g., AS 1201.05c.
    \187\ See, e.g., AS 1215.19 and rescinded AS 1205.12.
---------------------------------------------------------------------------

    As the Board proposed in the 2021 SRC, the amendments supplement
the existing standards by requiring the lead auditor to direct the
other auditor to provide for the lead auditor's review specified
documentation with respect to the work of the other auditor. This
requirement is designed so that the lead auditor obtains information
about the other auditor's work that is necessary for the lead auditor
to carry out its supervisory responsibilities and that supports the
lead auditor's obligation to obtain sufficient appropriate audit
evidence to provide a reasonable basis for its opinion.
    The amendments also state that the documentation requested by the
lead auditor from the other auditor depends on the necessary extent of
supervision of the other auditor's work by the lead auditor (which is
based on a number of factors, including risk). Thus, under the
amendments, review of additional documentation (i.e., beyond the items
listed in AS 1215.19) could be necessary to satisfy the lead auditor's
supervisory responsibilities, for example, for work performed by less
experienced other auditors, procedures in areas with heightened risks
of material misstatement (including the other auditors' testing of
controls that address the risks), or procedures to resolve significant
issues arising during the audit. In directing the other auditor, the
lead auditor could, for example, specify individual documents, types of
documents, or documentation for audit areas that it intends to review.
    One commenter generally supported the changes to proposed AS
1201.12 in the 2021 SRC that acknowledge the lead auditor's use of a
risk-based approach in determining the documentation to review in
performing its supervisory responsibilities. Another commenter
recommended that the amendments clarify that determining the necessary
incremental documentation for the lead auditor to review (in addition
to documents described in PCAOB standards) should be based on the facts
and circumstances of an audit engagement. Another commenter on the 2021
SRC stated that privacy laws in certain jurisdictions may create
obstacles for the transfer of documentation from the other auditor's
country to the lead auditor's country. And another recommended
clarifying that not all the documentation described in AS 1215.19 may
be applicable in some situations. For example, in situations where the
other auditor's involvement consists of only performing certain limited
procedures (e.g., observing a company's physical inventory), certain
documents in AS 1215.19 would not be applicable.
    The Board considered these comments and determined that the
requirements as proposed were sufficiently clear. The Board therefore
adopted the requirements as proposed. As noted previously, the
amendments specifically state that the documentation requested by the
lead auditor from the other auditor will be based on the necessary
extent of supervision of the other auditor's work by the lead auditor
(which depends on a number of factors, including risks of material
misstatement and the knowledge, skill, and ability of the other
auditor).
    Additionally, with regard to privacy laws and potential challenges
to accessing working papers, if effective methods of remote access to
the working papers are available to the lead auditor, the amendments do
not preclude the use of such methods. However, as is the case under the
existing requirements, engagement team members from the lead auditor
may need to travel to the country where the working papers are located
to access the working papers and perform their review. The amendments
do not change the existing requirement in AS 1215.19 for obtaining,
reviewing, and retaining certain documentation related to the other
auditor's work by the office of the firm issuing the auditor's report.
If the lead auditor cannot obtain sufficient appropriate audit
evidence, a limitation on the scope of the audit may exist. This may
require the engagement partner to qualify the audit opinion or disclaim
an opinion.\188\
---------------------------------------------------------------------------

    \188\ See AS 2810.35. See also paragraphs .05-.15 of AS 3105,
Departures from Unqualified Opinions and Other Reporting
Circumstances.
---------------------------------------------------------------------------

    Finally, the Board agrees with the commenter that in situations in
which the other auditor only performs select procedures for the lead
auditor, such as observing physical inventories, the lead auditor is
not required to obtain all of the documents described in AS 1215.19,
because those documents would not be applicable to the limited type of
work performed by the other auditor. However, this does not reduce the
need for the lead auditor to obtain documentation prepared by the other
auditor that is sufficient to fulfill its supervisory responsibilities
under AS 1201.\189\
---------------------------------------------------------------------------

    \189\ See also AS1215.A65.
---------------------------------------------------------------------------

Determining Whether the Other Auditor Has Performed the Work, and
Whether Additional Evidence Should Be Obtained
See Paragraph .13 of AS 1201
    Under the general supervisory requirements of AS 1201, the
engagement partner and his or her assistants should review the work of
engagement team members to evaluate whether: (i) the work was performed
and documented; (ii) the objectives of the procedures were achieved;
and (iii) the results of the work support the conclusions reached.\190\
In the scenarios that are governed by rescinded AS 1205, the lead
auditor should consider performing one or more specified procedures in
addition to obtaining, reviewing, and retaining certain documentation
of the other auditor's work.
---------------------------------------------------------------------------

    \190\ See AS 1201.05c. Additionally, AS 1201.05b requires the
engagement partner or other supervisors to direct engagement team
members to bring significant accounting and auditing issues to their
attention so they can evaluate those issues and determine that
appropriate actions are taken in accordance with PCAOB standards.
That requirement also applies in the supervision of other auditors.
---------------------------------------------------------------------------

    Under the amendments, AS 1201.13 provides that the lead auditor
should determine, based on a review of the documentation provided by
the other auditor, discussions with the other auditor, and other
information obtained by the lead auditor during the audit: (i) whether
the other auditor performed the work in accordance with the lead
auditor's instructions, including the use of applicable PCAOB
standards; and (ii) whether additional audit evidence should be
obtained by the lead auditor or other auditors. Notably, the amendments
do not require that in all cases the lead auditor review all the

documentation of the other auditor's work to determine whether the work
has been performed. Rather, the lead auditor's determination should be
based on the review of documents it requested from the other auditor
under the amendments, discussions with the other auditors, and other
information obtained during the audit.
    The requirement to determine the need for additional evidence is
intended to address circumstances that may be encountered in practice,
including where the other auditors did not perform the procedures as
instructed, or where sufficient appropriate audit evidence was not
obtained. In those situations, the lead auditor would need to determine
the appropriate next steps. For example, the lead auditor could
determine that it is necessary for the lead auditor or the other
auditor to perform additional audit procedures to address a previously
unidentified risk of material misstatement or to obtain further audit
evidence with respect to one or more locations or business units.\191\
---------------------------------------------------------------------------

    \191\ See AS 1201.13. See also AS 2810.35 and .36 (which are
referenced in a footnote to AS 1201.13b), requiring the auditor,
among other things, to obtain further audit evidence if sufficient
appropriate audit evidence has not been obtained.
---------------------------------------------------------------------------

    Commenters did not oppose or suggest modifications to the proposed
requirements in AS 1201.13, and the Board adopted them as proposed.
Multi-Tiered Audits
See Paragraphs .14-.15 of AS 1201 and Paragraphs .06Ac, .06E, and .06I
of AS 2101
Supervisory Procedures in Multi-Tiered Audits--Directing a First Other
Auditor
    For various reasons, some engagement teams could involve multiple
tiers of other auditors. Such ``multi-tiered'' audits are not expressly
addressed in the existing standards.
    In addition to describing multi-tiered audits, the amendments
clarify that in multi-tiered audits the lead auditor may seek
assistance from an other auditor (a ``first other auditor'') in
fulfilling certain planning and supervisory responsibilities of the
lead auditor with respect to one or more second other auditors (i.e.,
procedures in paragraphs .08-.13 of AS 1201). Multi-tiered audits are
described in the standard as those in which the engagement team is
organized in a multi-tiered structure, e.g., whereby an other auditor
assists the lead auditor in supervising a second other auditor or
multiple second other auditors. \192\
---------------------------------------------------------------------------

    \192\ See footnote 19 to AS 1201.14.
---------------------------------------------------------------------------

    Under the amendments, the lead auditor determines whether to seek
assistance from a first other auditor in supervising one or more second
other auditors, pursuant to factors in AS 1201.06.\193\ Notably,
however, the lead auditor is responsible for the supervision of the
entire audit, including the supervision of all other auditors.
---------------------------------------------------------------------------

    \193\ AS 1201.14.
---------------------------------------------------------------------------

    For example, a multi-tiered audit of a U.S. multinational
corporation that consolidates the results of its European operations in
the U.K. could include the following structure:
     A U.S. firm as lead auditor;
     A U.K. firm as first other auditor, auditing the European
operations; and
     A German firm as a second other auditor, auditing a
business unit in Germany that is consolidated into, and is a
significant portion of, the European operations.
    In this example, under the amendments, the lead auditor could seek
assistance from the U.K. firm in supervising the work of the second
other auditor in Germany. In a more complex structure, the lead auditor
could seek assistance from a first other auditor in supervising the
work of multiple second other auditors.
    The lead auditor's determination of whether it would be appropriate
for the first other auditor to perform supervisory procedures with
respect to the second other auditor should be based on the factors for
determining the extent of supervision in AS 1201.06.
    The lead auditor's use of a first other auditor is entirely within
the lead auditor's discretion. The lead auditor could decide not to
seek assistance from the first other auditor in supervising the work of
second other auditors where, for example, the first other auditor's
knowledge of a particular industry, particular accounting or auditing
area, or PCAOB rules and standards is insufficient to effectively
review the work of the second other auditors.
    A commenter on the 2021 SRC asserted that the description of multi-
tiered audits as proposed in footnote 19 to AS 1201.14 does not provide
sufficient context for circumstances that might give rise to multi-
tiered audits. The commenter suggested an alternative description that
would be based on the financial reporting structure of an entity, which
the commenter viewed as more important to defining the concept of a
multi-tiered audit than the audit structure.\194\ Having considered the
comment, the Board decided to adopt the amendments as proposed in the
2021 SRC. The description of multi-tiered audits in the amendments and
the related requirements are discussed in the context of existing
auditor responsibilities, to illustrate how the existing
responsibilities apply when an audit includes one or more supervisory
tiers.
---------------------------------------------------------------------------

    \194\ The commenter provided the rationale that a multi-tiered
audit may exist even if the first other auditor does not assist the
lead auditor in supervising the work of a second other auditor.
---------------------------------------------------------------------------

    Another commenter recommended that the description of multi-tiered
audits be moved to the definitions section in Appendix A of AS 2101.
The Board has decided not to relocate the description of ``multi-tiered
audits'' to Appendix A of AS 2101, as it is not intended to be a
defined term in the standards, but rather a description of a current
practice.
Supervisory Procedures in Multi-Tiered Audits--Evaluating a First Other
Auditor's Supervision of a Second Other Auditor's Work
    Under the amendments, the lead auditor is responsible for the
supervision of the entire audit, including the supervision of all the
other auditors' work. If a first other auditor performs supervisory
procedures with respect to a second other auditor, the lead auditor is
required to evaluate the first other auditor's supervision of the
second other auditor's work.\195\ If the first other auditor assists
the lead auditor with performing the supervisory procedures described
in AS 1201.14, the lead auditor is required to obtain, review, and
retain documentation identifying the scope of work to be performed by
the second other auditor.\196\ The requirements for the supervision of
the other auditor's work in a multi-tiered audit also apply to audits
in which there are multiple second other auditors.\197\
---------------------------------------------------------------------------

    \195\ See AS 1201.14.
    \196\ See AS 1201.14.
    \197\ See also discussion below.
---------------------------------------------------------------------------

    Under the amendments, the lead auditor will consider the first
other auditor's review of the second other auditor's work, and apply
the provisions of AS 1201.06, including taking into account the
knowledge, skill, and ability of the first other auditor, when
determining the necessary extent of its review (if any) of the second
other auditor's work.\198\ For example, the lead auditor could
determine it needs to be less involved in supervising the second other
auditor (including reviewing the second other auditor's work) if the
first other auditor has adequate experience in areas audited by the
second other auditor and maintains documentation sufficient to
understand the supervisory

procedures performed with respect to the second other auditor, and if
no unexpected issues arise during the audit.
---------------------------------------------------------------------------

    \198\ See AS 1201.15.
---------------------------------------------------------------------------

    For purposes of the lead auditor's compliance with AS 1215.19 with
respect to work performed by a second other auditor, the lead auditor
may request that the first other auditor both (i) obtain, review, and
retain the audit documentation described in AS 1215.19 related to the
second other auditor's work (including the second other auditor's
supervision of the work of further tiers of other auditors \199\) and
(ii) incorporate the information in that documentation in the first
other auditor's documentation that it provides to the lead auditor
pursuant to AS 1215.19.\200\ In other words, the amendments would not
require the first other auditor to provide to the lead auditor multiple
sets of the same type of documentation; for example, the first other
auditor could submit to the lead auditor one schedule that incorporates
misstatements identified during the audit by the first other auditor
and the second other auditor(s).
---------------------------------------------------------------------------

    \199\ See discussion below.
    \200\ See note to AS 1201.14.
---------------------------------------------------------------------------

    One commenter on the 2021 SRC supported the requirements and stated
that they provided the right approach to multi-tiered audits. Another
commenter indicated that the lead auditor should be able to place
greater reliance on a first other auditor than the proposed
requirements allowed, including relying on the first other auditor to
determine the extent of supervision of second other auditors. In
addition, this commenter stated that it disagreed with the requirement
that the lead auditor should obtain and review documentation that
identifies the scope of work for each location or business unit in a
multi-tiered audit, although it agreed that the lead auditor needed
such information in order to consider whether (and if so, the extent to
which) it should be involved in the work of the second other auditor.
    With regard to the comment that the lead auditor should be able to
place greater reliance on a first other auditor, including relying on
the first other auditor to determine the extent of supervision of
second other auditors, the aim of this rulemaking is to increase the
lead auditor's involvement in and evaluation of the other auditors'
work. This includes the lead auditor's supervision of the work of
second other auditors in multi-tiered audit scenarios. Allowing the
lead auditor to simply rely on the first other auditor's supervision of
a second other auditor, as recommended by the commenter, would not be
consistent with this goal. As stated above, under the amendments, the
lead auditor determines its extent of supervision of the second other
auditor's work in accordance with the factors in paragraph AS 1201.06.
    With regard to the comment that the lead auditor should not have to
obtain and review documentation that identifies the scope of work for
each location or business unit in a multi-tiered audit, the Board
continues to believe that obtaining and reviewing such documentation is
critical for informing the lead auditor's supervision of the other
auditors' work. Supervision of the engagement, including the work of
second other auditors, is the lead auditor's responsibility, and the
lead auditor's knowledge of the scope of the work of second other
auditors is necessary to effectively discharge that responsibility.
    One commenter on the 2021 SRC expressed concerns about how the
requirement to evaluate a first other auditor's supervision of a second
other auditor would be operationalized, in particular what information
would be taken into account in making the evaluation. This commenter
recommended that requiring an up-front discussion between the lead
auditor and the first other auditor about how second other auditors
will be used and supervised would be more beneficial to audit quality.
This commenter also stated that because it may not always be possible
to observe the nature and extent of the review performed by the first
other auditor, the standard should require the lead auditor to obtain a
written affirmation from the first other auditor that the second other
auditor has been supervised as agreed with the lead auditor (similar to
the requirement in AS 1201.11).
    When evaluating the first other auditor's supervision of the second
other auditor's work, the lead auditor would not, in normal
circumstances, be expected to reperform the first other auditor's
supervisory procedures. Instead, the lead auditor would evaluate
whether the first other auditor properly performed the assigned
supervisory procedures with respect to the second other auditor,
coordinated its work with the second other auditor, and resolved
significant matters arising during the audit. The lead auditor's
evaluation may include holding discussions with the first other auditor
and reviewing the first and second other auditors' audit plans, written
reports, or other documentation. Overall, the extent of the lead
auditor's evaluation of the first other auditor's supervision depends
on the nature of the work performed by the second other auditor, the
results of the work, and the necessary extent of the lead auditor's
supervision of the first other auditor's work.
    The Board does not agree with the recommendation that the lead
auditor obtain a written affirmation from the first other auditor that
the second other auditor has been supervised as agreed with the lead
auditor. Under the amendments, the lead auditor is responsible for
supervision of the entire engagement, including supervision of the
first other auditor's supervision of second other auditors. An
affirmation, by itself, may not provide information that is sufficient
to discharge this responsibility. In some circumstances, for example,
where the risks of material misstatements are higher, the lead auditor
would need to evaluate more information than an affirmation to fulfill
its responsibility to supervise the entire engagement, including the
involvement of other auditors, to a necessary extent under PCAOB
standards. Having considered the comments, the Board adopted the
amendments as proposed in the 2021 SRC.
Audit Planning in Multi-Tiered Audits--Serving as Lead Auditor and
Seeking Assistance From a First Other Auditor Related to a Second Other
Auditor's Qualifications
    As discussed in more detail above, the amendments include a third
consideration for determining whether the participation of an
engagement partner's firm is sufficient for the firm to carry out the
responsibilities of a lead auditor and to report as such on the
company's financial statements.\201\ This third consideration pertains
to the extent of the engagement partner's firm's supervision of other
auditors' work for portions of the company's financial statements for
which the other auditors perform audit procedures. With regard to
multi-tiered audits, this consideration applies only to the engagement
partner's firm's direct supervision of other auditors, and not to any
supervisory assistance that the firm might receive from a first other
auditor in a multi-tiered audit.
---------------------------------------------------------------------------

    \201\ See AS 2101.06Ac.
---------------------------------------------------------------------------

    Some commenters indicated that with respect to determining the
sufficiency of participation of the lead auditor, the amendments
regarding supervisory assistance from other auditors in a multi-tiered
audit are clear and appropriate. There were no comments opposing these
amendments, and the Board adopted them as proposed.

    Under the final amendments, the lead auditor may seek assistance
from a first other auditor in performing procedures relating to a
second other auditor's qualifications, including (i) compliance with
independence and ethics requirements (under AS 2101.06D),\202\ and (ii)
knowledge, skill, and ability, and certain other items (under AS
2101.06H).\203\
---------------------------------------------------------------------------

    \202\ See AS 2101.06E.
    \203\ See AS 2101.06I. This provision does not change the
existing requirement for the other auditors' documentation
(including the second other auditor's) to be accessible to the
office issuing the auditor's report. (See AS 1215.18 as amended.)
---------------------------------------------------------------------------

    The amendments emphasize that the lead auditor remains responsible
for determining the audit engagement's compliance with the independence
and ethics requirements pursuant to AS 2101.06b.\204\ If the lead
auditor seeks assistance from the first other auditor, it should
instruct the first other auditor to inform the lead auditor of the
results of procedures, including bringing to the lead auditor's
attention any information indicating that a second other auditor is not
in compliance with the independence and ethics requirements.\205\
Further, allowing the lead auditor to seek assistance from a first
other auditor regarding the second other auditor's knowledge, skill,
and ability is consistent with the existing supervisory requirement in
AS 1201.06, which provides that an auditor (first other auditor in this
instance) should take into account the second other auditor's
qualifications to determine the necessary extent of supervision of the
second other auditor's work.\206\
---------------------------------------------------------------------------

    \204\ See id.
    \205\ See AS 2101.06E.
    \206\ See AS 1201.06d.
---------------------------------------------------------------------------

    A couple of commenters agreed that the requirements applicable to
multi-tiered audits relative to the planning procedures regarding a
second other auditor's qualifications were clear and appropriate and
supported the notion that the first other auditor is often best suited
to perform these procedures. However, one commenter had concerns with
the placement of the requirement related to knowledge, skill, and
ability in a multi-tiered audit and suggested relocating it from AS
2101.06I to a note to AS 2101.06H but did not provide reasons for the
concern. The same commenter also recommended that the first other
auditor be expected to communicate to the lead auditor any concerns
about the second other auditor's knowledge, skill, and ability.
    With regard to the commenter's point on relocating the requirement
to a note, the Board considered the comment but determined that moving
the requirement to a note in AS 2101.06H is not necessary as its
placement in a paragraph is sufficiently clear. Regarding a first other
auditor's concerns about the second other auditor's knowledge, skill,
and ability, a key element for determining the extent of supervision
necessary is taking into account an engagement team member's knowledge,
skill, and ability.\207\ If the first other auditor had concerns
regarding the knowledge, skill, and ability of a second other auditor,
the first other auditor would take this into account and increase the
extent of its supervision of the second other auditor's work.
Additionally, under AS 1201.13, the first other auditor is required to
determine--based on a review of the documentation provided by the
second other auditor (pursuant to AS 1201.09-.12), discussions with the
second other auditor, and other information obtained by the lead
auditor during the audit--whether the second other auditor performed
the work in accordance with the instructions and whether additional
audit evidence should be obtained by the first other auditor, second
other auditor, or the lead auditor. Having considered the comments
received, the Board adopted the requirements as proposed.
---------------------------------------------------------------------------

    \207\ See id.
---------------------------------------------------------------------------

Further Tiers of Other Auditors
    In addition to the first and second other auditors, some
engagements may involve further tiers of other auditors. For example,
in the scenario discussed above, the business unit in Germany could
acquire a company in Belgium, audited by a local firm, and the second
other auditor in Germany could supervise and use the work of its
Belgian counterpart (a third other auditor). As noted, the lead auditor
could seek assistance from the U.K. firm in supervising the work of the
second other auditor in Germany, which would include the German firm's
supervision of the third other auditor in Belgium.
    PCAOB standards are designed to work in situations involving
multiple tiers of other auditors. While the amendments are focused on
the planning and supervision responsibilities of the lead auditor,
other requirements of PCAOB standards apply, and would continue to
apply under the amendments, to all auditors involved in the audit. For
example, in determining the necessary extent of supervision of the
third other auditor's work, the second other auditor would be required
to take into account items listed in AS 1201.06, including the nature
of the work assigned to the third other auditor, the risks of material
misstatement, and the third other auditor's knowledge, skill, and
ability. No commenters expressed views different from the approach in
the 2021 SRC regarding further tiers of other auditors. Therefore, the
Board adopted the requirements as proposed.
Dividing Responsibility for the Audit With Another Accounting Firm
See AS 1206
    AS 1206, a new standard, specifically addresses the lead auditor's
division of responsibility for the audit with another accounting firm
(i.e., a referred-to auditor).\208\ It carries forward, with certain
modifications, relevant requirements for the divided-responsibility
scenario that are in rescinded AS 1205.\209\ Currently, divided-
responsibility engagements are relatively uncommon.\210\
---------------------------------------------------------------------------

    \208\ Rescinded AS 1205 did not use the term ``referred-to
auditor.'' The definition of referred-to auditor is discussed above
in this release.
    \209\ As discussed above, AS 1205 also includes requirements for
audits in which the auditor assumes responsibility for the work of
another firm.
    \210\ According to PCAOB staff analysis of Form AP filings with
the PCAOB, lead auditors currently divide responsibility with
another auditor in about 40 issuer audits per year.
---------------------------------------------------------------------------

    AS 1206 applies when the lead auditor divides responsibility for an
audit of the financial statements and, if applicable, ICFR. Similar to
AS 1205, the new standard does not require the lead auditor to
supervise the referred-to auditor's work. Rather, each auditor is
required to supervise its respective engagement team members in
accordance with AS 1201.\211\
---------------------------------------------------------------------------

    \211\ With respect to supervision, if there is more than one
referred-to auditor, the requirements in AS 1206.03-.09 apply to the
lead auditor regarding each referred-to auditor separately. If the
lead auditor assumes responsibility for the work of another
accounting firm, the lead auditor would be required to supervise the
other firm's work in accordance with AS 1201.
---------------------------------------------------------------------------

    These requirements apply in circumstances where the lead auditor
decides to refer to the work of the referred-to auditor in its
auditor's report. In such circumstances, the lead auditor does not
assume responsibility for the work of the referred-to auditor. Instead,
the lead auditor discloses the division of responsibility between the
lead auditor and the referred-to auditor and the magnitude of the
portion of the audit performed by the referred-to auditor.
    Under AS 1206, both the lead auditor and referred-to auditor remain
responsible for their respective audits. For example, both the lead
auditor and referred-to auditor are required to comply with PCAOB
standards when planning and performing their

respective audits, including making materiality determinations, and
issuing audit reports.\212\
---------------------------------------------------------------------------

    \212\ See, e.g., AS 2101.11-.14 and AS 2105.10.
---------------------------------------------------------------------------

    AS 1206 sets forth certain requirements for the lead auditor, which
carry forward or strengthen the requirements of AS 1205. For example,
AS 1206 requires the lead auditor to:
     Determine that audit procedures are performed, in
coordination with the referred-to auditor, with respect to the
consolidation or combination of the portions of the financial
statements audited by the referred-to auditor; \213\
---------------------------------------------------------------------------

    \213\ See AS 1206.03 and AS 1205.10.
---------------------------------------------------------------------------

     Obtain a written representation from the referred-to
auditor regarding the referred-to auditor's independence under
requirements of the PCAOB and the SEC; \214\
---------------------------------------------------------------------------

    \214\ See AS 1206.05a and AS 1205.10b.
---------------------------------------------------------------------------

     Determine, based on inquiries made to the referred-to
auditor and other information obtained by the lead auditor during the
audit, that the referred-to auditor is familiar with the relevant
requirements of the applicable financial reporting framework, the
standards of the PCAOB, and the financial reporting requirements of the
SEC; \215\ and
---------------------------------------------------------------------------

    \215\ See AS 1206.06b and AS 1205.10c(ii)-.10c(iii).
---------------------------------------------------------------------------

     Disclose in its auditor's report (i) the division of
responsibility between the lead auditor and the referred-to auditor and
(ii) the magnitude of the portions of the company's financial
statements audited by the auditors.\216\
---------------------------------------------------------------------------

    \216\ See AS 1206.08a and .08c, and AS 1205.07.
---------------------------------------------------------------------------

     Communicate to the referred-to auditor the decision to
divide responsibility for the audit with the referred-to auditor \217\
and determine a course of action when the lead auditor is unable to
divide responsibility.\218\
---------------------------------------------------------------------------

    \217\ See AS 1206.04 and AS 1205.10(c)(i).
    \218\ See AS 1206.07 (requiring the lead auditor, if it cannot
divide responsibility, to plan and perform procedures necessary for
it to issue an opinion, qualify or disclaim its opinion, or withdraw
from the engagement) and AS 1205.11.
---------------------------------------------------------------------------

    In addition, AS 1206 establishes new requirements. For example, AS
1206 requires the lead auditor to:
     Obtain a representation from the referred-to auditor that
the referred-to auditor is duly licensed to practice under the laws of
the jurisdiction that apply to the referred-to auditor's work; \219\
---------------------------------------------------------------------------

    \219\ AS 1206.05b.
---------------------------------------------------------------------------

     If the referred-to auditor plays a substantial role in the
preparation or furnishing of the lead auditor's report, determine
whether the referred-to auditor is registered with the PCAOB; \220\
---------------------------------------------------------------------------

    \220\ AS 1206.06c.
---------------------------------------------------------------------------

     Disclose the name and refer to the report of the referred-
to auditor in the lead auditor's report; \221\ and
---------------------------------------------------------------------------

    \221\ AS 1206.08b.
---------------------------------------------------------------------------

     Establish which auditor (lead auditor or referred-to
auditor) has audited, and disclose in the lead auditor's report which
auditor has taken responsibility for, the conversion adjustments in
situations where the financial statements of the company's business
unit audited by the referred-to auditor were prepared using a financial
reporting framework that differs from the financial reporting framework
used to prepare the company's financial statements.\222\
---------------------------------------------------------------------------

    \222\ AS 1206.06d.
---------------------------------------------------------------------------

    Consistent with AS 1205, a note to AS 1206.01 requires that the
engagement partner in a divided-responsibility scenario determine the
sufficiency of his or her firm's participation in the audit to serve as
the lead auditor. This requirement appears in AS 2101.06A-.06C,
discussed above.\223\
---------------------------------------------------------------------------

    \223\ AS 2101.06A-.06C also address, among other things, the
sufficiency-of-participation determination for audits subject to AS
1201.
---------------------------------------------------------------------------

    The 2016 Proposal retained the divided-responsibility approach that
has long been permitted in PCAOB standards \224\ and solicited views on
whether this approach should be eliminated. Most commenters in the 2016
Proposal supported retaining the divided-responsibility approach
because they observed no compelling practice issues that would suggest
a need to eliminate it. In the 2017 SRC, the approach was retained.
---------------------------------------------------------------------------

    \224\ The SEC has historically accepted audit reports indicating
a division of responsibility between a lead auditor and referred-to
auditor that express their opinion on the respective financial
statements.
---------------------------------------------------------------------------

    Although most commenters to the 2016 Proposal supported retaining
the divided-responsibility approach, some commenters on both the 2016
Proposal and the 2017 SRC expressed concern about retaining the
approach.\225\ They stated that the lead auditor is ultimately
responsible for the overall audit opinion and should not refer to other
auditors.\226\
---------------------------------------------------------------------------

    \225\ See Section III.F.1 of the 2021 SRC for a more detailed
discussion of comments received (e.g., concern that a lead auditor
might divide responsibility to avoid liability for its work on the
audit, concern that the effectiveness of audit committee oversight
could be reduced if the audit committee has no relationship with the
referred-to auditor, risk of leakage of market sensitive information
may increase if the referred-to auditor is involved in a corporate
transaction), including the Board's responses.
    \226\ Similar comments were made by certain members of the
Board's Standing Advisory Group (``SAG'') at the May and December
2016 SAG meetings and the May 2017 SAG meeting. At the May 2016 and
2017 SAG meetings, the observer from the Auditing Standards Board
acknowledged that AICPA standards allow for divided responsibility.
Transcript excerpts for these meetings are available in the docket
for this rulemaking on the PCAOB's website, available at https://pcaobus.org/Rulemaking/Pages/Docket042.aspx.
---------------------------------------------------------------------------

    Having considered the comments received, the Board has decided to
retain the divided-responsibility alternative (with certain conditions
set forth in the standard). Without the ability for auditors to divide
responsibility, some companies may encounter situations in which no
accounting firm is in a position to opine on the company's financial
statements. For example, the lead auditor may be unable to plan and
supervise another auditor's work if the subsidiary audited by the other
auditor is acquired by the lead auditor's audit client late in a fiscal
year. In this situation, the lead auditor may be unable to gain access
to people (e.g., subsidiary management, other auditor's personnel) and
documentation (e.g., subsidiary records, other auditor's working
papers).\227\ As a result, the lead auditor may be unable to obtain
sufficient appropriate audit evidence to support an unqualified audit
opinion on the company's consolidated financial statements and may
determine to withdraw from the audit engagement or disclaim its
opinion.
---------------------------------------------------------------------------

    \227\ See also discussion below regarding investee financial
statements audited by an investee's auditor.
---------------------------------------------------------------------------

Objectives
See Appendix A of AS 2101 and Paragraph .02 of AS 1206
    AS 1206, unlike AS 1205 (which the Board has rescinded), discusses
the following objectives of the lead auditor: (i) communicate with the
referred-to auditor and determine that audit procedures are properly
performed with respect to the consolidation or combination of accounts
in the company's financial statements and, where applicable, internal
control over financial reporting; and (ii) make the necessary
disclosures in the lead auditor's report.\228\
---------------------------------------------------------------------------

    \228\ See AS 1206.02.
---------------------------------------------------------------------------

    Some commenters suggested revising the proposed objectives. One
commenter on the 2016 Proposal suggested that the objectives should
include performing procedures necessary to make reference to the report
of the referred-to auditor in the lead auditor's report, and making
necessary disclosures in the report. Another commenter suggested
broadening the objective to cover the assessment of the referred-to
auditor's independence and competence and

proper communication between the lead auditor and referred-to auditor
to clarify roles and responsibilities.
    Having considered the comments received, the Board believes that
the recommended revisions relate to details of performance and
reporting rather than to high-level objectives of the standard. It also
notes that the lead auditor would effectively accomplish the objectives
suggested by the commenters by performing the procedures described in
AS 1206.\229\ Thus, the Board adopted the standard's objectives as
proposed.
---------------------------------------------------------------------------

    \229\ See AS 1206.03-.07 regarding performing procedures with
respect to the audit of the referred-to auditor, and AS 1206.08-.09
regarding making reference in the lead auditor's report. See also AS
1206.05-.06 regarding certain qualifications of the referred-to
auditor, and AS 1206.03-.04 regarding coordinating certain
procedures with, and communicating certain matters to, the referred-
to auditor.
---------------------------------------------------------------------------

Performing Procedures With Respect to the Audit of the Referred-to
Auditor
Performing Procedures Regarding the Consolidation or Combination of the
Financial Statements
See Paragraph .03 of AS 1206
    Under AS 1206.03, the lead auditor should determine that audit
procedures are performed, in coordination with the referred-to auditor,
to test and evaluate the consolidation or combination of the financial
statements of the business units \230\ audited by the referred-to
auditor into the company's financial statements. Matters affecting the
consolidation or combination of the financial statements typically
include items that are not in the scope of the referred-to auditor's
audit, such as elimination of intercompany transactions with the
business unit audited by the referred-to auditor.
---------------------------------------------------------------------------

    \230\ As stated in footnote 7 of AS 1206.03, the term ``business
units'' includes subsidiaries, divisions, branches, components, or
investments.
---------------------------------------------------------------------------

    This provision in AS 1206 builds on and strengthens a requirement
for the lead auditor in AS 1205.10 regarding adopting appropriate
measures to assure the coordination of the lead auditor's activities
with those of the referred-to auditor in order to achieve a proper
review of matters affecting the consolidating or combining of accounts
in the financial statements. Commenters did not address this proposed
provision, and the Board adopted it as proposed.
Communicating the Plan To Divide Responsibility
See Paragraph .04 of AS 1206
    Under AS 1206.04, the lead auditor is required to communicate to
the referred-to auditor, in writing, its plan to divide responsibility
for the audit with the referred-to auditor pursuant to PCAOB standards.
A referred-to auditor who has been informed of the lead auditor's plan
to divide responsibility will be able to take the necessary steps to
ascertain the implications of participating in the audit of the
company. For example, SEC rules require that the audit report prepared
by the referred-to auditor be filed with the SEC.\231\
---------------------------------------------------------------------------

    \231\ See Regulation S-X Rule 2-05, 17 CFR 210.2-05, which
requires that, in divided-responsibility scenarios, the referred-to
auditor's report be filed with the SEC. Rule 2-05 provides that if,
with respect to the examination of the financial statements, part of
the examination is made by an independent accountant other than the
principal accountant and the principal accountant elects to place
reliance on the work of the other accountant and makes reference to
that effect in his report, the separate report of the other
accountant must be filed. The term ``principal accountant'' is used
in the rule. See discussion above regarding whether the term
``referred-to auditor'' is aligned with the term ``principal
accountant'' used by the SEC, noting that the definitions in this
rulemaking do not affect the applicability of SEC terms or rules to
audits involving other auditors or referred-to auditors, including
the definition of ``principal accountant.''
---------------------------------------------------------------------------

    This provision in AS 1206 builds on and strengthens a requirement
for the lead auditor in AS 1205.10 regarding ascertaining that the
referred-to auditor is aware of the divided-responsibility
arrangement.\232\ Commenters did not address this provision, and the
Board adopted it as proposed.
---------------------------------------------------------------------------

    \232\ See AS 1205.10(c)(i).
---------------------------------------------------------------------------

Requesting a Written Representation Regarding Independence and
Licensing
See Paragraph .05 of AS 1206
    AS 1206.05a provides that the lead auditor should obtain a written
representation from the referred-to auditor that the referred-to
auditor is independent of the audit client under the requirements of
the PCAOB and SEC. This provision is designed to strengthen the
existing requirements regarding the lead auditor's responsibilities
with respect to the independence of the referred-to auditor.\233\
Commenters did not address this proposed requirement, and the Board
adopted it as proposed.
---------------------------------------------------------------------------

    \233\ AS 1205.10 requires the lead auditor to ``make inquiries''
concerning the other auditor's independence, which inquiries ``may
include'' procedures such as obtaining a representation from the
other auditor that the other auditor is independent.
---------------------------------------------------------------------------

    AS 1206.05b provides that the lead auditor should obtain a written
representation from the referred-to auditor that it is duly licensed to
practice under the laws of the jurisdiction that apply to the work of
the referred-to auditor. This requirement is not included in AS 1205.
Commenters did not address this proposed requirement of AS 1206, and
the Board adopted it as proposed.
Conditions for the Lead Auditor To Divide Responsibility, and the Lead
Auditor's Course of Action When It Is Unable To Divide Responsibility
See Paragraphs .06 and .07 of AS 1206
    AS 1206 describes the (i) conditions that must be met for the lead
auditor to divide responsibility with the referred-to auditor and (ii)
lead auditor's course of action when it is unable to divide
responsibility.\234\ These provisions strengthen the requirements in AS
1205.11.\235\ The requirements of AS 1206, which are discussed in more
detail below, are designed to facilitate compliance with PCAOB and SEC
independence requirements and PCAOB registration rules, and to reduce
the likelihood of filing auditors' reports with the SEC that violate
any relevant local licensing requirements.
---------------------------------------------------------------------------

    \234\ See AS 1206.06 and .07.
    \235\ Under AS 1205.11, the lead auditor should appropriately
qualify or disclaim its opinion on the consolidated financial
statements if it concludes that it can neither assume responsibility
for the work of the other auditor nor divide responsibility with the
other auditor.
---------------------------------------------------------------------------

Conditions for the Lead Auditor To Divide Responsibility
Performed an Audit and Issued an Auditor's Report in Accordance With
PCAOB Standards, and Was Registered With PCAOB (When Applicable)
    Under AS 1206.06a, the lead auditor may divide responsibility with
another accounting firm only if the referred-to auditor has represented
that it has performed its audit and issued its auditor's report in
accordance with PCAOB standards.\236\ This provision, which is not
included in AS 1205, is consistent with existing SEC rules and guidance
with respect to the auditors' reports filed with the SEC.\237\ Further,
according to AS 1206.06c, the lead auditor may divide responsibility
with another accounting firm that would play

a substantial role in the preparation or furnishing of the lead
auditor's report, or, if the referred-to auditor's report is with
respect to a business unit that is itself an issuer, broker, or dealer,
only if that firm is registered with the PCAOB.\238\
---------------------------------------------------------------------------

    \236\ AS 3101, The Auditor's Report on an Audit of Financial
Statements When the Auditor Expresses an Unqualified Opinion, and AS
3105, Departures from Unqualified Opinions and Other Reporting
Circumstances, apply to auditors' reports issued for audits of
historical financial statements that are intended to present
financial position, results of operations, and cash flows in
conformity with the applicable financial reporting framework. AS
2201 applies to auditors' reports issued for audits of management's
assessment of the effectiveness of internal control over financial
reporting that is integrated with an audit of the financial
statements.
    \237\ See Regulation S-X Rule 2-02(b)(1), 17 CFR 210.2-02(b)(1);
SEC, Commission Guidance Regarding the Public Company Accounting
Oversight Board's Auditing and Related Professional Practice
Standard No. 1, Release No. 34-49708 (May 14, 2004).
    \238\ See Section 102(a) of Sarbanes-Oxley, 15 U.S.C. 7212(a);
PCAOB Rule 2100, Registration Requirements for Public Accounting
Firms; paragraph (p)(ii) of PCAOB Rule 1001 (defining the phrase
``play a substantial role in the preparation or furnishing of an
audit report'').
---------------------------------------------------------------------------

    AS 1206 mirrors current PCAOB registration requirements. It does
not establish additional criteria for registering with the PCAOB or
otherwise change the registration requirements. Specifically, AS 1206
will not allow the lead auditor to divide responsibility for the audit
with an unregistered public accounting firm unless that firm is not
required to be registered with the PCAOB under Sarbanes-Oxley Section
102(a) and PCAOB Rule 2100.
    The standard the Board adopted clarifies, in a footnote to
paragraph .06, that if the referred-to auditor is not registered with
the PCAOB, the requirement in AS 3101 regarding stating in the
auditor's report that the auditor is registered with the PCAOB does not
apply to the referred-to auditor's report.\239\ The same footnote also
points out that disclosure in the referred-to auditor's report that a
firm is not registered with the PCAOB (or omission of a statement that
the firm is registered) does not relieve that firm of its obligation to
register when required. The Board received no comments on this
provision and adopted it as proposed.
---------------------------------------------------------------------------

    \239\ See AS 3101.06 and .09g, and AS 2201.85A and .85Dd.
---------------------------------------------------------------------------

Knowledge of Relevant Requirements and Standards
    Under AS 1206.06b, the lead auditor may divide responsibility with
the referred-to auditor only if the lead auditor determines, based on
inquiries made to the referred-to auditor and other information
obtained by the lead auditor during the audit, that the referred-to
auditor is familiar with the relevant requirements of the applicable
financial reporting framework, PCAOB standards, and SEC financial
reporting requirements.
    The final standard's formulation ``is familiar with'' was included
in the 2021 SRC, modifying the earlier formulation ``knows,'' to
reflect the difference in the lead auditor's relationship with the
referred-to auditor (for divided responsibility) and the other auditor
(for supervision). As noted in the 2021 SRC, the lead auditor does not
supervise the referred-to auditor, because the referred-to auditor is
responsible for its audit of and audit report on the financial
statements (and, if applicable, ICFR) of the company's business unit.
The lead auditor does not take responsibility for the referred-to
auditor's audit. In contrast, when an other auditor is involved in the
audit, the lead auditor supervises the other auditor's work, takes
responsibility for that work, and is therefore required to obtain a
more in-depth understanding of the other auditors' knowledge, skill,
and ability when establishing the necessary extent of supervision than
for a referred-to auditor in a divided-responsibility audit.
    Commenters did not address this amendment, and the Board adopted it
as proposed.
Financial Reporting Framework Used To Prepare the Company's and
Business Unit's Financial Statements
    Under AS 1206.06d, in relatively uncommon situations when the
financial statements of the company's business unit audited by the
referred-to auditor are prepared using a financial reporting framework
that differs from the framework used to prepare the company's financial
statements, the lead auditor may divide responsibility only if (i)
either the lead auditor or the referred-to auditor has audited the
conversion adjustments and (ii) the auditor's report of the lead
auditor indicates which auditor audited the conversion adjustments. (AS