[Federal Register Volume 78, Number 221 (Friday, November 15, 2013)]
[Notices]
[Pages 68872-68887]
[FR Doc No: 2013-27345]

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SECURITIES AND EXCHANGE COMMISSION

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

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

November 8, 2013.
    Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 (the
``Sarbanes-Oxley Act''), notice is hereby given that on October 30,
2013, the Public Company Accounting Oversight Board (the ``Board'' or
the ``PCAOB'') filed with the Securities and Exchange Commission (the
``Commission'' or ``SEC'') the proposed rules described in items I and
II below, which items have been prepared by the Board. The Commission
is publishing this notice to solicit comments on the proposed rules
from interested persons.

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

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

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

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

is replaced with:

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

is replaced with:

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

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

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

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

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

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

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

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

B. Board's Statement on Burden on Competition

    Not Applicable.

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

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

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

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

    \28\ See Standards for Attestation Engagements Related to Broker
and Dealer Compliance or Exemption Reports Required by the U.S.
Securities and Exchange Commission and Related Amendments to PCAOB
Standards, PCAOB Release No. 2013-007 (October 10, 2013).
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Exclusion of Schedules Required by SEC Regulation S-X
    Some commenters expressed concern with the definition of
supplemental information because of the discussion in the proposing
release,\29\ which stated that the standard would not apply to
schedules prepared pursuant to SEC Regulation S-X.\30\ One commenter
noted that diversity in practice suggests that these schedules may be
considered supplementary and not part of the basic financial statements
covered by the standard auditor's opinion. The views of these
commenters are not consistent with SEC requirements. Section 1-01(b) of
SEC Regulation S-X \31\ states ``the term financial statements as used
. . . shall be deemed to include all notes to the statements and all
related schedules''. Thus, it is clear that the schedules required by
SEC Regulation S-X are part of the financial statements. As such, no
changes were made to the standard.\32\
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    \29\ See Section I.A.1 of Proposed Auditing Standard, Auditing
Supplemental Information Accompanying Audited Financial Statements
and Related Amendments to PCAOB Standards, PCAOB Release No. 2011-
005 (July 12, 2011).
    \30\ See Section 1-01(b) of SEC Regulation S-X, 17 CFR 210.1-
01(b).
    \31\ See e.g., Rules 5-04, 6-10, 6A-05, 7-05, and Article 12 of
Regulation S-X, 17 CFR 210.5-04, 6-10, 6A-05, 7-05, and 12.
    \32\ The schedules required by SEC Regulation S-X should be
referred to in the introductory paragraph and in the opinion of the
standard auditor's report set forth in AU sec. 508, Reports on
Audited Financial Statements.
---------------------------------------------------------------------------

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

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

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

    Another commenter expressed concern that paragraph 3 of the
proposed standard, which requires the auditor to base the nature,
timing, and extent of audit procedures on, among other things, the
materiality of the information presented, implied that the auditor will
undertake a second audit, separate from the audit of the financial
statements. Paragraph 3 of the standard does not require the auditor to
perform a second audit. The note to paragraph 3.b. specifically
provides that the auditor should use the same materiality
considerations for the supplemental information as that for the audit
of the financial statements. In general, the objective of using the
same materiality considerations from the financial statement audit is
consistent with the principle of reporting on the supplemental
information in relation to the financial statements as a whole. As
such, paragraph 3 was retained substantially as proposed. If the
auditor is engaged to audit and report on a stand-alone basis (i.e.,
not ``in relation to''), separate and apart from the audit of the
financial statement, the auditor should look to the requirements in AU
sec. 623. A stand-alone audit of supplemental information under AU sec.
623 is usually more extensive than applying audit procedures and
reporting on supplemental information in relation to the financial
statements taken as a whole.\34\
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    \34\ See AU sec. 623.13.
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Performing Audit Procedures on Supplemental Information Accompanying
Audited Financial Statements (Paragraphs 3 and 4)
    Similar to AU sec. 551, the standard auditor's report on
supplemental information pursuant to Auditing Standard No. 17 includes
an opinion on whether the supplemental information is fairly stated, in
all material respects, in relation to the financial statements as a
whole. As with any audit opinion, it is necessary for the auditor to
obtain reasonable assurance so the auditor has a reasonable basis for
that opinion.\35\ Accordingly, Auditing Standard No. 17 includes a
requirement for the auditor to perform audit procedures to obtain
appropriate audit evidence that is sufficient to support the auditor's
opinion on the supplemental information in relation to the financial
statements as a whole.
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    \35\ This also is consistent with the requirements of SEC Rule
17a-5, which requires the auditor to perform an examination of the
broker's or dealer's financial report, which consists of the
financial statements and supplemental schedules. See paragraph (g)
of SEC Rule 17a-5. See also the SEC Release at 74, which discusses
the SEC's intention that the auditor obtain reasonable assurance
regarding the financial statements and supporting schedules of
brokers and dealers.
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    At the same time, Auditing Standard No. 17 recognizes that the
circumstances in which the auditor expresses an opinion on supplemental
information differ from those of a stand-alone audit. That is, the
opinion under Auditing Standard No. 17 is expressed in relation to the
financial statements as a whole, and the auditor's procedures on the
financial statements ordinarily provide substantial evidence that is
relevant to the supplemental information. Thus, the standard provides
that the nature, timing, and extent of audit procedures necessary to
obtain sufficient appropriate audit evidence and to report on the
supplemental information depend on, among other things:
     The risk of material misstatement of the supplemental
information;
     The materiality considerations relevant to the information
presented;
     The evidence obtained from the audit of the financial
statements and, if applicable, other engagements by the auditor or
affiliates of the accounting firm for the period presented; and
     Whether a qualified opinion, an adverse opinion, or a
disclaimer of opinion was issued on the financial statements.
    Further, the standard states that the procedures performed
regarding the supplemental information should be planned and performed
in conjunction

with the audit of the financial statements and, for audits of brokers
and dealers, the procedures should be coordinated with the attestation
engagements related to compliance or exemption reports required by the
SEC.\36\ One commenter stated that this requirement implies that the
auditor would be required to separately consider and document audit
planning considerations relative to supplemental information.
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    \36\ For example, a compliance examination performed pursuant to
Attestation Standard No. 1, Examination Engagements Regarding
Compliance Reports of Brokers and Dealers, includes compliance tests
relating to the schedules the broker or dealer used to determine
compliance with the SEC's net capital rule, 17 CFR 240.15c3-1, and
the reserve requirements rule, paragraph (e) of 17 CFR 240.15c3-3.
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    While the standard requires the auditor to assess the risk of
material misstatement of the supplemental information as part of
determining the nature, timing, and extent of audit procedures, the
standard allows this assessment to be performed with, and informed by,
the planning and performance of procedures relating to the financial
statement audit. The auditor's knowledge obtained from the audit of
financial statements and any related engagements (such as an
attestation engagement) should generally provide necessary knowledge
for the auditor to assess the risk of material misstatement regarding
the supplemental information.
    For example, evidence regarding the completeness and accuracy of
the supplemental information that brokers and dealers are required to
file pursuant to SEC Rule 17a-5 may be obtained from procedures
performed during an attestation engagement regarding compliance for a
broker or dealer and include procedures regarding safeguarding
securities or compliance with certain SEC rules.
    In addition, paragraph 4 of the standard includes requirements for
the auditor to perform the following procedures on supplemental
information:
    a. Obtain an understanding of the purpose of the supplemental
information and the criteria management used to prepare the
supplemental information, including relevant regulatory requirements;
    b. Obtain an understanding of the methods of preparing the
supplemental information, evaluate the appropriateness of those
methods, and determine whether those methods have changed from the
methods used in the prior period and, if the methods have changed,
determine the reasons for and evaluate the appropriateness of such
changes;
    c. Inquire of management about any significant assumptions or
interpretations underlying the measurement or presentation of the
supplemental information;
    d. Determine that the supplemental information reconciles to the
underlying accounting and other records or to the financial statements,
as applicable;
    e. Perform procedures to test the completeness and accuracy of
information presented in the supplemental information to the extent
that it was not tested as part of the audit of financial statements;
and
    f. Evaluate whether the supplemental information, including its
form and content, complies with relevant regulatory requirements or
other applicable criteria, if any.
    Some commenters stated that certain of the required procedures in
the proposed standard exceeded those procedures necessary to support an
auditor's ``in relation to'' opinion on supplemental information.
Commenters stated that the required procedures in paragraph 4.d. and
4.e. expand the scope of the auditor's responsibility as compared to
the existing requirements in AU sec. 551 with respect to information
that was not derived from the underlying accounting records. One
commenter further stated that information not derived from the
underlying accounting records, by its nature, is not subject to
internal control over financial reporting and likely would not have
been subjected to the auditor's procedures in the audit of the
financial statements.
    In many instances, supplemental information reported on under PCAOB
standards is required by regulators that have determined that the
information required is important to carrying out their regulatory
authority, and users of that information can reasonably expect that an
auditor's report on supplemental information means that the
supplemental information has been subjected to audit procedures. This
is consistent with AU sec. 551.07, which states that the auditor may
``choose to modify or redirect certain of the procedures to be applied
in the audit of the basic financial statements so that [the auditor]
may express an opinion on the accompanying information'' under that
standard. If, as some commenters suggested, the auditor's procedures
are limited to solely those procedures performed in the financial
statement audit, it is possible that few or no audit procedures might
be applied directly to the supplemental information in some
engagements, and the auditor would have little or no basis for his or
her opinion.
    One commenter suggested a revision to the proposed requirement
regarding the auditor's responsibility for understanding and evaluating
the methods used by management to prepare the supplemental information.
The commenter recommended that the auditor should evaluate the
appropriateness of the methods used by management to prepare the
supplemental information, as well as any changes to those methods. Such
a suggestion can be viewed as a necessary step in evaluating whether
the supplemental information is fairly stated, so the standard has been
revised to specifically include that procedure.
    One commenter suggested that consultation with legal counsel or
other experts may be necessary. The standard does not prohibit such
consultations. Other commenters suggested that additional procedures be
included in the standard, such as a requirement for the auditor to
consider the complexity of the methodology used to prepare supplemental
information, particularly in those situations in which complex
analytical or sampling techniques have been employed in the preparation
of underlying data. These suggestions did not warrant changes to the
standard because the suggested examples are factors that affect the
risk of material misstatement of the supplemental information, which
the standard already addresses in paragraph 3.
Management Representations (Paragraph 5)
    The proposed standard included a requirement for the auditor to
obtain written representations from management. Commenters generally
supported the language as proposed. One commenter recommended that the
standard include an additional requirement for auditors to obtain a
representation that management acknowledge its responsibility for the
fair presentation of the supplemental information, including its form
and content, in accordance with regulatory requirements or other
applicable criteria. This additional requirement has been incorporated
into the standard.
    One commenter suggested that the standard specifically address
management representations with respect to supplemental information
arising after the auditor has been engaged to perform the financial
statement audit. As discussed previously, the auditor's and
management's responsibilities relating to supplemental information are
not affected by timing considerations, such

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

    \37\ For example, paragraph (g)(1) of SEC Rule 17a-5 requires
the auditor to prepare an auditor's report on the broker's or
dealer's financial report, which covers both the financial
statements and supporting schedules.
---------------------------------------------------------------------------

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

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

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

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

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

    In developing Auditing Standard No. 17, the Board sought to develop
a new auditing standard that takes into account the SEC's requirements
for supplemental information in SEC Rule 17a-5. As part of its process,
the Board also considered the SEC's economic analysis for its
amendments to SEC Rule 17a-5, which included considerations relating to
efficiency, competition, and capital formation. Notably, the SEC's
analysis considers the economic effects, including the costs and
benefits, of the required use of PCAOB standards, and discusses the
impact of such change on audits of financial statements and supporting
schedules that are required by the SEC to be filed by registered
brokers and dealers pursuant to SEC Rule 17a-5.\40\
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    \40\ See the SEC Release at 220-226. Notably, after analysis of
the views of commenters on the costs of the SEC's proposal to
replace GAAS with PCAOB standards with respect to audits of brokers
and dealers, the SEC concluded that the Commission ``does not expect
that a requirement that an audit of financial statements and
supporting schedules be conducted in accordance with the standards
of the PCAOB instead of with GAAS will result in substantial changes
for broker-dealer audit programs and therefore the Commission does
not anticipate that this change will result in significant costs to
broker-dealers in the form of increased audit fees.''
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    In addition to considering the SEC's requirements and economic
analysis, the Board also took into account other related economic
considerations, including comments received on the proposed standard,
as discussed further below.\41\
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    \41\ The Board did not specifically request comments that
attempted to quantify costs related to the auditing standard, but
the Board did request comment on the appropriateness of the standard
and received comments that pertained to audit effort and related
costs that it considered. The discussion in this section reflects
the Board's qualitative assessment of the standard.
---------------------------------------------------------------------------

Economic Baseline
    Regulators such as the SEC make the determination regarding whether
an entity must file supplemental information and whether auditors are
required to report on that information.
    To the Board's knowledge, the only entities that are required to
file supplemental information to which the standard would apply are (1)
brokers and dealers pursuant to SEC Rule 17a-5\42\ and (2) covered 11-K
filers.
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    \42\ See paragraphs (d)(1)(i)(A) and (d)(2) of SEC Rule 17a-5.
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    Accordingly, the Board's consideration of the economic consequences
of Auditing Standard No. 17 takes into account how the new standard
differs from the pre-existing auditing standards applicable to
supplemental information required in audits of brokers and dealers and
covered 11-K filers.
    For brokers and dealers, as discussed previously, the SEC's
amendments to Rule 17a-5 require audits of brokers and dealers to be
conducted in accordance with PCAOB standards. This includes the
examination of the financial report, which consists of the financial
statements and supporting schedules. Before the SEC's amendments to
Rule 17a-5, audits of brokers and dealers were performed under
generally accepted auditing standards (``GAAS''), established by the
American Institute of Certified Public Accountants (``AICPA'').
Specifically, AU-C Section 725-C, Supplementary Information in Relation
to the Financial Statements as a Whole, addressed the auditor's
responsibilities when auditors were engaged to report on supplemental
information in relation to audited financial statements.
    For covered 11-K filers, auditors generally use the reporting
language in AU sec. 551 in preparing their auditor's reports on the
supplemental information under PCAOB standards.
    Both GAAS and AU sec. 551 use an ``in relation to'' approach to
reporting. That is, the auditor's report on the supplemental
information generally presents an opinion on whether the supplemental
information is fairly stated in all material respects ``in relation
to'' the audited financial statements taken as a whole. When reporting
using the ``in relation to'' approach, the materiality considerations
generally are the same as those used in forming an opinion on the basic
financial statements taken as a whole.\43\ However, GAAS includes
requirements for audit procedures to be applied to the supplemental
information, whereas AU sec. 551 generally does not specify audit
procedures.
---------------------------------------------------------------------------

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

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

    Two principal alternatives were considered in developing the new
standard\44\--
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    \44\ The preceding section discusses the Board's decision to
adopt a new standard rather than retain AU sec. 551.
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     A stand-alone audit of the supplemental information
     An ``in relation to'' approach
    As adopted, Auditing Standard No. 17 builds on existing auditing
standards by retaining the ``in relation to'' approach for reporting on
supplemental information ``in relation to'' the financial statements as
a whole. The PCAOB assessed the alternative, which would have required
the supplemental information to be audited on a stand-alone basis. In
the Board's view, the stand-alone alternative could require substantial
additional audit effort because the materiality considerations would be
substantially lower than in an ``in relation to'' approach.\45\ The
Board does not believe that this additional audit effort would enhance
the quality of supplemental information significantly over properly
performed testing and evaluation under the ``in relation to'' approach.
In the Board's view, the use of the ``in relation to'' approach--
together with the required coordination with the work on the financial
statement audit--can accomplish the objectives of the financial
statement audit and audit procedures on the supplemental information
with more efficient use of resources than the alternative stand-alone
approach.
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    \45\ In a stand-alone audit, the auditor would apply materiality
considerations for the supplemental information by itself, which
typically would be substantially lower than the materiality level
for the financial statements as a whole. See e.g., paragraph .13 of
AU sec 623.
---------------------------------------------------------------------------

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

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

    Auditing Standard No. 17 is designed to be scalable based on an
entity's size and complexity. Specifically, the audit effort under the
standard likely will be greater for entities that have more
supplemental information or more complex supplemental information. For
example, audit effort generally would be greater for larger, more
complex brokers or dealers that carry securities for customers than for
smaller, less complex brokers that neither carry nor clear securities.
Similarly, audit effort generally would be greater for larger, more
complex covered 11-K filers that have more investments and reportable
transactions subject to regulatory reporting requirements.
Applicability to Audits of Emerging Growth Companies
    The Board is adopting Auditing Standard No. 17 pursuant to its
authority under the Sarbanes-Oxley Act.\48\
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    \48\ Public Law 107-204, 116 Stat. 745 (2002). Under Section 101
of the Sarbanes-Oxley Act, the mission of the PCAOB is to oversee
the audit of companies that are subject to the securities laws, and
related matters, in order to protect the interests of investors and
further the public interest in the preparation of informative,
accurate, and independent audit reports. Section 103 of the
Sarbanes-Oxley Act authorizes the Board to adopt auditing standards
for use by registered public accounting firms in the preparation and
issuance of audit reports ``as required by [the] Act or the rules of
the Commission, or as may be necessary or appropriate in the public
interest or for the protection of investors.''
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    Before rules adopted by the Board can take effect, they must be
approved by the SEC. Pursuant to Section 107(b)(3) of the Sarbanes-
Oxley Act, the SEC shall approve a proposed rule if it finds that the
rule is ``consistent with the requirements of [the Sarbanes-Oxley] Act
and the securities laws, or is necessary or appropriate in the public
interest or for the protection of investors.''
    Additionally, Section 104 of the Jumpstart Our Business Startups
Act (``JOBS Act'') \49\ amended the Sarbanes-Oxley Act to provide that
any additional rules adopted by the PCAOB after April 5, 2012 do not
apply to audits of emerging growth companies (``EGCs'') \50\ unless the
SEC ``determines that the application of such additional requirements
is necessary or appropriate in the public interest, after considering
the protection of investors, and whether the action will promote
efficiency, competition, and capital formation.'' \51\
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    \49\ Public Law 112-106, 126 Stat. 306 (2012).
    \50\ Section 3(a)(80) of the Exchange Act defines the term
``emerging growth company.'' An issuer generally qualifies as an EGC
if it has total annual gross revenue of less than $1 billion during
its most recently completed fiscal year (and its first sale of
common equity securities pursuant to an effective Securities Act
registration statement did not occur on or before December 8, 2011.)
See JOBS Act Section 101(a), (b), and (d). Once an issuer is an EGC,
it retains its EGC status until the earliest of: (i) The first year
after it has total annual gross revenue of $1 billion or more (as
indexed for inflation every five years by the SEC); (ii) the end of
the fiscal year after the fifth anniversary of its first sale of
common equity securities under an effective Securities Act
registration statement; (iii) the date on which the company issues
more than $1 billion in non-convertible debt during the prior three-
year period; or (iv) the date on which it is deemed to be a ``large
accelerated filer'' under the Exchange Act (generally, an entity
that has been public for at least one year and has an equity float
of at least $700 million).
    \51\ See Section 103(a)(3)(C) of Sarbanes-Oxley (15 U.S.C.
7213(a)(3)), as added by Section 104 of the JOBS Act, Public Law
112-106 (April 5, 2012).
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    The following discussion is intended to provide information that
may assist the SEC in any determination it may make regarding whether
to apply the new standard to audits of EGCs.
    As noted above, Auditing Standard No. 17:
     Strengthens and clarifies the audit requirements regarding
supplemental information to promote consistent audit performance and
compliance with regulatory requirements, which can enhance the quality
of information that is used in regulatory oversight for investor
protection and, with respect to covered 11-K filers, increase the
quality of information available to investors;
     Helps lessen the effects of the costs associated with the
new auditing standard by retaining the ``in relation to'' approach,
setting forth a risk-based approach for the required audit procedures,
and requiring coordination with the financial statement audit to avoid
redundancy in testing; and
     Is designed to be scalable based on the size and
complexity of the entity.
    The PCAOB has begun monitoring implementation of the JOBS Act to
better understand the characteristics of EGCs and inform the Board's
considerations regarding whether it should recommend to the SEC that it
apply the new standard and related amendments to audits of EGCs. Based
on the PCAOB's research of self-identified EGCs, a substantial majority
of EGCs are smaller reporting companies that began reporting under the
Exchange Act in 2012 or later.\52\
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    \52\ See Appendix 7 of The Auditor's Report on an Audit of
Financial Statements When the Auditor Expresses an Unqualified
Opinion, Reports on Audited Financial Statements, and The Auditor's
Responsibilities Regarding Other Information in Certain Documents
Containing Audited Financial Statements and the Related Auditor's
Report, and Related Amendments to PCAOB Standards, PCAOB Release No.
2013-005 (August 13, 2013).
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    Currently, the PCAOB is not aware of EGCs for which auditors would
be required to apply this standard. PCAOB staff has performed research
on filings of self-identified EGCs. Text searches were used to identify
any issuers with audit reports that opine on supplemental information
required by Rule 17a-5, and PCAOB staff read the most recent filings of
those companies. For those companies for which audited financial
statements were available and based on information included in the most
recent audited financial statements filed as of May 15, 2013, PCAOB
staff has observed that none of the EGCs is a broker or dealer or an
11-K filer. The staff observed one SEC filing containing supplemental
information for which an auditor expressed an opinion. Based on the
nature of the supplemental information filed, it appears that the
issuer included the supplemental information voluntarily rather than
pursuant to a requirement specified by rule.
    As noted previously, to the Board's knowledge, the only entities
that are required to file supplemental information to which Auditing
Standard No. 17 will apply are (1) brokers and dealers pursuant to SEC
Rule 17a-5 and (2) covered 11-K filers. PCAOB staff has discussed the
applicability of the JOBS Act to this rulemaking with the SEC staff.
The reporting regimes for registered brokers and dealers under SEC Rule
17a-5 and the reporting regime for employee benefit plans that must
comply with financial reporting requirements under both ERISA and the
SEC are separate and distinct from those for companies subject to
reporting requirements pursuant to Section 13 and 15 of the Exchange
Act or for a

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

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/pcaob.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number PCAOB-2013-02 on the subject line.

Paper Comments

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

All submissions should refer to File Number PCAOB-2013-02. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/pcaob.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rules that are filed
with the Commission, and all written communications relating to the
proposed rules between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for Web site viewing and printing in
the Commission's Public Reference Room, on official business days
between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing
will also be available for inspection and copying at the principal
office of the PCAOB. All comments received will be posted without
charge; we do not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File No. PCAOB-
2013-02 and should be submitted on or before December 6, 2013.

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