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Journal entry — PCAOB adopts broker-dealer attestation standards and an auditing standard related to supplemental information

Published on: Oct 28, 2013

On October 10, 2013, the PCAOB adopted two attestation standards1 (the “examination standard” and the “review standard”) related to the examination of broker-dealer compliance and exemption reports. In conjunction with the attestation standards, the PCAOB also adopted AS 17,2 which applies to auditors engaged to report on supplemental information. The standards, pending SEC approval, will become effective for audits of financial statements for fiscal years ending on or after June 1, 2014.

The Examination Standard

The examination standard establishes requirements associated with the auditor’s examination of certain statements made by a broker-dealer in its compliance report (as required by the amendments to Rule 17a-53). The auditor’s objective is to express an opinion regarding whether the statements made by the broker-dealer in its compliance report are fairly stated in all material respects. As noted in the PCAOB’s fact sheet on the new guidance, the standard includes requirements for auditors that:

• Focus the auditor on the matters that are most important to the auditor’s conclusions regarding the statements of the broker-dealer;

• Incorporate consideration of fraud risk, including the risk of misappropriation of customer assets;

• Are designed to be scalable, based on the size and complexity of the broker-dealer;

• Coordinate the examination engagement with the audit of the financial statements and the audit procedures performed on supplemental information; and

• Describe how to report on an examination engagement, in connection with the requirements of SEC Rule 17a-5.

The Review Standard

The review standard establishes requirements associated with the auditor’s review of assertions by a broker-dealer that is claiming an exemption from the customer protection rule.4 The auditor’s objective is to state, on the basis of the results of the review, whether the auditor is aware of the need for any material modifications to be made to the broker-dealer’s assertions for those assertions to be fairly stated in all material respects.

Auditing Standard 17

AS 17 establishes the auditor’s responsibilities related to audit procedures and reporting on whether supplemental information accompanying the financial statements is fairly stated, in all material respects, in relation to the financial statements as a whole.

As described in the PCAOB’s fact sheet, AS 17 requires the auditor to:

• Determine that the supplemental information reconciles to the underlying accounting and other records or to the financial statements, as applicable;

• 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

• Evaluate whether the supplemental information, including its form and content, complies with relevant regulatory requirements or other applicable criteria, if any.

According to AS 17, “supplemental information” refers to:

a. Supporting schedules that brokers and dealers are required to file pursuant to Rule 17a-5 under the Securities Exchange Act of 1934; [footnote omitted]

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.

 

Editor’s Note: AS 17 applies to audits of all supplemental information accompanying financial statements, not just that of broker-dealers. For example, it would apply to the audits of certain employee benefit plans if the plans must file with the SEC audited financial statements and schedules prepared in accordance with the financial reporting requirements of the Employee Retirement Income Security Act of 1974.

 

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1    PCAOB Attestation Standards, Examination Engagements Regarding Compliance Reports of Brokers and Dealers, and Review Engagements Regarding Exemption Reports of Brokers and Dealers.

2    PCAOB Auditing Standard No. 17, Auditing Supplemental Information Accompanying Audited Financial Statements.

3    SEC Rule 17a-5, “Reports to Be Made by Certain Brokers and Dealers.” See Deloitte’s September 2013 (Updated October 2013) Banking & Securities Spotlight for additional information about the amended rule.

4    SEC Rule 15c3-3, “Customer Protection — Reserves and Custody of Securities.”

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