
[Federal Register Volume 78, Number 221 (Friday, November 15, 2013)]
[Notices]
[Pages 68911-68944]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-27344]



[[Page 68911]]

Vol. 78

Friday,

No. 221

November 15, 2013

Part II





 Securities and Exchange Commission





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





Public Company Accounting Oversight Board; Notice of Filing of Proposed 
Rules on Attestation Standard No. 1, Examination Engagements Regarding 
Compliance Reports of Brokers and Dealers, Attestation Standard No. 2, 
Review Engagements Regarding Exemption Reports of Brokers and Dealers, 
and Related Amendments to PCAOB Standards; Notice

  Federal Register / Vol. 78 , No. 221 / Friday, November 15, 2013 / 
Notices  

[[Page 68912]]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70842; File No. PCAOB-2013-01]


Public Company Accounting Oversight Board; Notice of Filing of 
Proposed Rules on Attestation Standard No. 1, Examination Engagements 
Regarding Compliance Reports of Brokers and Dealers, Attestation 
Standard No. 2, Review Engagements Regarding Exemption Reports of 
Brokers and Dealers, 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 the ``SEC'') the proposed rules described in items I 
and II below, which items have been prepared by the Board. The 
Commission is publishing this notice to solicit comments on the 
proposed rules from interested persons.

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

    On October 10, 2013, the Board adopted Attestation Standard No. 1, 
Examination Engagements Regarding Compliance Reports of Brokers and 
Dealers, Attestation Standard No. 2, Review Engagements Regarding 
Exemption Reports of Brokers and Dealers, and related amendments to 
PCAOB standards (collectively, the ``proposed rules''). The text of the 
proposed rules is set out below.

Attestation Standard No. 1

Examination Engagements Regarding Compliance Reports of Brokers and 
Dealers
Introduction
    1. This standard establishes requirements that apply when an 
auditor is engaged to perform an examination \1\ of certain statements 
made by a broker \2\ or dealer \3\ in a compliance report (``compliance 
report'') prepared pursuant to Securities and Exchange Act of 1934 
(``Exchange Act'') Rule 17a-5, 17 CFR 240.17a-5 (``SEC Rule 17a-5'') of 
the U.S. Securities and Exchange Commission (``SEC'').\4\
---------------------------------------------------------------------------

    \1\ See paragraphs (d)(1)(i)(C) and (g)(2)(i) of SEC Rule 17a-5, 
which require that certain brokers or dealers file with the SEC a 
report prepared by an independent accountant based on an examination 
of the compliance report, if the broker or dealer is required to 
file a compliance report with the SEC.
    \2\ 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.
    \3\ 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.
    \4\ See paragraph (g)(2)(i) of SEC Rule 17a-5.
---------------------------------------------------------------------------

    2. SEC Rule 17a-5 requires a broker's or dealer's compliance report 
to include the following statements (hereinafter referred to as 
``assertions'') by the broker or dealer as to whether: \5\
---------------------------------------------------------------------------

    \5\ The scope of the auditor's examination does not encompass 
the statement required by paragraph (d)(3)(i)(A)(1) of SEC Rule 17a-
5, which is a statement as to whether the broker or dealer has 
established and maintained Internal Control Over Compliance as that 
term is defined in paragraph (d)(3)(ii) of SEC Rule 17a-5. See 
paragraphs (d)(3) and (g)(2)(i) of SEC Rule 17a-5.
---------------------------------------------------------------------------

    a. The Internal Control Over Compliance \6\ of the broker or dealer 
was effective during the most recent fiscal year;
---------------------------------------------------------------------------

    \6\ Terms defined in Appendix A, Definitions, are set in 
boldface type the first time they appear. The definitions of the 
terms in Appendix A are consistent with paragraphs (d)(3)(ii) and 
(iii) of SEC Rule 17a-5.
---------------------------------------------------------------------------

    b. The Internal Control Over Compliance of the broker or dealer was 
effective as of the end of the most recent fiscal year; \7\
---------------------------------------------------------------------------

    \7\ See paragraph (d)(3)(iii) of SEC Rule 17a-5, which provides 
that ``a broker or dealer is not permitted to conclude that its 
Internal Control Over Compliance was effective during the most 
recent fiscal year if there were one or more material weaknesses in 
its Internal Control Over Compliance during the most recent fiscal 
year. The broker or dealer is not permitted to conclude that its 
Internal Control Over Compliance was effective as of the end of the 
most recent fiscal year if there were one or more material 
weaknesses in its Internal Control Over Compliance as of the end of 
the most recent fiscal year.''
---------------------------------------------------------------------------

    c. The broker or dealer was in compliance with 17 CFR 240.15c3-1 
(the ``net capital rule'') and 240. 15c3-3(e) (the ``reserve 
requirements rule'') as of the end of the most recent fiscal year; and
    d. The information the broker or dealer used to state whether it 
was in compliance with the net capital rule and the reserve 
requirements rule was derived from the books and records of the broker 
or dealer.
Objective
    3. When performing an examination of the assertions made by a 
broker or dealer in a compliance report (an ``examination 
engagement''), the auditor's objective is to express an opinion 
regarding whether the assertions made by the broker or dealer in its 
compliance report are fairly stated, in all material respects.
    4. To express an opinion on the assertions made by a broker or 
dealer in a compliance report, the auditor must plan and perform the 
examination engagement to obtain appropriate evidence that is 
sufficient \8\ to obtain reasonable assurance \9\ about whether (1) one 
or more Material Weaknesses existed during the most recent fiscal year 
specified in the broker's or dealer's assertion; (2) one or more 
Material Weaknesses existed as of the end of the most recent fiscal 
year specified in the broker's or dealer's assertion; and (3) one or 
more instances of non-compliance with the net capital rule or the 
reserve requirements rule existed as of the end of the most recent 
fiscal year specified in the broker's or dealer's assertion.
---------------------------------------------------------------------------

    \8\ See the description of ``sufficiency'' and 
``appropriateness'' in Auditing Standard No. 15, Audit Evidence.
    \9\ Although not absolute assurance, reasonable assurance is a 
high level of assurance.

    Note: Because the broker's or dealer's assertions include 
assertions regarding Internal Control Over Compliance and its 
compliance with both the net capital rule and the reserve 
requirements rule, the auditor's examination should evaluate (a) the 
effectiveness of Internal Control Over Compliance with each 
financial responsibility rule \10\ during, and as of the end of, the 
most recent fiscal year, and (b) compliance with the net capital 
rule and with the reserve requirements rule as of the end of the 
---------------------------------------------------------------------------
most recent fiscal year.

    \10\ The term ``financial responsibility rules'' refers to: 17 
CFR 240.15c3-1 (``SEC Rule 15c3-1'' or the ``net capital rule''); 17 
CFR 240.15c3-3 (``SEC Rule 15c3-3''); 17 CFR 240.17a-13 (``SEC Rule 
17a-13''); and any rule of the designated examining authority 
(``DEA'') of the broker or dealer that requires account statements 
to be sent to the customers of the broker or dealer. The financial 
responsibility rules are the same as the rules cited in paragraph 
(d)(3)(ii) of SEC Rule 17a-5.

    Note: The auditor is not required to express an opinion on the 
process the broker or dealer used to arrive at the conclusions 
---------------------------------------------------------------------------
stated in the broker's or dealer's assertions.

    5. The auditor also must plan and perform the examination 
engagement to obtain appropriate evidence that is sufficient to obtain 
reasonable assurance to support the auditor's opinion regarding whether 
the assertion by the broker or dealer that the information used to 
assert compliance with the net

[[Page 68913]]

capital rule and the reserve requirements rule was derived from the 
books and records of the broker or dealer, is fairly stated, in all 
material respects.
Performing the Examination Engagement
General Requirements
    6. An auditor who performs an examination engagement pursuant to 
this standard must:
    a. Have adequate technical proficiency in attestation engagements;
    b. Obtain an understanding of the financial responsibility rules 
and other rules and regulations that are relevant to the broker's or 
dealer's assertions;
    c. Determine the auditor's compliance with independence and ethics 
requirements; and
    d. Exercise due professional care, which includes application of 
professional skepticism, in planning and performing the examination and 
the preparation of the report.

    Note:  Due professional care imposes a responsibility on each 
engagement team member to comply with this standard. The exercise of 
due professional care requires critical review at every level of 
supervision of the work done and the judgment exercised by those 
assisting in the engagement, including preparing the report.\11\

    \11\ The auditor's responsibility to exercise due professional 
care is consistent with the description in paragraphs .40-.41 of AT 
sec. 101, Attest Engagements.

    Note:  Auditing Standard No. 3, Audit Documentation, establishes 
the documentation requirements for examination engagements performed 
---------------------------------------------------------------------------
pursuant to this standard.

    7. The engagement partner is responsible for the examination 
engagement and performance of the examination procedures. Accordingly, 
the engagement partner is responsible for proper planning of the 
examination engagement, proper supervision of the work of engagement 
team members, and compliance with the requirements of this standard. 
The engagement partner may seek assistance from appropriate engagement 
team members in fulfilling these responsibilities.

    Note:  For purposes of this standard, the term ``engagement 
partner'' means the member of the engagement team with primary 
responsibility for the examination engagement.


    Note:  Proper planning includes establishing an overall strategy 
for the examination engagement and developing a plan for the 
engagement, which includes, in particular, the nature, timing, and 
extent of procedures necessary to obtain reasonable assurance. 
Proper supervision includes supervising the work of engagement team 
members so that the work is performed as directed and supports the 
conclusions reached.

Relationship Between the Examination Engagement and the Audit of the 
Financial Statements and the Audit Procedures Performed on Supplemental 
Information
    8. The examination engagement should be coordinated with the audit 
of the financial statements and the audit procedures performed on 
supplemental information of the broker or dealer.\12\ In planning and 
performing procedures for, and evaluating the results of the procedures 
performed in, the examination engagement, the auditor should take into 
account relevant evidence from the audit of the financial statements 
and the audit procedures performed on the supplemental information. 
However, the objectives of the financial statement audit and the 
examination engagement are not the same, so the auditor must plan and 
perform the work to meet the objectives of both engagements.
---------------------------------------------------------------------------

    \12\ Under the definition of supplemental information included 
in Auditing Standard No. 17, Auditing Supplemental Information 
Accompanying Audited Financial Statements, supplemental information 
includes the supporting schedules described in paragraph (d)(2) of 
SEC Rule 17a-5, which are required to be filed with the SEC, DEA, 
and the Securities Investor Protection Corporation (``SIPC'') by 
brokers and dealers. Such supporting schedules include a Computation 
of Net Capital Under SEC Rule 15c3-1, a Computation for 
Determination of the Reserve Requirements Under Exhibit A of SEC 
Rule 15c3-3, and Information Relating to Possession or Control 
Requirements Under SEC Rule 15c3-3.
---------------------------------------------------------------------------

Planning the Examination Engagement
    9. The auditor should plan the examination engagement to perform 
procedures that are sufficient to provide a reasonable basis for 
determining whether the broker's or dealer's assertions are fairly 
stated, in all material respects. In planning the examination 
engagement, the auditor should:
    a. Evaluate the nature of instances of non-compliance with the 
financial responsibility rules and Deficiencies in Internal Control 
Over Compliance identified during previous examination engagements;
    b. Obtain an understanding of the broker's or dealer's processes, 
including relevant controls, regarding compliance with the financial 
responsibility rule; \13\

    \13\ Appendix B of this standard discusses considerations for 
brokers and dealers with multiple divisions or branches.

    Note: The nature, timing, and extent of procedures that are 
necessary to obtain an understanding of the broker's or dealer's 
processes, including relevant controls, regarding compliance with 
the financial responsibility rules depend on the size and complexity 
of the broker or dealer; the auditor's existing knowledge of the 
broker's or dealer's processes and controls; the degree to which the 
broker's or dealer's compliance depends on the completeness and 
accuracy of the broker's or dealer's internally generated data; the 
nature and extent of changes in systems and operations, if any; and 
the nature of the broker's or dealer's documentation of its 
---------------------------------------------------------------------------
processes and controls.


    Note:  Obtaining an understanding of the broker's or dealer's 
processes, including relevant controls, includes evaluating the 
design of controls that are relevant to the examination and 
determining whether the controls have been implemented.

    c. Obtain an understanding of instances of non-compliance with the 
financial responsibility rules and Deficiencies in Internal Control 
Over Compliance identified by management during the most recent fiscal 
year;
    d. Assess the risks associated with related parties,\14\ including 
related parties that are investment advisors or entities with which the 
broker or dealer has a custodial or clearing relationship, that are 
relevant to compliance and controls over compliance;
---------------------------------------------------------------------------

    \14\ The auditor should look to the definition in the applicable 
financial reporting framework with respect to the term ``related 
parties.''
---------------------------------------------------------------------------

    e. Obtain an understanding of management's competence regarding the 
relevant rules and regulations;
    f. Read the Financial and Operational Combined Uniform Single 
Reports (``FOCUS Reports'') \15\ filed by the broker or dealer and 
obtain an understanding of the reasons for resubmissions, if any;
---------------------------------------------------------------------------

    \15\ The FOCUS Reports are: Form X-17A-5 Schedule I; Form X-17A-
5 Part II; Form X-17A-5 Part IIa; Form X-17A-5 Part IIb; and Form X-
17A-5 Part III.
---------------------------------------------------------------------------

    g. Read reports of internal auditors, others who perform an 
equivalent function, compliance functions, and other auditors that are 
relevant to the broker's or dealer's assertions;
    h. Inquire of management, and, if applicable, other individuals at 
the broker or dealer who have relevant knowledge regarding regulatory 
examinations and correspondence between the SEC or the broker's or 
dealer's DEA and the broker or dealer that are relevant to the broker's 
or dealer's assertions;
    i. Read correspondence and notifications regarding non-compliance 
that the broker or dealer has sent to or received from the SEC or the 
broker's or dealer's DEA that are relevant to the broker's or dealer's 
assertions, and, when necessary in the circumstances,

[[Page 68914]]

make inquiries of the regulatory agencies; and
    j. Obtain an understanding of the nature and frequency of customer 
complaints that are relevant to compliance with the financial 
responsibility rules.
    10. In addition, in planning the examination engagement, the 
auditor should assess the risk of fraud, including the risk of 
misappropriation of customer assets, relevant to compliance with the 
net capital rule and the reserve requirements rule and the 
effectiveness of the broker's or dealer's Internal Control Over 
Compliance.
Testing Controls Over Compliance
    11. The auditor must test those controls that are important to the 
auditor's conclusion about whether the broker or dealer maintained 
effective Internal Control Over Compliance for each financial 
responsibility rule during the fiscal year and as of the end of the 
fiscal year. The auditor must obtain evidence that the controls over 
compliance selected for testing are designed effectively and operated 
effectively during the fiscal year and as of the fiscal year end.
    12. For each control selected for testing, the evidence necessary 
to persuade the auditor that the control is effective depends upon the 
risk associated with the control. The risk associated with a control 
consists of the risk that the control might not be effective and, if 
not effective, the risk that a Material Weakness would result. As the 
risk associated with the control being tested increases, the 
persuasiveness of the evidence that the auditor should obtain also 
increases.

    Note:  Although the auditor must obtain evidence about the 
effectiveness of the selected controls for each financial 
responsibility rule, the auditor is not responsible for obtaining 
sufficient evidence to support an opinion about the effectiveness of 
each individual control.

    13. Factors that affect the risk associated with a control include:
     The nature of the financial responsibility rule;
     The risk associated with non-compliance with the financial 
responsibility rule and the significance of potential non-compliance;
     Changes in the broker's or dealer's policies or procedures 
or personnel that might adversely affect control design or operating 
effectiveness;
     The broker's or dealer's history of instances of non-
compliance with the financial responsibility rule that the control is 
intended to prevent or detect;
     The existence and effectiveness of controls that monitor 
other controls;
     The risk of management override of controls over 
compliance;
     The nature of the control and the frequency with which it 
operates;
     The degree to which the control relies on the 
effectiveness of other controls (e.g., the control environment or 
information technology general controls);
     The competence of the personnel who perform the control or 
monitor its performance and whether there have been changes in key 
personnel who perform the control or monitor its performance;
     The extent of use of part-time personnel to perform 
controls over compliance;
     Whether the control relies on performance by an individual 
or is automated (i.e., an automated control would generally be expected 
to be lower risk if relevant information technology general controls 
are effective); and
     The complexity of the control and the significance of the 
judgments made in connection with its operation.
Testing Design Effectiveness
    14. The auditor should test the design effectiveness of the 
selected controls by determining whether the broker's or dealer's 
controls, if they are operating as prescribed by persons possessing the 
necessary authority and competence to perform the control effectively, 
can effectively prevent or detect instances of non-compliance with the 
financial responsibility rules on a timely basis.

    Note:  If a broker or dealer makes changes to its policies and 
procedures or key personnel during the fiscal year, the auditor 
should obtain evidence regarding the design effectiveness of the 
selected controls before and after the change.

    15. Procedures the auditor performs to obtain evidence about design 
effectiveness include inquiry of appropriate personnel, observation of 
the broker's or dealer's operations, and inspection of relevant 
documentation. Walkthroughs that include these procedures ordinarily 
are sufficient to evaluate design effectiveness.
Testing Operating Effectiveness
    16. The auditor should test the operating effectiveness of the 
selected controls by determining whether each selected control is 
operating as designed and whether the person performing the control 
possesses the necessary authority and competence to perform the control 
effectively.

    Note: The auditor should obtain evidence regarding the operating 
effectiveness of the selected controls throughout the entire year 
and as of the end of the fiscal year.

    17. Procedures the auditor performs to test operating effectiveness 
include a mix of inquiry of appropriate personnel, observation of the 
broker's or dealer's operations, inspection of relevant documentation, 
and re-performance of the control.
    18. The evidence provided by the auditor's tests of the 
effectiveness of controls depends upon the mix of the nature, timing, 
and extent of the auditor's procedures. Further, for an individual 
control, different combinations of the nature, timing, and extent of 
testing might provide sufficient evidence in relation to the risk 
associated with the control.

    Note:  Generally, a conclusion that a control is not operating 
effectively can be supported by less evidence than is necessary to 
support a conclusion that a control is operating effectively.

Using Evidence Obtained in Past Examination Engagements
    19. The auditor should obtain evidence during the current fiscal 
year about the design and operating effectiveness of controls selected 
for testing. If controls selected for testing in the current year were 
tested in past examination engagements, and if the auditor plans to use 
evidence about the effectiveness of those controls that was obtained in 
prior years, the auditor should take into account the factors discussed 
in paragraph 13 and the following factors to determine the evidence 
needed during the current fiscal year examination:
     The nature, timing, and extent of procedures performed in 
previous examination engagements;
     The results of the previous years' testing of the control; 
and
     Changes in the control or the process in which the control 
operates since the previous examination engagement.

Using Tests of Controls That Are Modified During the Year

20. A broker or dealer might implement changes to controls over 
compliance to make them more effective or efficient or to address 
control deficiencies. The auditor should obtain an understanding of the 
reason for the change and obtain evidence regarding the design and 
operating effectiveness of the new and superseded controls. The nature, 
timing, and extent of the testing of new and superseded controls depend 
on the evidence needed to support the auditor's conclusions about the 
effectiveness of Internal Control Over Compliance during and as of the 
end of the fiscal year.

Performing Compliance Tests


[[Page 68915]]


    21. The auditor must perform procedures (``compliance tests'') that 
are sufficient to support the auditor's conclusions regarding whether 
the broker or dealer was in compliance with the net capital rule and 
reserve requirements rule as of the end of its most recent fiscal year. 
This includes performing the following procedures on the schedules \16\ 
the broker or dealer used to determine compliance with the net capital 
rule and the reserve requirements rule as of its fiscal year end:
---------------------------------------------------------------------------

    \16\ The term ``schedules'' used in this paragraph refers to the 
computations of the broker or dealer, in whatever form, that are 
performed to determine the broker's or dealer's compliance with the 
net capital rule and the reserve requirements rule.
---------------------------------------------------------------------------

    a. Evaluate whether the amounts in the schedules were determined in 
accordance with the net capital rule or reserve requirements rule, as 
applicable;
    b. Test the accuracy and completeness of the information in the 
schedules;
    c. Determine whether the broker or dealer maintained the required 
level of net capital in accordance with the net capital rule;
    d. Determine whether the broker or dealer maintained a special 
reserve bank account for the exclusive benefit of customers and 
deposited funds in at least the required amount in accordance with the 
reserve requirements rule;
    e. Determine whether the information in the schedules was derived 
from the books and records of the broker or dealer; and
    f. Determine whether the broker or dealer made the notifications, 
if any, required by the net capital rule and reserve requirements rule 
as of the end of the most recent fiscal year.

    Note:  Procedures performed as part of the audit of the 
financial statements and audit procedures performed on supplemental 
information also might provide evidence regarding the broker's or 
dealer's compliance with the net capital rule and the reserve 
requirements rule.

    22. The auditor should plan and perform compliance tests that are 
responsive to the risks, including fraud risks, associated with non-
compliance with the net capital rule and the reserve requirements rule. 
As the risk associated with non-compliance with the net capital rule or 
the reserve requirements rule increases, the persuasiveness of the 
evidence that the auditor should obtain from compliance tests also 
increases. The evidence provided by the auditor's compliance tests 
depends upon the mix of the nature, timing, and extent of those 
procedures. Inquiry alone does not provide sufficient appropriate 
evidence to support the auditor's conclusions about the broker's or 
dealer's compliance with the net capital rule or the reserve 
requirements rule.
    23. In conjunction with performing the compliance tests pursuant to 
paragraphs 21 and 22, the auditor must perform procedures to obtain 
evidence about the existence of customer funds or securities held for 
customers.

    Note:  Examples of procedures that provide evidence about the 
existence of customer assets include: (1) Counting customer 
securities or observing and testing the broker's or dealer's 
procedures for physical inspection and (2) confirming customer 
security positions directly with depositories and clearing 
organizations. Procedures performed in the audit of the financial 
statements and the audit procedures performed on supplemental 
information to test the existence of assets held for customers also 
may provide evidence that is relevant to the requirement in this 
paragraph.

Effect of Tests of Internal Controls on Compliance Tests
    24. The auditor should take into account the results of the 
auditor's tests of controls over compliance with the net capital rule 
and the reserve requirements rule in determining the necessary nature, 
timing, and extent of compliance tests. If the test results indicate 
that the controls are effective, less evidence is needed from 
compliance tests. If the test results indicate that the controls are 
ineffective, the auditor should revise the planned compliance tests as 
necessary to obtain more persuasive evidence regarding compliance.
Evaluating the Results of the Examination Procedures
    25. In forming an opinion on whether the assertions made by the 
broker or dealer in the compliance report are fairly stated, in all 
material respects, the auditor should evaluate all evidence obtained, 
regardless of whether the evidence corroborates or contradicts the 
broker's or dealer's assertions.
    26. The auditor should evaluate:
    a. Identified instances of non-compliance with the net capital rule 
and the reserve requirements rule to determine whether any instance of 
non-compliance existed as of the end of the most recent fiscal year;
    b. Identified instances in which the information used to assert 
compliance with the net capital rule or the reserve requirements rule 
was not derived from the broker's or dealer's books and records to 
determine whether they are material, individually or in combination; 
and
    c. Identified Deficiencies in Internal Control Over Compliance to 
determine whether the deficiencies, individually or in combination, are 
Material Weaknesses.

    Note:  A Material Weakness can exist even when no instances of 
non-compliance exist. However, instances of non-compliance might 
indicate the existence of one or more Deficiencies in Internal 
Control Over Compliance.


    Note:  The auditor cannot assume that an identified instance of 
non-compliance or an identified Deficiency in Internal Control Over 
Compliance is an isolated occurrence. The auditor should evaluate 
the effect of any instance of non-compliance or identified control 
deficiency on the auditor's assessment of the risks associated with 
controls and non-compliance.


    Note: The auditor also should evaluate the effect on the audit 
of the financial statements and audit procedures performed on 
supplemental information of any non-compliance, Material Weaknesses, 
or instances in which the information used to assert compliance with 
the net capital rule or reserve requirements rule was not derived, 
in all material respects, from the broker's or dealer's books and 
records.

    27. The auditor should evaluate whether he or she has obtained 
sufficient appropriate evidence to support the conclusions to be 
presented in the examination report taking into account the risks 
associated with controls and non-compliance, the results of the 
examination procedures performed, and the appropriateness (i.e., the 
relevance and reliability) of the evidence obtained.
    28. If the auditor has not obtained sufficient appropriate evidence 
about an assertion or has substantial doubt about an assertion, the 
auditor should perform procedures to obtain further evidence to address 
the matter.
    29. If the auditor is unable to obtain sufficient appropriate 
evidence about an assertion, the auditor should express a disclaimer of 
opinion.\17\
---------------------------------------------------------------------------

    \17\ See Appendix C of this standard, ``Examination Report 
Modifications,'' which describes the situations in which the auditor 
should modify his or her examination report and the specific 
modifications to be made to the auditor's examination report. The 
requirement in paragraph 29 does not preclude the auditor from 
withdrawing from the examination engagement.
---------------------------------------------------------------------------

Subsequent Events
    30. For the period from the end of the period specified in the 
broker's or dealer's assertions to the date of the auditor's 
examination report (the ``subsequent period''), the auditor should 
perform procedures to identify subsequent events relevant to the 
auditor's conclusions about the assertions made by the broker or dealer 
in the compliance report. Such

[[Page 68916]]

procedures should include, but are not limited to:
    a. Reading relevant reports of internal auditors, others who 
perform an equivalent function, compliance functions, and other 
auditors, and correspondence that the broker or dealer has sent to or 
received from the SEC or the broker's or dealer's DEA during the 
subsequent period that is relevant to the broker's or dealer's 
assertions; and
    b. Evaluating information obtained through other engagements 
performed by the auditor for the broker or dealer, including subsequent 
events procedures performed in the audit of the financial statements 
and the audit procedures performed on supplemental information.
    31. The auditor should evaluate the results of the procedures 
described in the previous paragraph to determine whether the results 
corroborate or contradict the broker's or dealer's assertions.
Obtaining a Representation Letter
    32. The auditor should obtain written representations from 
management of the broker or dealer:
    a. Acknowledging management's responsibility for establishing and 
maintaining a system of internal control with the objective of 
providing the broker or dealer with reasonable assurance that any 
instances of non-compliance with the financial responsibility rules 
will be prevented or detected on a timely basis;
    b. Stating the broker's or dealer's assertions included in the 
compliance report are the responsibility of management;
    c. Stating that management has made available to the auditor all 
records and other information relevant to the broker's or dealer's 
assertions, including all known matters contradicting the assertions, 
and all communications from regulatory agencies, internal auditors, 
others who perform an equivalent function, compliance functions, and 
other auditors, that are relevant to the broker's or dealer's 
assertions, received through the date of the auditor's report; and
    d. Stating whether there were, subsequent to the period addressed 
in the broker's or dealer's assertions, any known events or other 
factors that might significantly affect the broker's or dealer's 
assertions.
    33. The failure to obtain written representations from management, 
including management's refusal to furnish them, constitutes a 
limitation on the scope of the engagement, as described in Appendix C 
of this standard.
Communication Requirements
    34. The auditor should communicate to management all identified 
Deficiencies in Internal Control Over Compliance.
    35. The auditor should communicate to management and the audit 
committee \18\ identified instances of non-compliance with the 
financial responsibility rules, identified Material Weaknesses, and 
identified instances in which information used to determine compliance 
with the net capital rule or the reserve requirements rule was not 
derived, in all material respects, from the broker's or dealer's books 
and records.
---------------------------------------------------------------------------

    \18\ For purposes of this standard, the term ``audit committee'' 
has the same definition as that in Auditing Standard No. 16, 
Communications with Audit Committees.

    Note:  The auditor also must comply with the requirements of 
paragraph (h) of SEC Rule 17a-5, which contains notification 
---------------------------------------------------------------------------
requirements that apply to auditors of brokers and dealers.

Reporting on the Examination Engagement
    36. The auditor's examination report must include the following 
elements, modified as necessary in the circumstances and manner 
discussed in Appendix C:
    a. A title that includes the word independent;
    b. An identification of the compliance report and the broker's or 
dealer's assertions regarding the effectiveness of Internal Control 
Over Compliance during the fiscal year and as of the fiscal year end, 
compliance with the net capital rule and the reserve requirements rule 
as of the fiscal year end, and whether the information used to assert 
compliance with those rules was derived from the broker's or dealer's 
books and records;
    c. A statement that management of the broker or dealer is 
responsible for establishing and maintaining a system of internal 
control that has the objective of providing the broker or dealer with 
reasonable assurance that any instances of non-compliance with the 
financial responsibility rules will be prevented or detected on a 
timely basis;
    d. A statement that the auditor's responsibility is to express an 
opinion on the broker's or dealer's assertions based on his or her 
examination;
    e. A statement that the examination was conducted in accordance 
with the standards of the Public Company Accounting Oversight Board 
(United States);
    f. A statement that the standards of the Public Company Accounting 
Oversight Board require that the auditor plan and perform the 
examination engagement to obtain reasonable assurance about whether the 
broker's or dealer's Internal Control Over Compliance was effective 
during and as of the end of the most recent fiscal year, whether the 
broker or dealer complied with the net capital rule and the reserve 
requirements rule as of the end of the most recent fiscal year, and 
whether the information used to assert compliance with the net capital 
rule and the reserve requirements rule was derived from the books and 
records of the broker or dealer;
    g. A statement that an examination engagement includes evaluating 
the design and operating effectiveness of Internal Control Over 
Compliance; testing and evaluating the broker's or dealer's compliance 
with the net capital rule and the reserve requirements rule; 
determining whether the information used to assert compliance with the 
net capital rule and reserve requirements rule was derived from the 
broker's or dealer's books and records; and performing such other 
procedures as the auditor considered necessary in the circumstances;
    h. A statement that the auditor believes the examination provides a 
reasonable basis for his or her opinion;\19\
---------------------------------------------------------------------------

    \19\ When management has made an interpretation of the financial 
responsibility rules and the auditor has determined that it is 
necessary to emphasize this interpretation in the auditor's report, 
the auditor may include a paragraph stating the description and the 
source of the interpretation made directly following the scope 
paragraph.
---------------------------------------------------------------------------

    i. The auditor's opinion on whether the assertions made by the 
broker or dealer in the compliance report are fairly stated, in all 
material respects;
    j. The manual signature of the auditor's firm;
    k. The city and state (or city and country, in the case of non-U.S. 
auditors) from which the auditor's examination report has been issued; 
and
    l. The date of the examination report.
    37. The following example examination report expressing an 
unqualified opinion on the assertions made by a broker or dealer in a 
compliance report illustrates the report elements described in this 
section.

Report of Independent Registered Public Accounting Firm

[Introductory Paragraph]

    We have examined W Broker's statements, included in the 
accompanying [title of the compliance report], that (1) W Broker's 
internal control over compliance was effective during the most 
recent fiscal year ended [date]; (2) W Broker's internal control 
over compliance was effective as of [date]; (3) W Broker was in 
compliance with 17 CFR

[[Page 68917]]

240.15c3-1 and 240.15c3-3(e) as of [date]; and (4) the information 
used to state that W Broker was in compliance with 17 CFR 240.15c3-1 
and 240.15c3-3(e) was derived from W Broker's books and records. W 
Broker's management is responsible for establishing and maintaining 
a system of internal control over compliance that has the objective 
of providing W Broker with reasonable assurance that non-compliance 
with 17 CFR 240.15c3-1, 17 CFR 240.15c3-3, 17 CFR 240.17a-13, or 
Rule [fill in name/number] of [fill in DEA] that requires account 
statements to be sent to the customers of W Broker will be prevented 
or detected on a timely basis. Our responsibility is to express an 
opinion on W Broker's statements based on our examination.

[Scope Paragraph]

    We conducted our examination in accordance with the standards of 
the Public Company Accounting Oversight Board (United States). Those 
standards require that we plan and perform the examination to obtain 
reasonable assurance about whether W Broker's internal control over 
compliance was effective as of and during the most recent fiscal 
year ended [date]; W Broker complied with 17 CFR 240.15c3-1 and 
240.15c3-3(e) as of [date]; and the information used to assert 
compliance with 17 CFR 240.15c3-1 and 240.15c3-3(e) as of [date] was 
derived from W Broker's books and records. Our examination includes 
testing and evaluating the design and operating effectiveness of 
internal control over compliance, testing and evaluating W Broker's 
compliance with 17 CFR 240.15c3-1 and 240.15c3-3(e), determining 
whether the information used to assert compliance with 240.15c3-1 
and 240.15c3-3(e) was derived from W Broker's books and records, and 
performing such other procedures as we considered necessary in the 
circumstances. We believe that our examination provides a reasonable 
basis for our opinion.

[Opinion Paragraph]

    In our opinion, W Broker's statements referred to above are 
fairly stated, in all material respects.

[Signature]

[City and State or Country]

[Date]

Examination Report Date

    38. The auditor should date the examination report no earlier than 
the date on which the auditor obtains sufficient appropriate evidence 
to support his or her opinion.

    Note:  Because of the coordination between the examination 
engagement, the audit of the financial statements and the audit 
procedures performed on supplemental information, the date of the 
examination report should not be earlier than the date of the 
auditor's report on the financial statements and supplemental 
information.

Appendix A--Definitions

    A1. For purposes of this standard, the terms listed below are 
defined as follows:
    A2. Deficiency in Internal Control Over Compliance--A Deficiency in 
Internal Control Over Compliance exists when the design or operation of 
a control does not allow the management or employees of the broker or 
dealer, in the normal course of performing their assigned functions, to 
prevent or detect on a timely basis non-compliance with 17 CFR 
240.15c3-1, 240.15c3-3, 240.17a-13 or any rule of the designated 
examining authority of the broker or dealer that requires account 
statements to be sent to the customers of the broker or dealer.\20\
---------------------------------------------------------------------------

    \20\ The definition of ``Deficiencies in Internal Control Over 
Compliance'' is consistent with the same term in paragraph 
(d)(3)(iii) of SEC Rule 17a-5.
---------------------------------------------------------------------------

    A3. Internal Control Over Compliance--Internal controls that have 
the objective of providing the broker or dealer with reasonable 
assurance that non-compliance with 17 CFR 240.15c3-1, 240.15c3-3, 
240.17a-13, or any rule of the designated examining authority of the 
broker or dealer that requires account statements to be sent to the 
customers of the broker or dealer, will be prevented or detected on a 
timely basis.\21\
---------------------------------------------------------------------------

    \21\ The definition of ``Internal Control Over Compliance'' is 
consistent with the same term in paragraph (d)(3)(ii) of SEC Rule 
17a-5.
---------------------------------------------------------------------------

    A4. Material Weakness--A Material Weakness is a deficiency, or a 
combination of deficiencies, in Internal Control Over Compliance such 
that there is a reasonable possibility that non-compliance with 17 CFR 
240.15c3-1 or 17 CFR 240.15c3-3(e) will not be prevented or detected on 
a timely basis or that non-compliance to a material extent with 17 CFR 
240.15c3-3, except for paragraph (e), 17 CFR 240.17a-13, or any rule of 
the designated examining authority of the broker or dealer that 
requires account statements to be sent to the customers of the broker 
or dealer will not be prevented or detected on a timely basis.\22\
---------------------------------------------------------------------------

    \22\ The definition of a ``Material Weakness'' is consistent 
with the same term in paragraph (d)(3)(iii) of SEC Rule 17a-5.
---------------------------------------------------------------------------

Appendix B--Considerations for Brokers and Dealers With Multiple 
Divisions or Branches

    B1. When the broker or dealer has multiple divisions or branches, 
the auditor should determine the extent to which he or she should 
perform examination procedures at selected divisions or branches to 
obtain sufficient appropriate evidence to support the conclusions 
expressed in the auditor's examination report. This includes 
determining the divisions or branches at which to perform examination 
procedures, as well as the nature, timing, and extent of the procedures 
to be performed at those individual divisions or branches. In 
determining the extent of the examination procedures to be performed, 
the auditor should take into account:
    a. The degree to which the financial responsibility rules relate to 
activities at the division or branch level;
    b. The nature and significance of the related assets, transactions, 
or activities at the division or branch to the financial responsibility 
rules;
    c. The degree of centralization of records or information 
processing relevant to the financial responsibility rules; and
    d. The degree and effectiveness of management supervision and 
monitoring of the relevant activities of the division or branch.

Appendix C--Examination Report Modifications

    C1. The auditor should modify his or her examination report if any 
of the following conditions exist:
    a. There is non-compliance with the net capital rule or the reserve 
requirements rule as of the end of the most recent fiscal year, one or 
more Material Weaknesses in Internal Control Over Compliance during or 
as of the end of the most recent fiscal year, or the information used 
to assert compliance with the net capital rule or the reserve 
requirements rule was not derived, in all material respects, from the 
books and records of the broker or dealer (paragraphs C2-C3).
    b. There is a restriction on the scope of the examination 
engagement (paragraphs C4-C8).
    c. There is information other than the assertions and descriptions 
required under paragraph (d)(3)(i) of SEC Rule 17a-5 contained in the 
compliance report (paragraphs C9-C10).

Non-Compliance, Material Weakness, or Instance in Which Information 
Used To Assert Compliance Was Not Derived From the Broker's or Dealer's 
Books and Records

    C2. If (1) one or more instances of non-compliance with the net 
capital rule or the reserve requirements rule exist as of the end of 
the fiscal year; (2) one or more Material Weaknesses in Internal 
Control Over Compliance exist during or as of the end of the fiscal 
year; or (3) the information used to assert compliance with the net 
capital rule or

[[Page 68918]]

the reserve requirements rule was not derived, in all material 
respects, from the books and records of the broker or dealer, the 
auditor must express an adverse opinion directly on the subject matter 
of the respective assertions, rather than on the assertions themselves, 
unless there is a restriction on the scope of the examination 
engagement.

    Note:  The requirement in this paragraph to express an adverse 
opinion applies regardless of whether the non-compliance, Material 
Weakness, or other matters preventing the unqualified opinion were 
identified by management or by the auditor.

    C3. When expressing such an adverse opinion, the auditor's 
examination report should include, as applicable:
    a. A statement that non-compliance with the net capital rule or the 
reserve requirements rule has been identified and an identification of 
each instance of non-compliance described in the broker's or dealer's 
compliance report as of the end of the most recent fiscal year.
    b. A statement that one or more Material Weaknesses in Internal 
Control Over Compliance have been identified during the fiscal year and 
an identification of each Material Weakness described in the compliance 
report.
    c. A statement that one or more Material Weaknesses in Internal 
Control Over Compliance have been identified as of the end of the 
fiscal year and an identification of each Material Weakness described 
in the compliance report.
    d. A statement that one or more instances in which the information 
used to assert compliance with the net capital rule or the reserve 
requirements rule was not derived, in all material respects, from the 
broker's or dealer's books and records have been identified.

    Note:  If a description of all identified instances of non-
compliance with the net capital rule or the reserve requirements 
rule and all identified Material Weaknesses has not been included in 
the broker's or dealer's compliance report, the examination report 
must be modified to describe those instances of non-compliance or 
Material Weaknesses that the auditor has identified but that are not 
described in the broker's or dealer's compliance report.\23\

    \23\ Paragraphs (d)(3)(i)(B) and (C) of SEC Rule 17a-5 require 
the broker's or dealer's compliance report to contain a description 
of each material weakness in Internal Control Over Compliance during 
the most recent fiscal year and any instance of non-compliance with 
the net capital rule or the reserve requirements rule as of the end 
of the most recent fiscal year.
---------------------------------------------------------------------------

Scope Limitations

    C4. The auditor can express an opinion on whether the assertions 
made by a broker or dealer in a compliance report are fairly stated, in 
all material respects, only if the auditor has been able to apply the 
procedures necessary in the circumstances. If there are restrictions on 
the scope of the examination engagement, the auditor should withdraw 
from the engagement or disclaim an opinion. A disclaimer of opinion 
should state that the auditor does not express an opinion on the 
assertions made by the broker or dealer in the compliance report.
    C5. When disclaiming an opinion because of a scope limitation, the 
auditor should state that the scope of the examination engagement was 
not sufficient for the auditor to express an opinion and, in a separate 
paragraph or paragraphs, the substantive reasons for the disclaimer, 
including the procedures that were deemed necessary by the auditor that 
have been omitted and the reason for their omission. The auditor should 
not identify the procedures that were performed nor include the 
statements describing the characteristics of an examination engagement.
    C6. When the auditor plans to disclaim an opinion and the limited 
procedures performed by the auditor caused the auditor to conclude 
that: (1) One or more instances of non-compliance with the net capital 
rule or the reserve requirements rule existed as of the end of the 
fiscal year; (2) one or more Material Weaknesses in Internal Control 
Over Compliance existed during or as of the end of the most recent 
fiscal year; or (3) the information used to assert compliance with the 
net capital rule or the reserve requirements rule was not derived, in 
all material respects, from the books and records of the broker or 
dealer, the auditor's report also must include the matters described in 
paragraph C3, as applicable.
    C7. The auditor may issue a report disclaiming an opinion on the 
assertions made by a broker or dealer in a compliance report as soon as 
the auditor concludes that a scope limitation will prevent the auditor 
from obtaining the reasonable assurance necessary to express an 
opinion. The auditor is not required to perform any additional work 
before issuing a disclaimer when the auditor concludes that he or she 
will not be able to obtain sufficient evidence to express an opinion.

    Note:  In this case, in following the direction in paragraph 38 
of this standard regarding dating the auditor's examination report, 
the report date is the date on which the auditor concludes that he 
or she will not be able to obtain sufficient evidence to express an 
opinion.

    C8. If the auditor concludes that he or she cannot express an 
opinion because of a limitation on the scope of the examination 
engagement, the auditor should communicate on a timely basis, in 
writing, to management and the audit committee that the examination 
engagement cannot be satisfactorily completed.

Other Information in the Compliance Report

    C9. If the compliance report contains other information besides the 
statements and descriptions required by SEC Rule 17a-5,\24\ the auditor 
should disclaim an opinion on the other information.
---------------------------------------------------------------------------

    \24\ See paragraph (d)(3)(i) of SEC Rule 17a-5.
---------------------------------------------------------------------------

    C10. If the auditor believes that the other information in the 
compliance report contains a material misstatement of fact, he or she 
should discuss the matter with management of the broker or dealer. If, 
after discussing the matter with management, the auditor concludes that 
a material misstatement of fact remains, the auditor should notify 
management and the audit committee of the auditor's views concerning 
the information.\25\
---------------------------------------------------------------------------

    \25\ See also AU sec. 317, Illegal Acts by Clients, which 
describes the auditor's responsibilities in a financial statement 
audit regarding illegal acts.
---------------------------------------------------------------------------

Attestation Standard No. 2

Review Engagements Regarding Exemption Reports of Brokers and Dealers
Introduction
    1. This standard establishes requirements that apply when an 
auditor is engaged to perform a review \26\ of the statements made by a 
broker \27\ or dealer \28\ in an exemption report (``exemption 
report'') prepared pursuant to Securities and Exchange Act of 1934 
(``Exchange Act'') Rule 17a-5, 17 CFR 240.17a-5 (``SEC Rule 17a-5'') of 
the U.S. Securities and Exchange Commission (``SEC'').\29\
---------------------------------------------------------------------------

    \26\ See paragraphs (d)(1)(i)(C) and (g)(2)(ii) of SEC Rule 17a-
5, which require that certain brokers or dealers file with the SEC a 
report prepared by an independent accountant based on a review of 
the statements in the exemption report, if the broker or dealer is 
required to file an exemption report with the SEC.
    \27\ 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.
    \28\ 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.
    \29\ See paragraph (g)(2)(ii) of SEC Rule 17a-5.

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

[[Page 68919]]

    2. SEC Rule 17a-5 requires a broker's or dealer's exemption report 
to contain the following statements by the broker or dealer:
    a. A statement that identifies the provisions in paragraph (k) of 
SEC Rule 15c3-3 \30\ (the ``exemption provisions'') under which the 
broker or dealer claimed an exemption from SEC Rule 15c3-3 (the 
``identified exemption provisions'');
---------------------------------------------------------------------------

    \30\ See 17 CFR 240.15c3-3 (``SEC Rule 15c3-3'').
---------------------------------------------------------------------------

    b. A statement that the broker or dealer (1) met the identified 
exemption provisions throughout the most recent fiscal year without 
exception or (2) met the identified exemption provisions throughout the 
most recent fiscal year except as described in the exemption report; 
and
    c. If applicable, a statement that identifies each exception during 
the most recent fiscal year in meeting the identified exemption 
provisions (an ``exception'') and that briefly describes the nature of 
each exception and the approximate date(s) on which the exception 
existed.\31\
---------------------------------------------------------------------------

    \31\ See paragraph (d)(4) of SEC Rule 17a-5.
---------------------------------------------------------------------------

Objective
    3. When performing a review of the statements (hereinafter referred 
to as ``assertions'') made by a broker or dealer in an exemption report 
(a ``review engagement''), the auditor's objective is to state whether, 
based upon the results of the review procedures, the auditor is aware 
of any material modifications that should be made to the broker's or 
dealer's assertions for the assertions to be fairly stated, in all 
material respects.
    4. The auditor must plan and perform the review engagement to 
obtain appropriate evidence that is sufficient to obtain moderate 
assurance \32\ about whether one or more conditions exist that would 
cause one or more of the broker's or dealer's assertions not to be 
fairly stated, in all material respects. Such conditions include:
---------------------------------------------------------------------------

    \32\ Moderate assurance is obtained by performing with due 
professional care the inquiries and other procedures required by 
this standard in order to reach a conclusion about whether there is 
a need to modify the broker's or dealer's assertions regarding the 
exemption provisions for the assertions to be fairly stated, in all 
material respects. Further, this standard is consistent with the 
concept of moderate assurance as described in paragraph .55 of AT 
sec. 101, Attest Engagements.
---------------------------------------------------------------------------

    a. The broker's or dealer's assertion that identifies the 
provisions in paragraph (k) of SEC Rule 15c3-3 under which the broker 
or dealer claimed an exemption for SEC Rule 15c3-3 is inaccurate;
    b. The broker or dealer asserts that it met the identified 
exemption provisions in paragraph (k) of SEC Rule 15c3-3 without 
exception when the auditor is aware of exceptions in meeting the 
exemption provisions; or
    c. The broker's or dealer's assertion that identifies and describes 
each exception during the most recent fiscal year in meeting the 
identified exemption provisions in paragraph (k) of SEC Rule 15c3-3 is 
inaccurate or incomplete.
Performing the Review Engagement
General Requirements
    5. An auditor who performs a review engagement must:
    a. Have adequate technical proficiency in attestation engagements;
    b. Obtain an understanding of the exemption conditions and other 
rules and regulations that are relevant to the broker's or dealer's 
assertions;
    c. Determine the auditor's compliance with independence and ethics 
requirements; and
    d. Exercise due professional care, which includes application of 
professional skepticism, in planning and performing the review and 
preparation of the report.

    Note:  Due professional care imposes a responsibility on each 
engagement team member to comply with this standard. The exercise of 
due professional care requires critical review at every level of 
supervision of the work done and the judgment exercised by those 
assisting in the engagement, including preparing the report.\33\

    \33\ The auditor's responsibility to exercise due professional 
care is consistent with the description in paragraphs .40-.41 of AT 
sec. 101.

    Note:  Auditing Standard No. 3, Audit Documentation, establishes 
the documentation requirements for review engagements performed 
---------------------------------------------------------------------------
pursuant to this standard.

    6. The engagement partner is responsible for the review engagement 
and performance of the review procedures. Accordingly, the engagement 
partner is responsible for proper planning of the review engagement, 
proper supervision of the work of engagement team members, and 
compliance with the requirements of this standard. The engagement 
partner may seek assistance from appropriate engagement team members in 
fulfilling these responsibilities.

    Note:  For purposes of this standard, the term ``engagement 
partner'' means the member of the engagement team with primary 
responsibility for the review engagement.


    Note:  Proper planning includes determining the nature, timing, 
and extent of procedures necessary to obtain moderate assurance. 
Proper supervision includes supervising the work of engagement team 
members so that the work is performed as directed and supports the 
conclusions reached.

Relationship Between the Review Engagement and the Audit of Financial 
Statements and the Audit Procedures Performed on Supplemental 
Information
    7. The review engagement should be coordinated with the audit of 
the financial statements and the audit procedures performed on 
supplemental information of the broker or dealer.\34\ In planning and 
performing procedures for, and evaluating the results of the procedures 
performed in, the review engagement, the auditor should take into 
account relevant evidence from the audit of the financial statements 
and the procedures performed on the supplemental information. However, 
the objectives of the financial statement audit and the review 
engagement are not the same, so the auditor must plan and perform the 
work to meet the objectives of both engagements.
---------------------------------------------------------------------------

    \34\ Under the definition of supplemental information included 
in Auditing Standard No. 17, Auditing Supplemental Information 
Accompanying Audited Financial Statements, supplemental information 
includes the supporting schedules described in paragraph (d)(2) of 
SEC Rule 17a-5, which are required to be filed by brokers and 
dealers with the SEC and the broker's and dealer's designated 
examining authority (``DEA'') and the Securities Investor Protection 
Corporation (``SIPC''). Such supporting schedules consist of, as 
applicable, a Computation of Net Capital Under Rule 15c3-1, a 
Computation for Determination of the Reserve Requirements under 
Exhibit A of SEC Rule 15c3-3, and Information Relating to Possession 
or Control Requirements Under SEC Rule 15c3-3.
---------------------------------------------------------------------------

Review Procedures
    8. A review engagement includes the following procedures:
    a. Reading the exemption report to determine the exemption 
provisions under which the broker or dealer asserts its exemption and 
the identified exceptions to the exemption provisions;
    b. Performing inquiries and other review procedures set forth in 
this standard; and
    c. Evaluating whether the evidence indicates that there should be 
modifications to the broker's or dealer's assertions based on the 
results of the procedures performed.
    9. The nature, timing, and extent of the necessary inquiries and 
other review procedures depend on:
    a. The following risk factors:
    (1) The broker's or dealer's history of instances of non-compliance 
with the exemption provisions;
    (2) Changes in the broker's or dealer's procedures, controls, or 
the environment in which the controls operate since the prior year;
    (3) Changes in the broker's or dealer's operations that are 
relevant to

[[Page 68920]]

compliance with the exemption provisions;
    (4) Competence of the personnel who are responsible for compliance 
with the exemption provisions or who perform important controls over 
compliance, and whether there have been changes in those personnel 
during the period of the review;
    (5) The risk of fraud, including the risk of misappropriation of 
customer assets, relevant to the exemption provisions;
    (6) Potential non-compliance associated with related parties,\35\ 
including related parties that are investment advisors or entities with 
which the broker or dealer has a custodial or clearing relationship;
---------------------------------------------------------------------------

    \35\ The auditor should look to the definition in the applicable 
financial reporting framework with respect to the term ``related 
parties.''
---------------------------------------------------------------------------

    (7) The degree to which the broker's or dealer's processes that 
relate to the exemption provisions are performed, monitored, or 
controlled in a centralized or decentralized environment; and
    b. Evidence about the broker's or dealer's compliance with the 
exemption provisions or about the effectiveness of controls over 
compliance with the exemption provisions obtained from the audit of the 
financial statements and the audit procedures performed on supplemental 
information.
    10. The auditor should perform procedures to identify exceptions to 
the exemption provisions, including the following:
    a. If the broker or dealer identified exceptions to the exemption 
provisions during the year under review, the auditor should read the 
broker's or dealer's documentation regarding the exceptions to the 
exemption provisions and compare it to the information included in the 
exemption report.
    b. Inquire of management, and, if applicable, other individuals at 
the broker or dealer who have relevant knowledge regarding:
    (1) Whether the broker or dealer was in compliance with the 
exemption provisions throughout the year under review or whether 
exceptions have been identified.
    (2) Regulatory examinations and correspondence between the SEC or 
the broker's or dealer's DEA and the broker or dealer that are relevant 
to compliance with the exemption provisions.

    Note: If the broker or dealer has sent or received 
correspondence with the SEC or the broker's or dealer's DEA that is 
relevant to compliance with the exemption provisions, the auditor 
should read such correspondence and, when necessary in the 
circumstances, make inquiries of the regulatory agencies.

    (3) Subsequent events through the date of the auditor's review 
report that might have a material effect on the broker's or dealer's 
assertions.
    c. Inquire of individuals at the broker or dealer who have relevant 
knowledge of controls relevant to the broker's or dealer's compliance 
with the exemption provisions regarding:
    (1) The controls that are in place to maintain compliance with the 
exemption provisions, including the nature of the controls and their 
frequency of operation.

    Note:  The auditor should take into account procedures performed 
during the audit of the financial statements and the audit 
procedures performed on supplemental information in obtaining an 
understanding of controls or other activities relevant to the 
broker's or dealer's compliance with the exemption provisions.

    (2) Whether the individual is aware of:
    i. Any exceptions to the exemption provisions and, if so, the 
nature, frequency, timing, and cause (if known) of the exceptions to 
the exemption provisions, during the year under review.
    ii. Any deficiencies in controls over compliance with the exemption 
provisions and, if so, the nature, frequency, and cause (if known) of 
the control deficiencies during the year under review.
    d. Inquire of individuals who are responsible for monitoring 
compliance with the exemption provisions or the controls over 
compliance regarding:
    (1) The nature and frequency of the monitoring activities.
    (2) The results of those monitoring activities, including the 
nature, frequency, timing, and cause (if known) of any exceptions to 
the exemption provisions or deficiencies in controls over compliance.
    (3) The nature and frequency of customer complaints that are 
relevant to the broker's or dealer's compliance with the exemption 
provisions.
    e. Read reports of internal auditors, others who perform an 
equivalent function, compliance functions, and other auditors that are 
relevant to the broker's or dealer's compliance with the exemption 
provisions.
    f. Read regulatory filings of the broker or dealer that are 
relevant to the broker's or dealer's compliance with the exemption 
provisions.
    g. Evaluate whether the evidence obtained and the results of the 
procedures performed in the audit of the financial statements and the 
audit procedures performed on supplemental information corroborate or 
contradict the broker's or dealer's assertions regarding compliance 
with the exemption provisions.

    Note:  Examples of procedures performed during the audit of the 
financial statements that might provide evidence relevant to the 
broker's or dealer's compliance with the exemption provisions 
include: (i) Testing related to customer trades; (ii) testing of 
specially designated cash accounts; (iii) testing investment 
inventory or transactions related to the broker's or dealer's 
trading for its own account; and (iv) reading the clearing agreement 
in connection with testing trade fee or commission revenue or 
expenses.

    h. Perform other procedures as necessary in the circumstances to 
obtain moderate assurance regarding whether a material modification 
should be made to the broker's or dealer's assertions for the 
assertions to be fairly stated, in all material respects.
Evaluating the Results of the Review Procedures
    11. The auditor should evaluate whether information has come to the 
auditor's attention that causes the auditor to believe that one or more 
of the broker's or dealer's assertions are not fairly stated, in all 
material respects.\36\ If a broker's or dealer's assertion is not 
fairly stated, in all material respects, the auditor should:
---------------------------------------------------------------------------

    \36\ See paragraph 4 of this standard, which provides examples 
of conditions that would cause one or more of the broker's or 
dealer's assertions not to be fairly stated, in all material 
respects.
---------------------------------------------------------------------------

    a. Modify the review report, as discussed in paragraph 19 of this 
standard; and
    b. Evaluate the effect of the matter on the audit of the financial 
statements and the audit procedures performed on supplemental 
information.
    12. If information coming to the auditor's attention indicates that 
one or more exceptions to the exemption provisions occurred during the 
year under review or might exist at year-end, other than exceptions 
disclosed in the exemption report, that might cause one or more of the 
broker's or dealer's assertions not to be fairly stated, in all 
material respects, or if the auditor has substantial doubt about one or 
more of the broker's or dealer's assertions, the auditor should perform 
additional procedures as necessary to address the matter.
Obtaining a Representation Letter
    13. The auditor should obtain written representations from 
management of the broker or dealer:
    a. Acknowledging management's responsibility for compliance with 
the identified exemption provisions throughout the fiscal year;

[[Page 68921]]

    b. Stating the broker's or dealer's assertions and that they are 
the responsibility of management;
    c. Stating that management has made available to the auditor all 
records and other information relevant to the broker's or dealer's 
assertions, including all communications from regulatory agencies, 
internal auditors, others who perform an equivalent function, 
compliance functions, and other auditors concerning possible exceptions 
to the exemption provisions, received through the date of the auditor's 
review report; and
    d. Stating whether there were, subsequent to the period addressed 
in the broker's or dealer's assertions, any known events or other 
factors that might significantly affect the broker's or dealer's 
compliance with the identified exemption provisions.
    14. The failure to obtain written representations from management, 
including management's refusal to furnish them, constitutes a 
limitation on the scope of the review engagement as described in 
paragraph 20 of this standard.
Communication Requirements
    15. The auditor should communicate to management and to the audit 
committee \37\ any exceptions to the exemption provisions identified by 
the auditor and information that causes the broker's or dealer's 
assertions about the exemption provisions not to be fairly stated, in 
all material respects.
---------------------------------------------------------------------------

    \37\ For purposes of this standard, the term ``audit committee'' 
has the same definition as that in Auditing Standard No. 16, 
Communications with Audit Committees.

    Note: The auditor must also comply with the requirements of 
paragraph (h) of SEC Rule 17a-5, which contains notification 
---------------------------------------------------------------------------
requirements that apply to auditors of brokers and dealers.

Reporting on the Review Engagement
    16. The auditor's review report must include the following 
elements, modified as necessary in the circumstances and manner 
discussed in paragraphs 19-20:
    a. A title that includes the word independent;
    b. An identification of the exemption report and the broker's or 
dealer's assertions;
    c. A statement that management of the broker or dealer is 
responsible for compliance with the identified exemption provisions 
throughout the fiscal year and for its assertions;
    d. A statement that the review was conducted in accordance with the 
standards of the Public Company Accounting Oversight Board (United 
States) and, accordingly, included inquiries and other required 
procedures to obtain evidence about the broker's or dealer's compliance 
with the exemption provisions;
    e. A statement that a review is substantially less in scope than an 
examination, the objective of which is the expression of an opinion on 
management's assertions, and accordingly, no such opinion is expressed;
    f. A statement about whether the auditor is aware of any material 
modifications that should be made to the assertions for them to be 
fairly stated, in all material respects;
    g. The manual signature of the auditor's firm;
    h. The city and state (or city and country, in the case of non-U.S. 
auditors) from which the auditor's review report has been issued; and
    i. The date of the review report.
    17. The following example report illustrates the report elements 
described in this section.

Report of Independent Registered Public Accounting Firm

[Introductory paragraph--no exceptions to the exemption provisions 
included in the broker's or dealer's assertion]

    We have reviewed management's statements, included in the 
accompanying [title of the exemption report], in which (1) Z Broker 
identified the following provisions of 17 CFR 15c3-3(k) under which 
Z Broker claimed an exemption from 17 CFR 240.15c3-3: ([fill in 
which exemption provision--(1), (2)(i), (2)(ii), or (3)]) (the 
``exemption provisions'') and (2) Z Broker stated that Z Broker met 
the identified exemption provisions throughout the most recent 
fiscal year without exception. Z Broker's management is responsible 
for compliance with the exemption provisions and its statements.

[Introductory paragraph--exceptions to the exemption provisions 
included in the broker's or dealer's assertion]

    We have reviewed management's statements, included in the 
accompanying [title of the exemption report], in which (1) Z Broker 
identified the following provisions of 17 CFR 15c3-3(k) under which 
Z Broker claimed an exemption from 17 CFR 240.15c3-3: ([fill in 
which exemption provision--(1), (2)(i), (2)(ii), or (3)]) (the 
``exemption provisions'') and (2) Z Broker stated that Z Broker met 
the identified exemption provisions throughout the most recent 
fiscal year except as described in its exemption report. Z Broker's 
management is responsible for compliance with the exemption 
provisions and its statements.

[Scope paragraph]

    Our review was conducted in accordance with the standards of the 
Public Company Accounting Oversight Board (United States) and, 
accordingly, included inquiries and other required procedures to 
obtain evidence about Z Broker's compliance with the exemption 
provisions. A review is substantially less in scope than an 
examination, the objective of which is the expression of an opinion 
on management's statements. Accordingly, we do not express such an 
opinion.

[Review results paragraph]

    Based on our review, we are not aware of any material 
modifications that should be made to management's statements 
referred to above for them to be fairly stated, in all material 
respects, based on the provisions set forth in paragraph (k)([fill-
in which exemption provision--(1), (2)(i), (2)(ii), or (3)]) of Rule 
15c3-3 under the Securities Exchange Act of 1934.

[Signature]

[City and State or Country]

[Date]

Review Report Date

    18. The auditor should date the review report no earlier than the 
date on which the auditor has completed his or her review procedures.

    Note: Because of the coordination between the review engagement 
and the audit of the financial statements and the audit procedures 
performed on supplemental information, the date of the review report 
should not be earlier than the date of the auditor's report on the 
financial statements and supplemental information.

Modifications of the Report

    19. If one or more of the broker's or dealer's assertions are not 
fairly stated, in all material respects, the auditor must modify the 
review report to describe the reasons the assertions are not fairly 
stated, in all material respects. If a broker's or dealer's assertion 
is not fairly stated, in all material respects, because of one or more 
omitted exceptions, the auditor's review report should disclose each 
omitted exception.
    20. Scope Limitations. If the auditor cannot perform the procedures 
required by this standard or other procedures that the auditor deems 
necessary in the circumstances, the review is incomplete because of the 
scope limitation. An incomplete review is not a sufficient basis for 
stating a conclusion regarding the broker's or dealer's assertions. In 
those circumstances, the auditor should withdraw from the engagement or 
should modify the review report to:
    a. Describe the scope limitation and any review procedures deemed 
necessary by the auditor that have been omitted and the reason for 
their omission;
    b. State that the auditor does not express any form of assurance on 
the broker's or dealer's assertions; and, if applicable,

[[Page 68922]]

    c. Describe any circumstances that cause one or more of the 
broker's or dealer's assertions not to be fairly stated, in all 
material respects.

Amendments to PCAOB Standards

Auditing Standards
Auditing Standard No. 3, ``Audit Documentation''
    Auditing Standard No. 3, ``Audit Documentation,'' as amended, is 
amended as follows:
    a. The following is added at the end of footnote 2 in paragraph 6: 
In an engagement conducted pursuant to Attestation Standard No. 1, 
Examination Engagements Regarding Compliance Reports of Brokers and 
Dealers, or Attestation Standard No. 2, Review Engagements Regarding 
Exemption Reports of Brokers and Dealers, the relevant assertions are 
the assertions expressed by management or the responsible party 
regarding the subject matter of the attestation engagement. The 
documentation requirements in this standard regarding assertions apply 
to the aspects of the subject matter to which the assertions relate.
    b. The following note is added at the end of paragraph 12:

    Note: In an engagement conducted pursuant to Attestation 
Standard No. 1, Examination Engagements Regarding Compliance Reports 
of Brokers and Dealers, or Attestation Standard No. 2, Review 
Engagements Regarding Exemption Reports of Brokers and Dealers, 
significant findings or issues include, when applicable: (a) The 
assessment of, and the responses to, risks requiring special 
consideration by the auditor; (b) significant matters involving 
systems, processes, and controls to ensure the appropriateness of 
the subject matter and management's related assertions; and (c) the 
evaluation of identified instances of nonconformity with the 
evaluation criteria (e.g., errors, instances of non-compliance, or 
control deficiencies).

    c. The following note is added as the second note to paragraph 13:

    Note: When conducting an attestation engagement pursuant to 
Attestation Standard No. 1, Examination Engagements Regarding 
Compliance Reports of Brokers and Dealers, or Attestation Standard 
No. 2, Review Engagements Regarding Exemption Reports of Brokers and 
Dealers, the auditor may include the documentation of significant 
findings or issues related to the attestation engagement in the 
engagement completion document prepared in connection with the audit 
of the financial statements.

Auditing Standard No. 7, ``Engagement Quality Review''
    Auditing Standard No. 7, ``Engagement Quality Review,'' is amended 
as follows:
    a. Paragraph 1 is replaced with:
    An engagement quality review and concurring approval of issuance 
are required for the following engagements conducted pursuant to the 
standards of the Public Company Accounting Oversight Board (``PCAOB''): 
(a) An audit engagement; (b) a review interim financial information; 
and (c) an attestation engagement performed pursuant to Attestation 
Standard No. 1, Examination Engagements Regarding Compliance Reports of 
Brokers and Dealers, or Attestation Standard No. 2, Review Engagements 
Regarding Exemption Reports of Brokers and Dealers.
    b. Paragraph 18A. is added:
    Engagement Quality Review for an Attestation Engagement Performed 
Pursuant to Attestation Standard No. 1, Examination Engagements 
Regarding Compliance Reports of Brokers and Dealers, or Attestation 
Standard No. 2, Review Engagements Regarding Exemption Reports of 
Brokers and Dealers
    In an attestation engagement performed pursuant to Attestation 
Standard No. 1, Examination Engagements Regarding Compliance Reports of 
Brokers and Dealers, or Attestation Standard No. 2, Review Engagements 
Regarding Exemption Reports of Brokers and Dealers, the engagement 
quality reviewer should evaluate the significant judgments made by the 
engagement team and the related conclusions reached in forming the 
overall conclusion on the attestation engagement and in preparing the 
engagement report. To evaluate such judgments and conclusions, the 
engagement quality reviewer should, taking into account the procedures 
performed in the engagement quality review of the financial statement 
audit, (1) hold discussions with the engagement partner and other 
members of the engagement team, (2) read the engagement report and the 
document containing management's assertions, and (3) review the 
engagement completion document and other relevant documentation.
    c. Paragraph 18B. is added:
    In an attestation engagement performed pursuant to Attestation 
Standard No. 1, Examination Engagements Regarding Compliance Reports of 
Brokers and Dealers, or Attestation Standard No. 2, Review Engagements 
Regarding Exemption Reports of Brokers and Dealers, the engagement 
quality reviewer may provide concurring approval of issuance only if, 
after performing with due professional care the review required by this 
standard, he or she is not aware of a significant engagement 
deficiency.
    d. The following note is added after paragraph 18B.:

    Note: A significant engagement deficiency in an attestation 
engagement performed pursuant to Attestation Standard No. 1, 
Examination Engagements Regarding Compliance Reports of Brokers and 
Dealers, or Attestation Standard No. 2, Review Engagements Regarding 
Exemption Reports of Brokers and Dealers, exists when (1) the 
engagement team failed to perform attestation procedures necessary 
in the circumstances of the engagement, (2) the engagement team 
reached an inappropriate overall conclusion on the subject matter of 
the engagement, (3) the engagement report is not appropriate in the 
circumstances, or (4) the firm is not independent of its client.

    e. Paragraph 18C. is added:
    In an attestation engagement performed pursuant to Attestation 
Standard No. 1, Examination Engagements Regarding Compliance Reports of 
Brokers and Dealers, or Attestation Standard No. 2, Review Engagements 
Regarding Exemption Reports of Brokers and Dealers, the firm may grant 
permission to the client to use the engagement report only after the 
engagement quality reviewer provides concurring approval of issuance.
Auditing Standard No. 16, ``Communications With Audit Committees''
    Auditing Standard No. 16, ``Communications with Audit Committees,'' 
is amended as follows:
    a. The following bullets are inserted after the third bullet in 
Appendix B:
     Attestation Standard No. 1, Examination Engagements 
Regarding Compliance Reports of Brokers and Dealers, paragraphs 34 and 
35.
     Attestation Standard No. 2, Review Engagements Regarding 
Exemption Reports of Brokers and Dealers, paragraph 15.
Attestation Standards
AT Sec. 101, ``Attestation Engagements''
    AT sec. 101, ``Attestation Engagements,'' as amended, is amended as 
follows:
    a. The following is added at the end of paragraph .04:
    g. Engagements in which a practitioner is engaged to perform an 
examination of certain statements of a broker or dealer in a compliance 
report that is prepared pursuant to SEC Rule 17a-5. Such engagements 
must be conducted pursuant to Attestation Standard No. 1, Examination 
Engagements Regarding Compliance Reports of Brokers and Dealers.
    h. Engagements in which a practitioner is engaged to perform a

[[Page 68923]]

review of statements of a broker or dealer in an exemption report that 
is prepared pursuant to SEC Rule 17a-5. Such engagements must be 
conducted pursuant to Attestation Standard No. 2, Review Engagements 
Regarding Exemption Reports of Brokers and Dealers.
AT Sec. 601, ``Compliance Attestation''
    AT sec. 601, ``Compliance Attestation,'' is amended as follows:
    a. Within paragraph .02, subparagraph e. is replaced with:
    Apply to examination engagements of brokers and dealers covered by 
Attestation Standard No. 1, Examination Engagements Regarding 
Compliance Reports of Brokers and Dealers.
    b. Footnote 2 to paragraph .02.e. is deleted.
    c. The last sentence of paragraph .06 is deleted.
    d. Paragraph .07 is replaced with:
    When a practitioner is engaged to perform a review of statements 
made by a broker or dealer in an exemption report that is prepared 
pursuant to SEC Rule 17a-5, the practitioner must conduct the review 
engagement pursuant to Attestation Standard No. 2, Review Engagements 
Regarding Exemption Reports of Brokers and Dealers.

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, since the attestation standards will apply solely in 
connection with audits of registered brokers and dealers pursuant to 
the Rule 17a-5 under the Securities Exchange Act of 1934, the Board 
defers to the SEC, pursuant to Section 103(a)(3)(c) of the Sarbanes-
Oxley Act, on the applicability of Attestation Standards No. 1 and No. 
2 to audits of emerging growth companies (``EGCs''), as that term is 
defined in Section 3(a)(80) of the Securities Exchange Act of 1934. The 
Board's economic analysis is set forth in section C.

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.'' In 2010, the Dodd-Frank Wall Street Reform and Consumer 
Protection Act amended the Sarbanes-Oxley Act to give the Board 
oversight authority with respect to audits of brokers and dealers that 
are registered with the Commission. On July 30, 2013, the SEC adopted 
amendments to Rule 17a-5 \38\ under the Securities Exchange Act of 1934 
(``Exchange Act'') to strengthen and clarify broker and dealer annual 
financial reporting requirements and also facilitate the ability of the 
PCAOB to implement the oversight of independent public accountants of 
brokers \39\ and dealers \40\ provided by Section 982 of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (the ``Dodd-Frank 
Act'').\41\
---------------------------------------------------------------------------

    \38\ See Rule 17a-5, 17 CFR 240.17a-5 (``SEC Rule 17a-5'') and 
SEC Exchange Act Release No. 34-70073, Broker-Dealer Reports (July 
30, 2013), 78 Federal Register 51910 (August 21, 2013) (``SEC 
Release''), available at http://www.sec.gov/rules/final/2013/34-70073.pdf.
    \39\ 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.
    \40\ 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.
    \41\ Public Law 111-203, 124 Stat. 1376 (2010).
---------------------------------------------------------------------------

    The Board is adopting two attestation standards, Examination 
Engagements Regarding Compliance Reports of Brokers and Dealers (the 
``examination standard'') and Review Engagements Regarding Exemption 
Reports of Brokers and Dealers (the ``review standard'') (collectively, 
the ``attestation standards''). These attestation standards will apply 
to examination engagements regarding compliance reports of brokers and 
dealers (``examination engagements'') and review engagements regarding 
exemption reports of brokers and dealers (``review engagements''), 
pursuant to requirements contained in SEC Rule 17a-5.\42\ Pursuant to 
SEC Rule 17a-5, the audits of brokers and dealers, including the 
attestation engagements, are required to be performed under PCAOB 
standards.\43\ Before these amendments to SEC Rule 17a-5, audits of 
brokers and dealers were required to be performed under generally 
accepted auditing standards (``GAAS'') established by the American 
Institute of Certified Public Accountants (``AICPA''). The attestation 
standards will be effective, subject to approval by the SEC, for 
examination engagements and review engagements for fiscal years ending 
on or after June 1, 2014. This effective date would coincide with the 
effective date for the corresponding amendments to SEC Rule 17a-5.
---------------------------------------------------------------------------

    \42\ See paragraphs (g)(2)(i) and (ii) of SEC Rule 17a-5.
    \43\ See paragraph (g) of SEC Rule 17a-5.
---------------------------------------------------------------------------

Background
    Sections 17(a) and (e) of the Exchange Act and SEC Rule 17a-5 
together generally require a broker or dealer to, among other things, 
file an annual report \44\ with the SEC and the broker's or dealer's 
designated examining authority (``DEA'').\45\ SEC Rule 17a-5 requires 
the annual report to contain, among other things:
---------------------------------------------------------------------------

    \44\ Paragraph (d) of SEC Rule 17a-5 contains general 
requirements for annual reports to be filed by SEC-registered 
brokers and dealers. Paragraphs (d)(1)(iii) and (iv) of SEC Rule 
17a-5 provide certain limited exceptions to the requirement to file 
an annual report.
    \45\ Under SEC Rule 17d-1, 17 CFR 240.17d-1, 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 
designated examining authority is the Financial Industry Regulatory 
Authority.
---------------------------------------------------------------------------

    a. A financial report consisting of audited financial statements 
and supporting schedules;\46\ and
---------------------------------------------------------------------------

    \46\ See paragraph (d)(2) of SEC Rule 17a-5. Auditing Standard 
No. 17, Auditing Supplemental Information Accompanying Audited 
Financial Statements (PCAOB Release No. 2013-008) (October 10, 
2013), applies to the audit procedures performed and the audit 
report on supporting schedules.
---------------------------------------------------------------------------

    b. A compliance report or an exemption report.\47\
---------------------------------------------------------------------------

    \47\ See paragraphs (d)(3) and (4) of SEC Rule 17a-5. 
Attestation Standard No. 1 applies to an examination of certain 
statements made by the broker or dealer in the compliance report. 
Attestation Standard No. 2 applies to a review of the statements 
made by the broker or dealer in the exemption report.
---------------------------------------------------------------------------

    The requirements for the compliance report and the exemption report 
are new requirements that are the result of the Commission's amendments 
to SEC Rule

[[Page 68924]]

17a-5. According to the SEC, these reports contain information 
regarding broker and dealer compliance with key SEC financial 
responsibility rules \48\ that enhance the ability of the SEC to 
oversee the financial responsibility practices of registered brokers 
and dealers and, in particular, the safekeeping of customer assets.
---------------------------------------------------------------------------

    \48\ The SEC Release used the term ``financial responsibility 
rules'' to refer to: 17 CFR 240.15c3-1 (``SEC Rule 15c3-1'' or the 
``net capital rule''); 17 CFR 240.15c3-3 (``SEC Rule 15c3-3''); 17 
CFR 240.17a-13 (``SEC Rule 17a-13''); and any rule of the DEA of the 
broker or dealer that requires account statements to be sent to the 
customers of the broker or dealer (an ``account statement rule''). 
See the SEC Release at 8-9. The terms ``financial responsibility 
rules'' and ``account statement rule'' have the same meaning in 
these standards as they have in the SEC Release.
---------------------------------------------------------------------------

    Generally, SEC Rule 17a-5 provides that brokers or dealers that did 
not claim an exemption from SEC Rule 15c3-3 throughout the most recent 
fiscal year must prepare and file the compliance report. A broker or 
dealer must prepare and file the exemption report if the broker or 
dealer did claim that it was exempt from SEC Rule 15c3-3 throughout the 
most recent fiscal year.
    Brokers and dealers also must generally file reports prepared by a 
PCAOB-registered independent public accountant covering the financial 
report and the compliance report or exemption report, as 
applicable.\49\
---------------------------------------------------------------------------

    \49\ See paragraph (d)(1)(i)(C) of SEC Rule 17a-5.
---------------------------------------------------------------------------

    The auditor's examination report or review report would replace the 
prior requirement in SEC Rule 17a-5 that the auditor report on material 
inadequacies identified in the broker's or dealer's accounting system, 
internal accounting controls, procedures of the broker or dealer for 
safeguarding securities, and certain practices and procedures related 
to customer protection and securities.
Considerations in Adopting the Attestation Standards
    The Board is adopting the attestation standards to establish 
requirements aligned with the auditor's responsibilities under SEC Rule 
17a-5.\50\ Specifically, the attestation standards establish 
requirements for examining certain statements in a broker's or dealer's 
compliance report and reviewing a broker's or dealer's statements in an 
exemption report. The Board is also adopting related amendments to 
certain PCAOB standards, including amendments regarding documentation 
and amendments to require engagement quality reviews of the examination 
and the review engagements.\51\
---------------------------------------------------------------------------

    \50\ See paragraphs (g) and (h) of SEC Rule 17a-5.
    \51\ In addition, on February 28, 2012, the Board proposed to 
update certain of its rules to conform to the Dodd-Frank Act 
amendments to the Sarbanes-Oxley Act of 2002. See Proposed 
Amendments to Conform the Board's Rules and Forms to the Dodd-Frank 
Act and Make Certain Updates and Clarifications, PCAOB Release No. 
2012-002 (February 28, 2012). Among other things, these proposed 
amendments would amend the Board's rules to require that registered 
firms comply with the Board's interim standards in broker or dealer 
engagements. See proposed amendments to Rule 1001(a)(v), Rule 
1001(a)(vi), Rule 3200T, and Rule 3300T, Rule 3400T, Rule 3500T, and 
Rule 3600T. The Board expects to act on these proposed amendments in 
a separate rulemaking in the near future.
---------------------------------------------------------------------------

    The attestation standards for the examination and review 
engagements represent stand-alone standards that are based on existing 
concepts and principles in the existing attestation standards but are 
tailored for the specific requirements under SEC Rule 17a-5.\52\
---------------------------------------------------------------------------

    \52\ The requirements in the examination standard are generally 
consistent with the requirements of AT sec. 101, Attest Engagements, 
and AT sec. 601, Compliance Attestation. Similarly, the requirements 
in the review standard are generally consistent with AT sec. 101. 
However, when an auditor performs an engagement pursuant to the 
examination standard or a review pursuant to the review standard, AT 
sec. 101 and AT sec. 601 would not apply.
---------------------------------------------------------------------------

    In general, both standards set forth a framework of specific 
procedures that are required for auditors to opine or conclude on a 
broker's or dealer's statements--referred to in the standards as 
``assertions'' \53\--in compliance reports and exemption reports 
required by SEC Rule 17a-5, respectively.\54\
---------------------------------------------------------------------------

    \53\ These standards use the term ``assertion'' to refer to the 
broker's or dealer's individual statements that are covered by the 
examination and review. In the examination standard, the term 
``assertion'' also distinguishes the portion of the statements in 
the broker's or dealer's compliance report that are covered by the 
examination.
    \54\ See paragraphs (i)(3)(iii)(A) and (B) of SEC Rule 17a-5 for 
the specific requirement for an opinion or conclusion to be 
expressed in the auditor's report.
---------------------------------------------------------------------------

    Furthermore, both of the attestation standards emphasize 
coordination between the examination engagement or review engagement, 
the audit of the broker's or dealer's financial statements and audit 
procedures performed on the supporting schedules (referred to as 
``supplemental information''). This emphasis on coordination, when 
properly executed, can promote overall audit effectiveness and avoid 
redundancy in the work performed. For example, auditors can take into 
account, when appropriate, evidence obtained while planning and 
performing the audit of the financial statements and the audit 
procedures performed on supplemental information in planning and 
performing the attestation engagement.
    This emphasis on coordination is also a key aspect of Auditing 
Standard No. 17, Auditing Supplemental Information Accompanying Audited 
Financial Statements (the ``auditing standard''),\55\ which the Board 
is separately adopting. Auditing Standard No. 17 will apply when the 
auditor of the financial statements is engaged to perform audit 
procedures and report on supplemental information accompanying audited 
financial statements in accordance with PCAOB standards, including 
supporting schedules prepared pursuant to SEC Rule 17a-5.\56\ The 
auditing standard also includes requirements for the procedures on the 
supplemental information to be planned and performed in conjunction 
with the audit of the financial statements, and for the audits of 
brokers and dealers to be coordinated with the attestation engagements 
related to compliance or exemption reports.\57\
---------------------------------------------------------------------------

    \55\ See Auditing Standard No. 17, Auditing Supplemental 
Information Accompanying Audited Financial Statements, PCAOB Release 
No. 2013-008 (October 10, 2013).
    \56\ See paragraph (d)(2) of SEC Rule 17a-5.
    \57\ See the note to paragraph 3.c. of Auditing Standard No. 17.
---------------------------------------------------------------------------

    In the Board's view, the attestation standards further the public 
interest and promote investor protection because they are tailored to 
the corresponding requirements of SEC Rule 17a-5, which are designed to 
provide safeguards with respect to broker and dealer custody of 
customer securities and funds. For example, the specific requirements 
in the examination standard for evaluating Internal Control Over 
Compliance \58\ can help auditors to identify deficiencies in a 
broker's or dealer's internal controls for safeguarding customer 
securities and funds or maintaining necessary capital or reserves. 
Similarly, the specific requirements in the review standard should 
focus auditors on whether the broker or dealer appropriately meets the 
exemption provisions in paragraph (k) of SEC Rule 15c3-3.
---------------------------------------------------------------------------

    \58\ Consistent with SEC Rule 17a-5, the examination standard 
defines ``Internal Control Over Compliance'' as ``internal controls 
that have the objective of providing the broker or dealer with 
reasonable assurance that non-compliance with the [financial 
responsibility rules], will be prevented or detected on a timely 
basis.'' See paragraph (d)(3)(ii) of SEC Rule 17a-5.
---------------------------------------------------------------------------

    Also, the SEC Release states that SEC enforcement actions alleging 
fraudulent conduct by brokers and dealers highlight the need for 
enhancements to the rules governing broker and dealer custody of 
customer assets, including increased focus on compliance and internal 
compliance controls by brokers and dealers and their auditors.\59\ The 
attestation standards include requirements related to the auditor's

[[Page 68925]]

consideration of fraud risks, including the risk of misappropriation of 
customer assets. The new standard includes requirements for testing 
controls of the broker or dealer for safeguarding customer assets and 
funds and for performing procedures to obtain evidence about the 
existence of customer funds and securities held for customers.
---------------------------------------------------------------------------

    \59\ See the SEC Release at 206-207.
---------------------------------------------------------------------------

    Furthermore, PCAOB inspections staff in their inspections of broker 
and dealer audits have identified auditing deficiencies in 57 of 60 
audits that were conducted under GAAS and the prior SEC Rule 17a-5.\60\ 
The attestation standards--tailored for the new audit and reporting 
requirements under SEC Rule 17a-5--establish an approach specific to 
examining compliance reports and reviewing exemption reports that 
should provide greater clarity as to the procedures that should be used 
and facilitate consistent compliance for auditors of SEC registered 
brokers and dealers.
---------------------------------------------------------------------------

    \60\ 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) at 6.
---------------------------------------------------------------------------

    The financial responsibility rules serve an important investor 
protection function by requiring brokers and dealers to maintain 
minimum levels of net capital and take steps to safeguard customer 
securities and cash.\61\ As described in the SEC Release, the new 
requirements for engagement of accountants should result in higher 
levels of compliance with the financial responsibility rules by 
increasing the focus of carrying brokers and dealers and their 
independent public accountants on specific statements made in 
compliance reports and increasing the focus of non-carrying brokers and 
dealers and their independent public accountants regarding whether the 
broker or dealer meets applicable exemption provisions.\62\ Moreover, 
in the Board's view, the involvement of auditors, under the attestation 
standards and PCAOB oversight, should enhance the quality of the 
compliance information provided to the SEC and used in its regulatory 
oversight, which is important to the protection of investors who 
entrust their cash and securities with brokers and dealers.
---------------------------------------------------------------------------

    \61\ See the SEC Release at 255.
    \62\ See the SEC Release at 238.
---------------------------------------------------------------------------

(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 rule amendment for public comment 
in PCAOB Release 2011-004 (July 12, 2011). 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.
Attestation Standard No. 1, Examination Engagements Regarding 
Compliance Reports of Brokers and Dealers
    As discussed more fully below, the examination standard has been 
designed specifically for an auditor's examination of certain 
statements made by a broker or dealer in a compliance report required 
by SEC Rule 17a-5. As a result of amendments to SEC Rule 17a-5, certain 
brokers and dealers (e.g., those that maintain custody of customer 
funds) must file a compliance report with the Commission making 
statements regarding compliance with and controls over certain 
financial responsibility rules.\63\ Specifically, SEC Rule 17a-5 also 
requires the broker or dealer to engage an independent public 
accountant registered with the PCAOB to examine, and independently 
report on, certain statements made by the broker or dealer in the 
compliance report.\64\
---------------------------------------------------------------------------

    \63\ The examination standard and the SEC Release use the term 
``financial responsibility rules'' to refer to 17 CFR 240.15c3-1 
(``SEC Rule 15c3-1'' or the ``net capital rule''); 17 CFR 240.15c3-3 
(``SEC Rule 15c3-3''); and 17 CFR 240.17a-13 (``SEC Rule 17a-13''); 
and any rule of the designated examining authority (``DEA'') of the 
broker or dealer that requires account statements to be sent to the 
customers of the broker or dealer (an ``account statement rule''). 
See the SEC Release at 8-9.
    \64\ See paragraph (g)(2)(i) of SEC Rule 17a-5.
---------------------------------------------------------------------------

    According to the Commission, the amendments to SEC Rule 17a-5 
strengthen audit requirements for brokers and dealers as well as 
provide additional safeguards with respect to brokers' and dealers' 
custody of customers' assets.\65\ Previously, audits of brokers and 
dealers were subject to generally accepted auditing standards 
(``GAAS'') established by the American Institute of Certified Public 
Accountants (``AICPA''). The examination standard the Board is adopting 
has been designed to align with the requirements of SEC Rule 17a-5. The 
examination standard includes specific procedures for auditors 
performing examinations of certain statements required in a compliance 
report prepared by brokers and dealers as required under SEC Rule 17a-
5. In the Board's view, this approach is consistent with the objectives 
of SEC oversight and is warranted in view of the importance of brokers' 
and dealers' compliance with the financial responsibility rules and to 
the protection of investors. In developing the standard, the Board has 
emphasized coordination with the financial statement audit and audit 
procedures performed on supplemental information. This approach should 
enhance overall audit effectiveness and also help avoid unnecessary 
duplication of work.
---------------------------------------------------------------------------

    \65\ See generally the SEC Release at 206-209.
---------------------------------------------------------------------------

    The following discussion provides background regarding the 
attestation standards, including significant comments received on the 
proposed standards and changes made to the standards.
SEC Rule 17a-5 and Related Changes
    SEC Rule 17a-5 requires a broker's or dealer's compliance report to 
include the following statements by the broker or dealer as to whether: 
\66\
---------------------------------------------------------------------------

    \66\ See paragraph (d)(3)(i)(A) of SEC Rule 17a-5. SEC Rule 17a-
5 also requires the compliance report to contain a statement as to 
whether the broker or dealer has established and maintained Internal 
Control Over Compliance. However, the auditor is not required by SEC 
Rule 17a-5 to examine and report on that statement.
---------------------------------------------------------------------------

    a. The Internal Control Over Compliance of the broker or dealer was 
effective during the most recent fiscal year;
    b. The Internal Control Over Compliance of the broker or dealer was 
effective as of the end of the most recent fiscal year;
    c. The broker or dealer was in compliance with the net capital rule 
and 17 CFR 240.15c3-3(e) (the ``reserve requirements rule'') as of the 
end of the most recent fiscal year; and
    d. The information the broker or dealer used to state whether it 
was in compliance with the net capital rule and the reserve 
requirements rule was derived from the books and records of the broker 
or dealer.
    As noted above, SEC Rule 17a-5 also requires the broker or dealer 
to engage an independent public accountant registered with the PCAOB to 
examine, and independently report on, certain statements made by a 
broker or dealer in the compliance report. Neither the SEC Rule nor the 
examination standard require the auditor to opine on the broker's or 
dealer's process for arriving at the conclusions in the statements

[[Page 68926]]

made in the compliance report.\67\ Thus, the auditor need not opine on 
the evaluation procedures that a broker or dealer may have performed in 
order make the statements in the compliance report.
---------------------------------------------------------------------------

    \67\ See the SEC Release at 38 and the second note to paragraph 
5 of the examination standard.
---------------------------------------------------------------------------

    As amended by the Commission, SEC Rule 17a-5 includes modifications 
from the SEC's proposed amendments,\68\ including changes that are 
reflected in the examination standard. Amendments made to SEC Rule 17a-
5 included narrowing the scope of the compliance assertion; \69\ 
eliminating the concepts of ``material non-compliance'' and 
``compliance in all material respects;'' and requiring the auditor to 
opine on Internal Control Over Compliance as of the end of the fiscal 
year, as well as during the fiscal year.\70\
---------------------------------------------------------------------------

    \68\ See SEC Exchange Act Release No. 34-64676, Broker-Dealer 
Reports (June 15, 2011), 76 Federal Register 37572 (June 27, 2011) 
(``SEC Proposing Release'').
    \69\ These standards use the term ``assertion'' to refer to the 
broker's or dealer's statements that are covered by the examination 
and review. In the examination standard, the term ``assertion'' also 
distinguishes the portion of the statements in the broker's or 
dealer's compliance report that are covered by the examination.
    \70\ See paragraph (d)(3)(ii) of SEC Rule 17a-5, which states 
that the term ``Internal Control Over Compliance'' means internal 
controls that have the objective of providing the broker or dealer 
with reasonable assurance that non-compliance with Sec. Sec.  
240.15c3-1, 240.15c3-3, 240.17a-13, or any rule of the designated 
examining authority of the broker or dealer that requires account 
statements to be sent to the customers of the broker or dealer will 
be prevented or detected on a timely basis.
---------------------------------------------------------------------------

    The Commission's narrowing of the scope of the compliance assertion 
and changes to the evaluation of Internal Control Over Compliance 
affected the scope of the examination procedures required to be 
performed by the auditor and the auditor's report, and therefore 
resulted in conforming changes to the final examination standard. These 
and other modifications to the examination standard are discussed 
further below.
Changes to the Examination Standard To Align With SEC Rule 17a-5
    The proposed examination standard was designed specifically for the 
examination of the compliance report required by the proposed 
amendments to SEC Rule 17a-5. As noted earlier, the examination 
standard reflects conforming changes based on the Commission's revision 
of its amendments to SEC Rule 17a-5 in the following areas: Narrowing 
the scope of the compliance assertion; eliminating the concepts of 
``material non-compliance'' and ``compliance in all material 
respects;'' and requiring the auditor to opine on Internal Control Over 
Compliance as of the end of the fiscal year, as well as during the 
fiscal year.
Changes to the Scope of the Compliance Assertion
    The SEC's Adopting Release states:

    [T]he final rule [SEC Rule 17a-5] requires a statement as to 
whether the broker-dealer was in compliance with Rule 15c3-1 and 
paragraph (e) of Rule 15c3-3 as of the end of the most recent fiscal 
year and, if applicable, a description of any instances of non-
compliance with these rules as of the fiscal year end. This is a 
modification from the proposed assertion that the broker-dealer is 
in compliance with the financial responsibility rules in all 
material respects and proposed description of any material non-
compliance with the financial responsibility rules. Thus, the final 
rule reflects two changes from the proposal: (1) Elimination of the 
concepts of ``material non-compliance'' and ``compliance in all 
material respects'' for the purposes of reporting in the compliance 
report; and (2) a narrowing of these statements and requirements 
from compliance with all of the financial responsibility rules to 
compliance with Rule 15c3-1 and paragraph (e) of Rule 15c3-3.\71\
---------------------------------------------------------------------------

    \71\ See the SEC Release at 32.

    The narrowing of the scope of the broker's or dealer's assertion to 
include only compliance with the net capital rule and reserve 
requirements rule resulted in several changes to the performance and 
reporting requirements in the examination standard. As the final rule 
limits the broker's or dealer's assertion regarding compliance to SEC 
Rule 15c3-1 and paragraph (e) of SEC Rule 15c3-3, the examination 
standard requires tests of compliance tailored to compliance with the 
net capital rule and the reserve requirements rule.
    Because the broker's or dealer's assertion relates to compliance 
with the net capital rule rather than compliance ``in all material 
respects,'' the concept of material non-compliance has been removed 
from the provisions of the examination standard regarding testing 
compliance. Also, the auditor cannot opine that a broker's or dealer's 
assertion that it is in compliance with the net capital rule and 
reserve requirements rule is fairly stated, in all material respects, 
if one or more instances of non-compliance with either the net capital 
rule or reserve requirements rule exist as of the end of the most 
recent fiscal year.
Materiality Considerations
    As discussed previously, the SEC's elimination of the concepts of 
``material non-compliance'' and ``compliance in all material respects'' 
from the provisions of SEC Rule 17a-5 related to asserting compliance 
has been carried over to the examination standard, which no longer 
refers to ``material non-compliance'' or the ``risk of material non-
compliance.'' However, most of the procedures set forth in the proposal 
for assessing the risks of material non-compliance have been retained 
in paragraph 9 of the examination standard as planning procedures 
because they remain relevant for determining the necessary nature, 
timing, and extent of procedures to be performed in the examination.
    Also, consistent with SEC Rule 17a-5, the examination standard 
retains the concept of a Material Weakness in Internal Control Over 
Compliance, and the requirements regarding performing procedures to 
determine whether Material Weaknesses exist in Internal Control Over 
Compliance.
    The concept of materiality also remains relevant when evaluating 
whether the information the broker or dealer used to assert compliance 
with the net capital rule and reserve requirements rule is derived from 
the broker's or dealer's books and records, is fairly stated, in all 
material respects.
    The Board received a number of comments on the proposed examination 
standard that are no longer applicable given the narrowing of the scope 
of the compliance assertion. These comments included requests for 
additional guidance related to the determination of material non-
compliance and requests for specific examples regarding the 
consideration of qualitative and quantitative factors in the context of 
each of the rules included in the compliance assertion, as well as 
matters within each of those rules that the PCAOB considers to be most 
significant to compliance.
Evaluating Internal Control Over Compliance During the Fiscal Year and 
as of the End of the Fiscal Year
    The SEC Release states that SEC Rule 17a-5 requires that the 
compliance report contain, among other things, statements as to whether 
(1) the broker or dealer has established and maintained Internal 
Control Over Compliance, (2) the Internal Control Over Compliance of 
the broker or dealer was effective during the most recent fiscal year, 
and (3) the Internal Control Over Compliance of the broker or dealer 
was effective as of the end of the most recent fiscal year.\72\
---------------------------------------------------------------------------

    \72\ See the SEC Release at 29-30.
---------------------------------------------------------------------------

    To align with SEC Rule 17a-5, the examination standard requires the 
auditor to express an opinion regarding whether the specified 
assertions made

[[Page 68927]]

by the broker or dealer in its compliance report are fairly stated, in 
all material respects, including whether the broker's or dealer's 
Internal Control Over Compliance was effective during and as of the end 
of the most recent fiscal year. This change from the proposed SEC Rule 
17a-5 resulted in conforming changes to the examination standard 
relating to the requirements for testing controls and the scope of the 
examination report. For example, the examination standard addresses the 
effect of changes in controls on the auditor's testing.
    Further, Appendix A to the examination standard defines certain 
terms used in the examination standard, including ``Internal Control 
Over Compliance,'' ``Deficiency in Internal Control Over Compliance,'' 
and ``Material Weakness.'' The definitions of these terms in the 
examination standard are consistent with the definitions of these terms 
in SEC Rule 17a-5.
Performing the Examination Engagement (Paragraphs 6--33 of Attestation 
Standard No. 1) General Requirements (Paragraphs 6--7 of Attestation 
Standard No. 1)
    The examination standard retains the general requirements as 
proposed. These requirements are consistent with AT sec. 101, Attest 
Engagements. Briefly, paragraph 6 of the examination standard sets 
forth general requirements for an auditor performing an engagement 
pursuant to the examination standard. Paragraph 6 requires that an 
auditor: Have adequate technical proficiency in attestation 
engagements; obtain an understanding of the financial responsibility 
rules and other rules and regulations that are relevant to the broker's 
or dealer's assertions; determine the auditor's compliance with 
independence and ethics requirements; \73\ and exercise due 
professional care.
---------------------------------------------------------------------------

    \73\ Determining the auditor's compliance with independence and 
ethics requirements includes determining that the auditor complied 
with relevant requirements of the PCAOB and the SEC. Paragraph 
(f)(1) of SEC Rule 17a-5 requires the auditor to be independent in 
accordance with 17 CFR 210.2-01.
---------------------------------------------------------------------------

    Some commenters stated that the general requirements in the 
examination engagement were sufficiently clear as proposed. One 
commenter recommended that the examination standard specify the level 
of understanding of the financial responsibility rules that auditors 
are expected to have. The commenter also recommended deleting the 
reference to ``other rules and regulations that are relevant to the 
broker's or dealer's assertions,'' asserting that the requirement is 
too broad to allow auditors to identify suitable criteria and express 
an opinion on management's assertion. Additionally, that commenter 
recommended that the examination standard specify how the auditor's 
understanding of the financial responsibility rules should be 
documented.
    The requirement for the auditor to obtain an understanding of the 
financial responsibility rules is similar to an existing requirement in 
AT sec. 101, which includes a requirement for the engagement to be 
performed by an auditor ``having adequate knowledge of the subject 
matter.'' \74\ In addition, understanding the requirements in other 
rules and regulations is important to enable the auditor to form 
conclusions on the broker's or dealer's assertions, as well as aiding 
the auditor's own compliance with the requirements in the examination 
standard and SEC Rule 17a-5. For example, paragraph (h) of SEC Rule 
17a-5 requires a broker or dealer to provide notification to the 
Commission and other securities regulators when the auditor notifies 
the broker or dealer that the auditor has determined that the broker or 
dealer is not in compliance with SEC Rule 15c3-1 as required by SEC 
Rule 17a-11, Notification Provisions for Brokers and Dealers. In 
addition to the financial responsibility rules, it is of course 
important that the auditor understands the requirements of SEC Rule 
17a-5, including the notification requirements when an instance of non-
compliance is identified. As such, the requirement was retained 
substantially as proposed.
---------------------------------------------------------------------------

    \74\ See AT sec. 101.21.
---------------------------------------------------------------------------

    With respect to documentation, the attestation engagements are 
subject to the requirements of Auditing Standard No. 3, Audit 
Documentation, which applies to engagements conducted pursuant to the 
standards of the PCAOB. Auditing Standard No. 3 states that as audit 
documentation is the written record that provides the support for the 
representations in the auditor's report, it should demonstrate that the 
engagement complied with the standards of the PCAOB.\75\ Further, as 
there are potentially a variety of ways for the auditor to document 
their understanding of the financial responsibility rules and other 
rules and regulations, the examination standard does not prescribe any 
specific manner to do so. A note has been added to paragraph 6 of the 
examination standard to remind auditors of their responsibility to 
comply with Auditing Standard No. 3.
---------------------------------------------------------------------------

    \75\ See paragraph 4 of Auditing Standard No. 3.
---------------------------------------------------------------------------

    The proposed examination standard included a footnote which stated 
that ``due professional care'' referred to in that paragraph was the 
same term in paragraph .40 of AT sec. 101. One commenter stated that 
while the commenter did not disagree with the meaning of ``due 
professional care,'' referencing AT sec. 101 from the examination 
standard may be confusing, especially as AT sec. 101 would not be 
applicable to engagements in which the examination standard is 
applicable. In the examination standard, a note has been added to state 
that due professional care imposes a responsibility on each engagement 
team member to comply with the examination standard and that the 
exercise of due professional care requires critical review at every 
level of supervision of the work done and the judgment exercised by 
those assisting in the engagement, including the preparation of the 
report. A footnote to that note states that the auditor's 
responsibility to exercise due professional care is consistent with the 
description in paragraphs .40-.41 of AT sec. 101.
    The Board did not receive other significant comments on the general 
requirements of the proposed examination standard. As such, the general 
requirements are being adopted substantially as proposed.
Relationship Between the Examination Engagement and the Audit of the 
Financial Statements and Audit Procedures Performed on Supplemental 
Information (Paragraph 8 of Attestation Standard No. 1)
    By its terms, SEC Rule 17a-5 requires the financial statement audit 
and the compliance examination to be performed by the same auditor.\76\ 
Accordingly, the examination standard includes a requirement for the 
auditor to coordinate the examination engagement with the audit of the 
financial statements and the audit procedures performed on supplemental 
information. The emphasis on appropriately coordinating the examination 
engagement with the audit of the financial statements and the audit 
procedures performed on supplemental information should promote overall 
audit effectiveness and avoid redundancy in the auditor's work.
---------------------------------------------------------------------------

    \76\ See paragraph (g) of SEC Rule 17a-5.
---------------------------------------------------------------------------

    For example, the examination standard includes a requirement for 
the auditor to take into account evidence from the audit of the 
financial

[[Page 68928]]

statements in planning and performing procedures for the examination 
engagement and in evaluating the results of the procedures performed in 
the examination. This enables the auditor to plan, perform, and 
evaluate the results of the examination engagement concurrent with the 
audit of the financial statements because the examination standard is 
structured similarly to, and contains many of the same concepts 
included in, auditing standards related to the auditor's assessment of 
and response to risk.\77\
---------------------------------------------------------------------------

    \77\ See generally, Auditing Standards Nos. 8-15.
---------------------------------------------------------------------------

    The proposing release requested comments on other ways the Board 
could promote coordination of the examination engagement with the audit 
of the financial statements and the audit procedures performed on 
supplemental information. Commenters generally stated that requirements 
regarding the coordination of the examination engagement with the audit 
of the financial statements were appropriate.
    One commenter stated that the Board should require the auditor of 
the financial statements to perform the examination engagement and 
issue the examination report. As noted previously, SEC Rule 17a-5 
includes this requirement.\78\ Thus, the attestation standards do not 
include specific requirements for performing the examination or review 
if the auditor did not audit the financial statements.
---------------------------------------------------------------------------

    \78\ See paragraph (g) of SEC Rule 17a-5.
---------------------------------------------------------------------------

    Another commenter stated that it is inappropriate to require that 
the auditor plan and perform the work to meet the objectives of both 
the examination engagement and the financial statement audit, and that 
the auditor's obligation under the examination standard is to meet the 
objectives of the examination engagement. The language in the standard 
was retained as proposed. The auditor should plan and perform the work 
to meet the objectives of both the examination engagement as well as 
the financial statement audit. Existing auditing standards require the 
auditor to properly plan and perform the financial statement audit.\79\ 
Since the objectives are not identical, the auditor must plan and 
perform the work to achieve the objectives of both engagements. 
Further, the examination standard does require the auditor to take into 
account the evidence obtained and the results of procedures performed 
during the audit of the financial statements and the audit procedures 
performed on the supplemental information in planning and performing 
procedures for the examination engagement and in evaluating the results 
of the procedures performed in the examination engagement.
---------------------------------------------------------------------------

    \79\ See Auditing Standard No. 9, Audit Planning.
---------------------------------------------------------------------------

Consideration of Fraud (Paragraph 10 of Attestation Standard No. 1)
    The auditor's consideration of fraud is an important part of the 
examination engagement. Fraud risks particularly relevant to a broker's 
or dealer's non-compliance with the financial responsibility rules 
include the risk of misappropriation of customer funds or securities 
held for customers and intentional manipulation of the books and 
records to conceal material misappropriations or other non-compliance. 
The SEC Release notes that the amendments to SEC Rule 17a-5, which 
include requiring the examination and review engagements, are designed 
to provide additional safeguards with respect to broker and dealer 
custody of customer securities and funds.\80\
---------------------------------------------------------------------------

    \80\ See the SEC Release at 206.
---------------------------------------------------------------------------

    Paragraph 10 of the examination standard includes a requirement for 
the auditor to assess the risk of fraud, and specifically refers to the 
risk of misappropriation of customer assets, which is relevant to 
compliance with the net capital rule and the reserve requirements rule, 
as well as the broker's or dealer's Internal Control Over Compliance.
    The requirement to coordinate the examination engagement with the 
audit of the financial statements and audit procedures performed on 
supplemental information is also important for the proper assessment of 
fraud risk in the examination engagement. The auditor's assessment of 
fraud risk in the examination engagement will be informed to a 
substantial degree by the procedures performed and the fraud risk 
assessments in the audit of the financial statements and audit 
procedures performed on supplemental information. Many of the fraud 
risk factors identified in the financial statement audit regarding (1) 
incentives or pressures to misappropriate assets or commit fraudulent 
financial reporting, and (2) attitudes and rationalizations that 
justify such fraudulent actions,\81\ are relevant when identifying and 
assessing risks of misappropriation of customer assets or intentional 
manipulation of the books and records to conceal misappropriation of 
customer assets or non-compliance with the financial responsibility 
rules. Also, weaknesses in controls regarding safeguarding of assets or 
stock records can result in opportunities for misappropriation of 
customer assets or non-compliance. In addition, the evaluation of 
misstatements for indications of fraud or matters identified during the 
audit that might affect the assessment of fraud risks in the audit of 
the financial statements also might affect the assessment of fraud 
risks in the examination engagement.\82\
---------------------------------------------------------------------------

    \81\ See paragraphs 65-66 of Auditing Standard No. 12, 
Identifying and Assessing Risks of Material Misstatement, and 
paragraph 85 of AU sec. 316, Consideration of Fraud in a Financial 
Statement Audit.
    \82\ See paragraphs 19-22, 28-29 and Appendix C of Auditing 
Standard No. 14, Evaluating Audit Results.
---------------------------------------------------------------------------

    Paragraph 9.d. of the examination standard includes a requirement 
for the auditor to assess the risks associated with related parties, 
including related parties that are investment advisors or entities with 
which the broker or dealer has a custodial or clearing relationship, 
that are relevant to compliance and controls over compliance. Given the 
nature of the transactions with related parties that are investment 
advisors or entities with which the broker or dealer has a custodial or 
clearing relationship, they are particularly relevant to the auditor's 
consideration of the risks associated with related parties in the 
examination engagement and in considering both the broker's or dealer's 
assertions related to Internal Control Over Compliance, as well as to 
the broker's or dealer's assertion related to compliance with the net 
capital rule and the reserve requirements rule.
    Likewise, paragraph 9.j. of the examination standard includes a 
requirement for the auditor to obtain an understanding of the nature 
and frequency of customer complaints that are relevant to compliance 
with the financial responsibility rules, which can provide evidence 
relevant to the assessment of fraud risks, especially if there is a 
high incidence of customer complaints, thematic issues in the 
complaints that indicate the potential for misappropriation of customer 
assets, or specific allegations of fraud or misfeasance by the broker's 
or dealer's customers.
    Other paragraphs in the examination standard address the auditor's 
responsibilities for responding to fraud risks. For example, paragraph 
22 of the examination standard retains an important requirement from 
the proposed examination standard for the auditor to perform compliance 
tests that are responsive to risks, including fraud risks. Also, 
paragraph 23 of the examination standard retains from the proposal the 
requirement for the auditor to perform procedures to obtain evidence 
about the existence of

[[Page 68929]]

customer funds or securities held for customers. This is an important 
responsibility in an audit of a broker or dealer that has access to 
customer assets. It affects compliance with the net capital rule and 
the reserve requirements rule, and it has the potential to result in 
contingent liability to the broker or dealer that requires recognition 
or disclosure in the financial statements.
    Because the examination standard requires the auditor to perform 
tests that are responsive to fraud risks, the nature, timing, and 
extent of procedures to obtain evidence about the existence of assets 
held for customers should be commensurate with the risk of 
misappropriation of customer assets. Determining the necessary 
procedures involves considering relevant risk factors, including, but 
not limited to, the amount of cash and securities held for customers 
and the results of testing and evaluation of the relevant controls. 
Examples of procedures that provide evidence about the existence of 
customer assets include (1) counting customer securities or observing 
and testing the broker's or dealer's procedures for physical inspection 
and (2) confirming customer security positions directly with 
depositories and clearing organizations. Procedures performed in the 
audit of the financial statements and the audit procedures performed on 
supplemental information to test the existence of assets held for 
customers also provide relevant evidence in the examination engagement.
    The Board requested comment regarding whether specific requirements 
should be added to either of the proposed attestation standards to 
further enhance protection of customer assets. One commenter stated 
that generally the attestation standards are adequate to enhance 
protection of customer assets. Another commenter stated that the 
principles in the examination standard for performing compliance tests 
are sufficiently clear.
    One commenter recommended that the Board clarify the extent and 
timing of procedures included as examples in paragraph 26 of the 
proposed examination standard regarding procedures that provide 
evidence about the existence of customer assets. The examination 
standard requires the auditor to perform procedures to obtain evidence 
of customer funds or securities held for customers, but the standard 
does not prescribe specific procedures for the auditor to perform to 
obtain such evidence. The procedures included in the note to paragraph 
23 of the examination standard are examples of procedures that the 
auditor might perform to obtain such evidence. The necessary extent and 
timing of those procedures depends on, among other things, the 
complexity of the operations of the broker's or dealer's business, the 
nature of carrying and clearing arrangements, and the design and 
effectiveness of controls related to the existence assertion. As such, 
the examination standard has not been changed to reflect this comment.
Testing Controls Over Compliance (Paragraphs 11-20 of Attestation 
Standard No. 1)
    SEC Rule 17a-5 requires the broker's or dealer's compliance report 
to include an assertion regarding the effectiveness of Internal Control 
Over Compliance during the most recent fiscal year and as of the end of 
the fiscal year.\83\ Accordingly, the examination standard requires the 
auditor to obtain evidence about the design and operating effectiveness 
of relevant controls over compliance throughout the fiscal year and as 
of the end of the fiscal year.
---------------------------------------------------------------------------

    \83\ See paragraphs (d)(3)(i)(A)(2) and (3) of SEC Rule 17a-5, 
which requires the broker or dealer to assert on the effectiveness 
of its Internal Control Over Compliance with the financial 
responsibility rules throughout the fiscal year and as of the end of 
the most recent fiscal year.
---------------------------------------------------------------------------

    The examination standard requires the auditor to test those 
controls that are important to the auditor's conclusion about whether 
the broker or dealer maintained effective Internal Control Over 
Compliance for each financial responsibility rule during the fiscal 
year and as of the end of the fiscal year. The examination standard 
also requires the auditor to obtain evidence that the controls over 
compliance selected for testing are designed effectively and operated 
effectively during the fiscal year and as of the fiscal year end.\84\
---------------------------------------------------------------------------

    \84\ See paragraphs (d)(3)(i)(A)(2) and (3) of SEC Rule 17a-5, 
which requires the broker or dealer to assert on the effectiveness 
of its Internal Control Over Compliance throughout the fiscal year 
and as of the broker's or dealer's fiscal year end. See also 
paragraphs (d)(3)(i)(B) and (C) of SEC Rule 17a-5, which require the 
broker or dealer to describe each material weakness in Internal 
Control Over Compliance and any instance of non-compliance with the 
net capital rule or reserve requirements rule.
---------------------------------------------------------------------------

    As the broker's or dealer's assertion regarding Internal Control 
Over Compliance relates to each financial responsibility rule 
individually, the auditor should obtain evidence about the 
effectiveness of the selected controls for each financial 
responsibility rule. However, when testing controls over compliance, 
the auditor's objective is not to support an opinion about the 
effectiveness of each individual control, rather, the objective is to 
form an opinion about whether the broker's or dealer's assertions 
regarding Internal Control Over Compliance are fairly stated, in all 
material respects. This allows the auditor to focus his or her effort 
on the controls that are important to each of the financial 
responsibility rules and to vary the level of evidence obtained 
regarding the effectiveness of individual controls selected for testing 
based on the risk associated with the individual control.
    One commenter recommended that the examination standard include 
guidance regarding the identification of controls important to the 
auditor's conclusion about whether the broker or dealer maintained 
effective internal controls over compliance for each financial 
responsibility rule. As the financial responsibility rules outline the 
requirements necessary to be in compliance, the auditor can identify 
the controls for testing by understanding the controls the broker or 
dealer has implemented to assure compliance with the respective 
requirements.
    Additionally, the examination standard identifies certain factors 
that affect the risk associated with a control. One factor included in 
paragraph 13 is the broker's or dealer's history of instances of non-
compliance with the financial responsibilities rules that the control 
is intended to prevent or detect. A recent history of non-compliance 
generally indicates higher risk associated with the control. Factors 
that affect the risk associated with a control include, but are not 
limited to, those described in paragraph 13 of the examination 
standard.
    Another factor included in paragraph 13 includes the extent of use 
of part-time personnel. Some commenters stated that they did not agree 
that the use of part-time personnel is a factor that affects the risk 
associated with a control. Those commenters stated that this risk 
factor is incorporated in another risk factor regarding the competence 
of the personnel who perform the control or monitor its performance. 
One commenter stated that, in their opinion, it would be more 
appropriate to evaluate the competence and objectivity of personnel 
executing the controls and their knowledge of the financial 
responsibility rules.
    In considering these comments, the Board took into account the 
SEC's June 2007 compliance alert,\85\ which noted that SEC examinations 
found that many part-time financial and operational principals did not 
actually supervise or

[[Page 68930]]

create and maintain various books and records. In light of risks 
illustrated in the SEC compliance alert, the use of part-time personnel 
has been retained in the examination standard as a risk factor for the 
auditor to consider when testing internal controls over compliance. The 
auditor's understanding of the role and responsibilities of the part-
time personnel is important to evaluating the associated risks.
---------------------------------------------------------------------------

    \85\ See Compliance Alert, June 2007, available at http://www.sec.gov/about/offices/ocie/complialert.htm.
---------------------------------------------------------------------------

    Paragraphs 14-18 of the examination standard provide requirements 
for the auditor to test the design and operating effectiveness of the 
selected controls over compliance. These requirements for testing 
design and operating effectiveness of controls over compliance are 
analogous to the requirements for testing controls in Auditing Standard 
No. 13, The Auditor's Responses to the Risks of Material Misstatement.
    Under the examination standard, the auditor should obtain evidence 
about the effectiveness of controls each year. Similar to testing 
controls in a financial statement audit, the examination standard 
provides factors for the auditor to take into account if the auditor 
plans to use evidence obtained in prior years in determining the extent 
of testing in the current year.
    One commenter recommended that paragraph 16 of the proposed 
examination standard, which stated ``[a]s the risk associated with the 
control being tested increases, the evidence that the auditor should 
obtain also increases,'' be replaced with paragraph 18 of Auditing 
Standard No. 13, which states that [t]he auditor should obtain more 
persuasive audit evidence. . . .'' The suggested revision is consistent 
with the intent of the requirement, so it has been included in 
paragraph 12 of the examination standard. This change will focus the 
auditor on the persuasiveness of audit evidence, rather than quantity, 
and avoid unnecessary differences between the examination standard and 
the auditing standards. Similar changes are reflected in paragraphs 22 
and 24 of the examination standard.
    Paragraphs 19 and 20 of the examination standard describe the 
auditor's use of evidence obtained in past examination engagements and 
using tests of controls that are modified during the year. One 
commenter suggested that as changes to controls occur throughout the 
period, the examination standard should require the auditor to 
determine with management what types of changes could materially affect 
control effectiveness. That commenter stated that the auditor should 
then test and evaluate management's documentation of the changes to 
controls and perform procedures to test the broker's or dealer's 
implementation of that change. SEC Rule 17a-5 requires that the broker 
or dealer assert that its controls were effective during the most 
recent fiscal year. As stated in the examination standard, to evaluate 
controls over compliance throughout the period, the auditor should 
obtain evidence regarding the design effectiveness of the selected 
controls before and after the change. Further, the examination standard 
also requires that, if a broker or dealer makes changes to its policies 
and procedures or key personnel during the fiscal year, the auditor 
should obtain an understanding of the reason for the change and obtain 
evidence regarding the design and operating effectiveness of the 
superseded and new controls before and after the change.
    One commenter stated that the phrase within paragraph 20 of the 
proposed examination standard which stated, ``whether each control is 
operating as designed'' might be confusing and recommended revising the 
paragraph to state ``each control selected for testing.'' The suggested 
revision is consistent with the intent of the requirement, so it has 
been included in paragraph 16 of the examination standard.
Performing Compliance Tests (Paragraphs 21-24 of Attestation Standard 
No. 1)
    Paragraphs 21-24 set forth requirements for performing tests of 
compliance with the net capital rule and reserve requirements rule.
    With respect to compliance tests, the auditor's objective is to 
form a conclusion about whether the broker's or dealer's assertion 
regarding compliance with the net capital rule and the reserve 
requirements rule is fairly stated, in all material respects. To 
satisfy this objective, the examination standard requires the auditor 
to perform procedures that are sufficient to support the auditor's 
conclusions regarding whether the broker or dealer was in compliance 
with the net capital rule and reserve requirements rule as of the end 
of its most recent fiscal year.
    The examination standard requires the auditor to perform specific 
procedures on the schedules the broker or dealer used to determine 
compliance with the net capital rule and the reserve requirements rule 
as of the end of its fiscal year, including:
    a. Evaluating whether the amounts in the schedule were determined 
in accordance with the net capital rule or reserve requirements rule, 
as applicable;
    b. Testing the accuracy and completeness of the information in the 
schedule;
    c. Determining whether the broker or dealer maintained the required 
level of net capital in accordance with the net capital rule;
    d. Determining whether the broker or dealer maintained a special 
reserve bank account for the exclusive benefit of customers and 
deposited funds in at least the required amount in accordance with the 
reserve requirements rule;
    e. Determining whether the information in the schedule was derived 
from the books and records of the broker or dealer; and
    f. Determining whether the broker or dealer made the notifications, 
if any, required by the net capital rule and reserve requirements rule 
as of the end of the most recent fiscal year.
    Paragraph 21.e. of the examination standard requires the auditor to 
perform procedures to determine whether the information used to assert 
compliance with the net capital rule and the reserve requirements rule 
was derived from the broker's or dealer's books and records. Proper 
coordination of these procedures with the audit of the financial 
statements and audit procedures performed on supplemental information 
should allow the auditor to avoid redundancy in the auditor's work and 
increase the effectiveness of the procedures performed. For example, 
Auditing Standard No. 17, Auditing Supplemental Information 
Accompanying Audited Financial Statements, 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 themselves, as applicable. Such supplemental information 
includes the supporting schedules that brokers or dealers are required 
to include in their financial reports pursuant to SEC Rule 17a-5.\86\
---------------------------------------------------------------------------

    \86\ See paragraph (d)(2) of SEC Rule 17a-5.
---------------------------------------------------------------------------

    To test compliance pursuant to paragraph 21, the auditor will need 
to design his or her procedures to test the provisions of the net 
capital rule and reserve requirements rule that have a bearing on the 
broker's or dealer's compliance with that rule. For example, the 
current requirements in the net capital rule generally include:
    a. The requirement to maintain minimum net capital and tentative 
net capital, as applicable, at all times.\87\
---------------------------------------------------------------------------

    \87\ See paragraph (a) of 17 CFR 240.15c3-1.
---------------------------------------------------------------------------

    b. The requirement for certain brokers or dealers not to let a 
specified amount of certain accounts it carries exceed a

[[Page 68931]]

specified threshold for more than five business days.\88\
---------------------------------------------------------------------------

    \88\ See paragraph (a)(6)(v) of 17 CFR 240.15c3-1.
---------------------------------------------------------------------------

    c. The requirement for brokers or dealers carrying accounts of 
listed options specialists not to let the amount of certain deductions 
required under Appendix A of the net capital rule to exceed a specified 
threshold for more than three business days.\89\
---------------------------------------------------------------------------

    \89\ See paragraph (c)(2)(x)(C) of 17 CFR 240.15c3-1.
---------------------------------------------------------------------------

    d. The notification requirement relating to paragraph (c)(2)(x)(C) 
of the net capital rule.\90\
---------------------------------------------------------------------------

    \90\ See paragraph (c)(2)(x)(C)(1) of 17 CFR 240.15c3-1.
---------------------------------------------------------------------------

    e. The requirement for brokers or dealers carrying accounts of 
listed options specialists to liquidate accounts when a liquidating 
deficit exists which includes a notice requirement.\91\
---------------------------------------------------------------------------

    \91\ See paragraph (c)(2)(x)(D) of 17 CFR 240.15c3-1.
---------------------------------------------------------------------------

    f. The requirement that the total of outstanding principal amounts 
of satisfactory subordination agreements cannot exceed 70% of the 
broker's or dealer's debt-equity total for a period in excess of 90 
days.\92\
---------------------------------------------------------------------------

    \92\ See paragraph (d) of 17 CFR 240.15c3-1.
---------------------------------------------------------------------------

    g. The notification requirements relating to withdrawals of equity 
capital.\93\
---------------------------------------------------------------------------

    \93\ See paragraph (e)(1) of 17 CFR 240.15c3-1.
---------------------------------------------------------------------------

    h. The limitations on withdrawal of equity capital.\94\
---------------------------------------------------------------------------

    \94\ See paragraph (e)(2) of 17 CFR 240.15c3-1.
---------------------------------------------------------------------------

    i. The requirements regarding temporary restrictions on net capital 
withdrawals.\95\
---------------------------------------------------------------------------

    \95\ See paragraph (e)(3) of 17 CFR 240.15c3-1.
---------------------------------------------------------------------------

    Other provisions of the rule also may apply depending on the 
particular activities or elections of the broker or dealer. Auditors 
should look to the requirements of the individual rules in order to 
test compliance.\96\
---------------------------------------------------------------------------

    \96\ See paragraph 6.b. of the examination standard, which 
requires the auditor to obtain an understanding of the financial 
responsibility rules and other rules and regulations that are 
relevant to the broker's or dealer's assertions.
---------------------------------------------------------------------------

    The requirements for testing compliance with the net capital rule 
and the reserve requirements rule should facilitate the coordination of 
the examination engagement and the audit procedures performed on 
supplemental information. The compliance procedures, if properly 
planned and performed, should provide substantial evidence to satisfy 
the requirements of Auditing Standard No. 17.
    As discussed earlier, in view of the amendments to SEC Rule 17a-5 
adopted by the Commission, the examination standard was revised to more 
closely align the auditor's performance requirements with the scope of 
the compliance assertion in SEC Rule 17a-5. It is appropriate to 
include specific procedures the auditor should perform on the schedules 
the broker or dealer used to determine compliance with the net capital 
rule and the reserve requirements rule as of the end of its fiscal 
year.
    In addition to those procedures that the auditor would perform on 
the broker's or dealer's schedules when planning and performing 
compliance tests, the auditor should take into account the evidence 
obtained from procedures performed as part of the audit of the 
financial statements and the audit procedures performed on supplemental 
information. For example, certain audit procedures performed to test 
the valuation and classification of the broker's or dealer's 
investments as of the end of the fiscal year may provide relevant 
evidence regarding the broker's or dealer's compliance with the net 
capital rule. Further, when testing the broker's or dealer's cash and 
cash equivalents, certain audit procedures may provide evidence 
regarding the existence of special reserve bank accounts for the 
exclusive benefit of customers, as well as evidence about the deposits 
to, and withdrawals from, those bank accounts. Such evidence may be 
relevant to the broker's or dealer's compliance with the reserve 
requirements rule. However, as the objectives of the audit and the 
examination engagement are not the same, the auditor must plan and 
perform the work to meet the objectives of both engagements.
Evaluating the Results of the Examination Procedures (Paragraphs 25-29 
of Attestation Standard No. 1)
    Paragraph 25 of the examination standard states that in forming an 
opinion on whether the assertions made by the broker or dealer in the 
compliance report are fairly stated, in all material respects, the 
auditor should evaluate all evidence obtained, regardless of whether 
the evidence corroborates or contradicts the broker's or dealer's 
assertions. Paragraph 26 of the examination standard provides that the 
auditor should evaluate: (1) Identified instances of non-compliance 
\97\ with the net capital rule and reserve requirements rule, to 
determine whether any instances of non-compliance existed as of the end 
of the most recent fiscal year; (2) identified instances in which the 
information used to assert compliance with the net capital rule or the 
reserve requirements rule was not derived from the broker's or dealer's 
books and records to determine whether they are material, individually 
or in combination; and (3) identified Deficiencies in Internal Control 
Over Compliance to determine whether the deficiencies, individually or 
in combination, are Material Weaknesses. Identified instances of non-
compliance might be an indication of a Deficiency in Internal Control 
Over Compliance.
---------------------------------------------------------------------------

    \97\ In evaluating the results of compliance testing, an error 
in a broker's or dealer's computation used to determine compliance 
with a provision of the net capital rule or reserve requirements 
rule is not an instance of non-compliance if, after giving 
consideration to the effect of the error, the broker or dealer still 
met the requirements of that provision, e.g., maintained at least 
the required minimum level or net capital or at least the minimum 
level on deposit in the special reserve account. However, such an 
instance might be an indication of a Deficiency in Internal Control 
Over Compliance that requires evaluation pursuant to this standard.
---------------------------------------------------------------------------

    The auditor's evaluation of the materiality of instances in which 
the information used to assert compliance with the net capital rule or 
the reserve requirements rule was not derived from the broker's or 
dealer's books and records is based on relevant quantitative and 
qualitative factors, including, in particular, the importance of the 
information not derived from the books and records to the broker's or 
dealer's compliance with the corresponding requirement in the net 
capital rule or the reserve requirements rule. For example, when a 
broker or dealer asserts that the information used to state whether it 
was in compliance with the net capital rule was derived from its books 
and records, and the auditor identifies an amount not derived from a 
broker's or dealer's books and records, the broker or dealer may still 
be able to support its assertion that it maintained the required net 
capital using information that was derived from the books and records 
of the broker or dealer. However, such an instance might be an 
indication of a Deficiency in Internal Control Over Compliance.
    Paragraph 28 of the examination standard applies when the auditor 
has not obtained sufficient appropriate evidence about an assertion or 
has substantial doubt about an assertion. Pursuant to paragraph 28, the 
auditor in those situations is required to perform additional 
procedures to address the matter. Performing the examination with due 
professional care requires an auditor conducting an examination to take 
appropriate actions when becoming aware of non-compliance or Material 
Weaknesses not included in the broker's or dealer's assertions or when 
substantial doubt remains. This requirement is similar to the 
requirement in paragraph 35 of Auditing

[[Page 68932]]

Standard No. 14, which states that if the auditor has not obtained 
sufficient appropriate audit evidence about a relevant assertion or has 
substantial doubt about a relevant assertion, the auditor should 
perform procedures to obtain further audit evidence to address the 
matter.
Obtaining a Representation Letter (Paragraphs 32-33 of Attestation 
Standard No. 1)
    The examination standard includes a requirement for the auditor to 
obtain written representations from management of the broker or dealer. 
The failure to obtain written representations from management, 
including management's refusal to furnish them, constitutes a 
limitation on the scope of the examination engagement. See Reporting on 
the Examination Engagement below for further discussion regarding scope 
limitations.
    Overall, commenters were supportive of the requirement for the 
auditor to obtain representations from management and stated that 
obtaining representations from management is a necessary part of the 
auditor's ability to support the auditor's opinion. One commenter 
recommended that the auditor obtain a written representation from the 
broker or dealer that acknowledges the broker's or dealer's 
responsibility for the assertions in the compliance report. This 
recommendation has been incorporated into paragraph 32.b. of the 
examination standard.
    Commenters suggested additional representations that the auditor 
should obtain from management during an examination engagement, 
including representations regarding management's responsibility for 
compliance with the financial responsibility rules, that management has 
performed an evaluation of compliance, that management did not use the 
auditor's procedures performed during the audit of the financial 
statements or procedures performed on supplemental information as part 
of the basis for management's assertions and that management has 
disclosed to the auditor all known instances of non-compliance and 
fraud. While many of these additional representations might be 
appropriate based on the facts and circumstances of the examination 
engagement, the examination standard was not modified to include them 
as they are either duplicative of management's assertions or not 
necessary to meet the requirements of the standard. However, the 
examination standard does not preclude the auditor from obtaining 
additional representations from management in situations in which the 
auditor believes additional representations are appropriate.
Communication Requirements (Paragraphs 34-35 of Attestation Standard 
No. 1)
    The examination standard requires the auditor to communicate 
certain matters to management and the audit committee. These 
requirements reflect changes from the proposed communication 
requirements to conform to SEC Rule 17a-5. In addition, rather than 
defining the term ``audit committee,'' the examination standard states 
that the term ``audit committee'' has the same definition as that in 
Auditing Standard No. 16, Communication with Audit Committees.
    One commenter stated that communication requirements in the 
proposed examination standard are sufficient. Another commenter 
requested that the Board clarify the meaning of ``identified'' as used 
in paragraph 36 of the proposed examination standard. That commenter 
questioned whether an ``identified'' instance of non-compliance 
referred to the moment the auditor becomes aware of its existence or 
only after the auditor concludes it represented a significant 
deficiency. The language in the standard was retained as proposed. In 
the context of the examination standard, the term ``identified instance 
of non-compliance'' is meant to clarify that the communication 
requirement applies to instances of non-compliance identified by the 
auditor.\98\ A note has been included to paragraph 35 of the 
examination standard reminding auditors of their obligation to comply 
with the requirements of paragraph (h) of SEC Rule 17a-5.
---------------------------------------------------------------------------

    \98\ See also the discussion of the notification requirements in 
the SEC Release at 101-107.
---------------------------------------------------------------------------

Reporting on the Examination Engagement (Paragraphs 36-38 of 
Attestation Standard No. 1)
    The examination standard requires the auditor to issue a single 
report that expresses an opinion on whether the assertions made by a 
broker or dealer in a compliance report are fairly stated, in all 
material respects, when expressing an unqualified opinion. Paragraph 36 
of the standard includes basic report elements, while paragraph 37 
includes an illustrative report.
    The reporting requirements in the examination standard have been 
revised to align with the compliance report that is required by SEC 
Rule 17a-5. This includes reporting on the broker's or dealer's 
assertions regarding the effectiveness of Internal Control Over 
Compliance during and as of the end of the most recent fiscal year, 
compliance with the net capital rule and the reserve requirements rule, 
and whether the information used to assert compliance with those rules 
was derived from the broker's or dealer's books and records.
Legal Determinations, Discussion of Inherent Limitation of the 
Examination, Discussion of Interpretations of Rules and Regulations, 
and Restrictions on the Use of the Examination Report
    One commenter stated that the report clearly communicates the 
auditor's responsibilities. Other commenters suggested that the 
examination standard should address additional reporting matters, such 
as including a caveat about legal determinations, discussion of 
inherent limitations of the examination, discussion of interpretations 
of rules and regulations, and restrictions on the use of the 
examination report.
Legal Determinations
    Some commenters stated that the auditor's examination report should 
be modified to include language indicating that the auditor's 
examination does not provide for a legal determination of a broker's or 
dealers compliance with financial responsibility rules. When the 
auditor is engaged to perform an examination, it is necessary for the 
auditor to read and make judgments regarding the application of the 
regulatory requirements, as applicable to the engagement. The auditor's 
report issued pursuant to the examination standard does not provide a 
legal determination, nor does it purport to provide a legal 
determination, of a broker's or dealer's compliance with the net 
capital rule or the reserve requirements rule. However, such a report 
may be useful to legal counsel or others in making such determinations. 
In the context of an examination, the auditor expresses an opinion on 
whether the assertions made by a broker or dealer in a compliance 
report are fairly stated, in all material respects. Accordingly, the 
Board did not add the suggested language to the examination standard.
Inherent Limitations of the Examination
    Some commenters stated that the examination report should be 
revised to include language discussing the inherent limitations of the 
examination, similar to language contained in other PCAOB auditing 
standards. Those commenters recommended including a statement similar 
to the statement

[[Page 68933]]

contained in the audit report on internal control over financial 
reporting, which states that because of inherent limitations, internal 
control over financial reporting may not prevent or detect 
misstatements.\99\
---------------------------------------------------------------------------

    \99\ Paragraph 85.j. of Auditing Standard No. 5, An Audit of 
Internal Control Over Financial Reporting That Is Integrated With an 
Audit of Financial Statements.
---------------------------------------------------------------------------

    The examination standard does not prescribe reporting language 
regarding the inherent limitations of the examination. Such language 
might be confusing to users who interpret such a statement as a 
limitation on the opinion expressed in the auditor's examination 
report, rather than the nature of internal controls over compliance. 
Also, an inherent limitation statement about internal control over 
financial reporting, which is management's responsibility and the 
subject of the audit, is different from a limitation statement about 
the auditor's examination itself.
Interpretations of Rules and Regulations
    Several commenters stated that evaluating a broker's or dealer's 
compliance with regulatory requirements may be based upon 
interpretations of regulations or rules established by the Commission 
and/or DEAs. Commenters recommended that the examination standard 
permit the inclusion of a statement within the examination report 
stating the description and the source of interpretations made by the 
brokers and dealer's management. After considering these comments, a 
footnote has been added to paragraph 36.h. of the examination standard. 
The statement in the footnote is consistent with the existing 
requirements of paragraph .59 of AT sec. 601, Compliance Attestation, 
which allows the auditor to include a paragraph stating the description 
and the source of interpretations made by the entity's management 
immediately after the scope paragraph of the auditor's report. The 
following is an example of such a paragraph:
    We have been informed that, under X Broker's interpretation of 
[identify the compliance requirement, e.g. SEC Rule 15c3-1], [explain 
the source and nature of the relevant interpretation].
    One commenter recommended that the auditor's examination report 
should include a statement that the assertions are the responsibility 
of the broker or dealer. The examination standard does not include this 
language because the first sentence in the auditor's examination report 
clarifies that the assertions are the responsibility of the broker or 
dealer.
Restriction of Use of the Examination Report
    The proposed examination standard did not include provisions for 
restricting the use of the examination report to specified parties. 
Some commenters stated that audit firms previously have often 
restricted the use of reports required by SEC Rule 17a-5 to the board 
of directors, management, the Commission, and other regulatory agencies 
that rely on SEC Rule 17a-5. Some commenters stated that a restriction 
on the use of an auditor's examination or review report is appropriate, 
given that general users of these reports may not have a sufficient 
understanding of the subject matter to which they relate, such as the 
financial responsibility rules.
    SEC Rule 17a-5 specifies the required reports, assertions, and the 
compliance requirements related to these engagements. The reports 
pursuant to this rule are generally filed only with the Commission, the 
broker's or dealer's DEA, and the Securities Investor Protection 
Corporation (``SIPC''). Accordingly, these criteria are suitable and 
available for purposes of these engagements.
    As the reporting criteria have been established by the Commission 
and those reporting criteria are publicly available, including language 
restricting the auditor's examination report in the examination 
standard is unnecessary. As such, no additional language is included in 
the examination standard.
Examination Report Date (Paragraph 38 of Attestation Standard No. 1)
    Under paragraph 38 of the examination standard, the auditor should 
date the examination report no earlier than the date on which the 
auditor obtains sufficient appropriate evidence to support his or her 
opinion. Because of the coordination between the examination 
engagement, the audit of the financial statements and the audit 
procedures performed on supplemental information, the date of the 
examination report should not be earlier than the date of the auditor's 
report on the financial statements and supplemental information. The 
Board did not receive comments on the proposed dating of the report. As 
such, these requirements are adopted as proposed.
Examination Report Modifications (Appendix C of Attestation Standard 
No. 1)
    The examination standard includes an appendix (``Appendix C'') that 
builds on existing concepts described in AT sec. 101 regarding report 
modifications and adapts them as appropriate to the requirements of the 
examination engagement.
    Under the examination standard, if one or more instances of non-
compliance with the net capital rule or the reserve requirements rule 
exist as of the end of the most recent fiscal year, one or more 
Material Weaknesses in Internal Control Over Compliance exist during or 
as of the end of the most recent fiscal year, or the information used 
to assert compliance with the net capital rule or the reserve 
requirements rule was not derived, in all material respects, from the 
books and records of the broker or dealer, the auditor must express an 
adverse opinion directly on the subject matter of the respective 
assertions, rather than on the assertions themselves, unless there is a 
restriction on the scope of the examination engagement.\100\ For 
example, if the broker or dealer is not in compliance with the net 
capital rule, the auditor's report would include an adverse opinion on 
compliance and would identify the instance of non-compliance regardless 
of whether it was described in the broker's or dealer's compliance 
report.
---------------------------------------------------------------------------

    \100\ The requirement to express an adverse opinion applies 
regardless of whether the instance of non-compliance, material 
weakness, or other matters preventing an unqualified opinion were 
identified by management or the auditor.
---------------------------------------------------------------------------

    This requirement is different from AT sec. 101, which states that 
``[r]eservations about the subject matter . . . can result in either a 
qualified or an adverse opinion, depending on the materiality of the 
departure from the criteria against which the subject matter . . . was 
evaluated.'' \101\ Qualified opinions are not appropriate because any 
instance of non-compliance as of the end of the fiscal year, any 
Material Weakness in Internal Control Over Compliance during or as of 
the end of the fiscal year, or any instance in which the information 
used to assert compliance with the net capital rule and the reserve 
requirements rule was not derived, in all material respects, from the 
broker's or dealer's books and records, is by definition material and, 
as such, must result in an adverse opinion.
---------------------------------------------------------------------------

    \101\ See AT sec. 101.76.
---------------------------------------------------------------------------

    The examination standard describes specific matters that the 
auditor should include in the examination report when expressing an 
adverse opinion. For example, when expressing an adverse opinion 
because one or more Material Weaknesses exist, the auditor's 
examination report must include a statement that one or more Material 
Weaknesses have been identified and an identification of the 
description of the

[[Page 68934]]

Material Weaknesses in the compliance report.
    The requirement to express an adverse opinion applies only to the 
subject matter for the respective assertion. It does not require an 
adverse opinion on the subject matter of all assertions in every 
instance. For example, if a Material Weakness was identified during the 
year but not at year end, and there were no instances of non-compliance 
or instances in which the information used to assert compliance with 
the net capital rule and the reserve requirements rule was not derived, 
in all material respects, from the broker's or dealer's books and 
records, the examination report should include an adverse opinion on 
Internal Control Over Compliance during the year and an unqualified 
opinion on the other three assertions.
    Several commenters recommended that the examination standard 
include examples of modified examination reports. Appendix C to the 
examination standard describes examination report modifications. 
Additional report examples may be considered, if guidance is issued in 
the future.
    Further, paragraph C6 of the examination standard states that, when 
the auditor plans to disclaim an opinion and the limited procedures 
performed by the auditor caused the auditor to make certain 
conclusions, the auditor's report also must include the matters 
described in paragraph C3 of the examination standard. Those 
conclusions include that: (1) One or more instances of non-compliance 
with the net capital rule or the reserve requirements rule existed as 
of the end of the fiscal year, (2) one or more Material Weaknesses 
existed during or as of the end of the most recent fiscal year, or (3) 
the information used to assert compliance with the net capital rule or 
the reserve requirements rule was not derived, in all material 
respects, from the books and records of the broker or dealer.
    The examination standard states that the auditor may issue a report 
disclaiming an opinion on the assertions made by a broker or dealer in 
a compliance report as soon as the auditor concludes that a scope 
limitation will prevent the auditor from obtaining the reasonable 
assurance necessary to express an opinion. The auditor is not required 
to perform any additional work before issuing a disclaimer when the 
auditor concludes that he or she will not be able to obtain sufficient 
evidence to express an opinion.
    In addition, unlike AT sec. 101, if the auditor concludes that he 
or she cannot express an opinion because there has been a limitation on 
the scope of the examination engagement, under the examination 
standard, the auditor should communicate on a timely basis, in writing, 
to management and the audit committee that the examination engagement 
cannot be satisfactorily completed.
    Some commenters stated that when the auditor expresses an adverse 
opinion, the auditor should report directly on the subject matter for 
all assertions, rather than the respective assertion necessitating the 
adverse opinion. As discussed, the examination standard aligns with the 
requirements of SEC Rule 17a-5, which requires the auditor to report on 
the respective management assertion.
    Under the examination standard, if the broker's or dealer's 
compliance report contains other information in addition to the 
statements and descriptions, if applicable, required by SEC Rule 17a-
5,\102\ the auditor should disclaim an opinion on the other 
information. For example, if the broker's or dealer's compliance report 
states that an identified Material Weakness no longer exists because 
controls have been implemented after the end of the fiscal year that 
address the Material Weakness, the auditor should disclaim an opinion 
on this information.
---------------------------------------------------------------------------

    \102\ See paragraphs (d)(3) and (g)(2) of SEC Rule 17a-5.
---------------------------------------------------------------------------

    One commenter recommended that the examination standard address 
instances when there is a misstatement of fact in management's 
assertion, particularly when management's assertion is improperly 
presented. SEC Rule 17a-5 establishes the assertions brokers and 
dealers are required to make regarding compliance with the financial 
responsibility rules. The auditor's responsibility is to express an 
opinion on management's assertions. SEC Rule 17a-5 specifically 
describes the content of the statements to be made by the broker or 
dealer.\103\ Further, a misstatement of fact by the broker or dealer in 
its assertion would likely result in an adverse opinion on one or more 
of the broker's or dealer's assertions. As the examination standard 
provides requirements relating to adverse opinions, no further changes 
were made based on this comment. Furthermore, as stated in the 
proposing release, if the auditor believes that additional information 
in the compliance report contains a material misstatement of fact, the 
auditor should discuss the matter with management of the broker or 
dealer. If, after discussing the matter with management, the auditor 
concludes that a material misstatement of fact remains, the auditor 
should notify management and the audit committee of the auditor's views 
concerning the information.
---------------------------------------------------------------------------

    \103\ See paragraph (d)(3) of SEC Rule 17a-5.
---------------------------------------------------------------------------

Appendix B. Considerations for Brokers and Dealers With Multiple 
Divisions or Branches

    When a broker or dealer conducts its operations through multiple 
divisions and branch offices, the examination standard includes, in 
Appendix B, a requirement for the auditor to determine the extent to 
which examination procedures should be performed at selected divisions 
or branches to obtain sufficient appropriate evidence to support the 
conclusions expressed in the auditor's examination report. This 
includes determining the divisions or branches at which to perform 
examination procedures, as well as the nature, timing, and extent of 
the procedures to be performed at those individual divisions or 
branches. The same requirements were included in the body of the 
proposed examination standard.
    One commenter recommended certain additional factors that should be 
taken into account when determining the extent of the examination 
procedures to be performed at divisions or branches, including 
judgments about materiality of the division or branch and the 
similarity of operations over compliance for different divisions or 
branches. These factors were considered during the development of the 
examination standard. The requirement in the examination standard for 
the auditor to take into account the degree to which the financial 
responsibility rules relate to activities at the division or branch 
level is broader than judgments based solely on the materiality of a 
specific division. Adding another factor regarding materiality within 
paragraph 13 of the examination standard might limit an auditor's 
consideration of the procedures to be performed to only quantitative 
factors rather than risks related to non-compliance. As such, this 
factor has not been included in the examination standard.
    One commenter recommended including the similarity of operations 
over compliance for different divisions or branches as a factor within 
the examination standard. Similar to the discussion in the preceding 
paragraph, the requirement in the examination standard for the auditor 
to take into account the degree to which the financial responsibility 
rules relate to activities at the division or branch level includes 
considerations regarding the similarity of operations over compliance

[[Page 68935]]

for different divisions or branches. Including this factor within 
paragraph 13 of the examination standard might limit the auditor's 
consideration of the procedures to be performed to identify differences 
between different divisions or branches, rather than assessing the risk 
that different divisions or branches with similar operations over 
compliance might have instances of non-compliance.

Other Comments

Use of the Work of Other Auditors
    Some commenters stated that situations could exist in which the 
auditor that is engaged to perform an examination engagement might use 
the work of other auditors. Those commenters stated that the 
examination standard should include a reference to AU sec. 543, Part of 
Audit Performed by Other Independent Auditors. Other commenters stated 
that references to the Board's auditing standards were inappropriate 
within the attestation standards. By its terms, AU sec. 543 applies 
when one auditor uses the work and reports of another auditor of the 
financial statements of a component. As this situation does not apply 
to a compliance examination engagement, the standard does not refer to 
AU sec. 543. Nonetheless, auditors can use the work of other auditors 
if such work is performed under their supervision.
Interaction With an Audit of Internal Control Over Financial Reporting
    Some commenters stated that additional guidance relating to the 
relationship between internal control over financial reporting and 
Internal Control Over Compliance would be beneficial. Those commenters 
stated that while SEC Proposed Rule 17a-5 is clear that the attestation 
reports do not extend to internal control over financial reporting, 
there may be certain controls over financial reporting that could 
overlap with Internal Control Over Compliance with the financial 
responsibility rules.
    Several commenters stated that the Board should coordinate with the 
SEC to provide further guidance regarding the relationship between the 
evaluation of Deficiencies in Internal Control Over Compliance and the 
evaluation of Material Weaknesses and significant deficiencies in 
internal control over financial reporting. The SEC Release contains 
relevant discussion regarding the interaction between Internal Control 
Over Compliance and internal control over financial reporting.\104\
---------------------------------------------------------------------------

    \104\ See the SEC Release at 38, which notes, among other 
things, that internal control over financial reporting is focused on 
the reliability of financial reporting and preparation of financial 
statements in accordance with generally accepted accounting 
principles, whereas the compliance report should focus on oversight 
of net capital, custody arrangements, and protection of customer 
assets, and, therefore should be focused on compliance with the 
financial responsibility rules.
---------------------------------------------------------------------------

Attestation Standard No. 2, Review Engagements Regarding Exemption 
Reports of Brokers and Dealers
    As previously described, the review standard has been designed 
specifically for an auditor's review of statements made by a broker or 
dealer in an exemption report required by the Commission's amendments 
to SEC Rule 17a-5.
    Briefly, certain brokers and dealers claim exemption from the 
Commission's requirements contained in SEC Rule 15c3-3, the SEC rule 
relating to the custody of customer funds, pursuant to exemption 
provisions contained in paragraph (k) of SEC Rule 15c3-3 (the 
``exemption provisions''). In the exemption report, the broker or 
dealer identifies (i) the exemption provision of paragraph (k) of SEC 
Rule 15c3-3 under which the broker or dealer claimed exemption from the 
SEC's custody requirements (the ``identified exemption provisions''), 
and (ii) states that the broker or dealer met the exemption provisions 
throughout the most recent fiscal year without exception or, if 
applicable, states that exceptions to the identified exemption 
provisions were identified, including a description of any such 
exceptions and the approximate date on which the exception existed. SEC 
Rule 17a-5 requires the broker or dealer to engage an independent 
public accountant registered with the PCAOB to review, and 
independently report on, the statements in the broker's or dealer's 
exemption report.
    Because brokers and dealers claiming an exemption from SEC Rule 
15c3-3 requirements under paragraph (k) of that rule might have access 
to customer funds, a review engagement focusing on the identification 
of exceptions to the exemption provisions claimed by brokers and 
dealers is important to the protection of investors. Notably, a recent 
PCAOB report on the progress of its interim inspection program of 
broker and dealer audits noted that in a significant number of audits 
of brokers and dealers that claimed an exemption from SEC Rule 15c3-3, 
auditors did not perform sufficient procedures to ascertain that the 
broker or dealer complied with the conditions of the exemption.\105\ 
The review standard includes specific procedures for auditors 
performing compliance reviews of a broker's or dealer's assertions in 
an exemption report with an emphasis on coordination with the auditor's 
work on the financial statement audit and the audit procedures 
performed relating to supplemental information. This approach should 
enhance overall audit effectiveness and also help avoid unnecessary 
duplication of work.
---------------------------------------------------------------------------

    \105\ 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), at 9.
---------------------------------------------------------------------------

    The following discussion provides background regarding the review 
standard, including significant comments received on the proposed 
review standard and changes made to the standard.
Overview of SEC Rule 17a-5 and Related Changes
    As amended by the Commission, SEC Rule 17a-5 includes modifications 
from the SEC's proposed amendments, including a number of changes that 
focus the auditor more directly on the exemption provisions claimed by 
the broker or dealer and the identification of any exceptions. These 
modifications resulted in corresponding changes to the review standard. 
Principally, the changes involve:
     The introduction of certain terms, including ``exemption 
provisions,'' and ``exceptions;''
     Changes to the broker's or dealer's assertions, as set 
forth in SEC Rule 17a-5, to include more detailed information regarding 
the exemption provision claimed asserted by the broker or dealer and 
any exceptions identified; and
     Changes to the auditor's reporting requirements, and the 
example report, including requirements for auditors to modify their 
reports in situations in which the broker or dealer fails to disclose 
an exception in the exemption report.
    As noted above, the review standard was designed specifically to 
implement the auditor's requirements in SEC Rule 17a-5. The review 
standard establishes requirements that apply when an auditor is engaged 
to perform an exemption review of the statements made by a broker or 
dealer in an exemption report prepared pursuant to SEC Rule 17a-5.
    Paragraph 2 states that SEC Rule 17a-5 requires a broker's or 
dealer's exemption report to contain the following statements \106\ by 
the broker or dealer:
---------------------------------------------------------------------------

    \106\ See paragraph (d)(4) of SEC Rule 17a-5.
---------------------------------------------------------------------------

    a. A statement that identifies the exemption provisions under which 
the

[[Page 68936]]

broker or dealer claimed an exemption from SEC Rule 15c3-3;
    b. A statement that the broker or dealer (1) met the identified 
exemption provisions throughout the most recent fiscal year without 
exception or (2) met the identified exemption provisions throughout the 
most recent fiscal year except as described in the exemption report; 
and
    c. If applicable, a statement that identifies each exception during 
the most recent fiscal year in meeting the identified exemption 
provisions (an ``exception'') and that briefly describes the nature of 
each exception and the approximate dates on which the exception 
existed.
    The changes reflected in SEC Rule 17a-5 to include exceptions to 
the exemption provisions in the exemption report did not result in 
significant changes to the procedural requirements in the proposed 
review standard. The review standard, similar to the proposed review 
standard, requires the auditor to state a conclusion regarding whether, 
based upon the results of the review procedures, the auditor is aware 
of any material modifications that should be made to the broker's or 
dealer's assertions for the assertions to be fairly stated, in all 
material respects.\107\ To state such a conclusion, the auditor must 
plan and perform the review engagement to obtain appropriate evidence 
that is sufficient to obtain moderate assurance about whether one or 
more conditions exist that would cause one or more of the broker's or 
dealer's assertions not to be fairly stated, in all material respects.
---------------------------------------------------------------------------

    \107\ The review standard largely carries forward the 
requirement from prior SEC Rule 17a-5 that the independent public 
accountant engaged by the broker or dealer ``must ascertain that the 
conditions of the exemption were being complied with as of the 
examination date and that no facts came to the independent public 
accountant's attention to indicate that the exemption had not been 
complied with during the period since the last examination.'' See 
the SEC Release at 72.
---------------------------------------------------------------------------

Moderate Assurance
    The requirement that the auditor obtain moderate assurance \108\ to 
support his or her opinion has not been changed from the Board's 
proposal. The approach taken in the review standard is in contrast to 
the examination standard, in which the auditor obtains reasonable 
assurance to support his or her opinion on the broker's or dealer's 
assertions. In the review engagement contemplated by the review 
standard, the auditor must obtain moderate assurance regarding the 
broker's or dealer's assertions.
---------------------------------------------------------------------------

    \108\ Obtaining moderate assurance in a review engagement is 
consistent with both existing PCAOB standards and the SEC Release. 
AT sec. 101.55 describes a review as an attest engagement designed 
to provide a moderate level of assurance. See the SEC Release at 88, 
which states that a ``moderate level of assurance [is] contemplated 
by the required review.''
---------------------------------------------------------------------------

    Review engagements typically involve the performance of inquiries 
and analytical procedures,\109\ and the auditor's conclusions typically 
are expressed in the report in the form of negative assurance.\110\
---------------------------------------------------------------------------

    \109\ AT sec. 101.55 states that ``[i]n an attest engagement 
designed to provide a moderate level of assurance (referred to as a 
review), the objective is to accumulate sufficient evidence to 
restrict attestation risk to a moderate level. To accomplish this, 
the types of procedures performed generally are limited to inquiries 
and analytical procedures (rather than also including search and 
verification procedures).''
    \110\ See AT sec. 101.68.
---------------------------------------------------------------------------

    The proposing release noted that, in a review engagement covered by 
the proposed review standard, analytical procedures are not feasible 
for evaluating compliance with the exemption conditions, as the 
conditions are based on activities of the broker or dealer rather than 
on financial statement amounts. Thus, the review standard establishes 
specific procedural requirements that are commensurate with the 
responsibility to obtain moderate assurance. This approach is 
consistent with AT sec 101.55-.56 which states that ``. . . there will 
be circumstances in which inquiry and analytical procedures . . . 
cannot be performed. . . . In [this] circumstance, the practitioner 
should perform other procedures that he or she believes can provide him 
or her with a level of assurance equivalent to that which inquiries and 
analytical procedures would have provided.''
    Commenters generally stated that the requirements in the review 
standard were appropriate for obtaining moderate assurance. Further, 
some commenters stated that the term ``moderate assurance'' as used in 
the review standard is consistent with how the term ``moderate 
assurance'' is presently used in practice and with how auditors are 
currently performing engagements to obtain moderate assurance.
    One commenter stated that the review standard could clarify that 
the auditor plans and performs the review engagement in the context of 
obtaining a moderate level of assurance. In considering this comment, 
the Board noted that the objective of the review standard states ``. . 
. the auditor must plan and perform the review engagement to obtain 
appropriate evidence that is sufficient to obtain moderate assurance. . 
. .'' As such, additional clarification is not necessary.
    One commenter stated that an ``agreed-upon procedures'' engagement 
would be more appropriate than a review engagement for a broker's or 
dealer's assertion that it is exempt from SEC Rule 15c3-3. SEC Rule 
17a-5 requires a broker or dealer that claimed exemption from the 
requirements of SEC Rule 15c3-3 to file a report from their independent 
public accountants that includes the results of a review of the 
broker's or dealer's assertions. As adopted, the review standard 
establishes requirements that are designed specifically to provide 
auditors with a standard for performing the review required by SEC Rule 
17a-5.
Performing the Review Engagement (Paragraphs 5-14 of Attestation 
Standard No. 2)
General Requirements (Paragraphs 5-6 of Attestation Standard No. 2)
    Paragraphs 5 and 6 of the review standard set forth general 
requirements for an auditor performing the review standard. The Board 
did not receive significant comments on the general requirements of the 
proposed review standard. As such, the general requirements are being 
adopted largely as proposed.
    Paragraph 5 of the review standard requires that an auditor 
performing a review engagement have adequate technical proficiency in 
attestation engagements, obtain an understanding of the exemption 
conditions and other rules and regulations that are relevant to the 
broker's or dealer's assertion, determine the auditor's compliance with 
independence and ethics requirements,\111\ and exercise due 
professional care.
---------------------------------------------------------------------------

    \111\ Determining the auditor's compliance with independence and 
ethics requirements includes determining whether the auditor 
complied with relevant requirements of the PCAOB and the SEC. 
Paragraph (f)(1) of SEC Rule 17a-5 requires the auditor to be 
independent in accordance with 17 CFR 210.2-01.
---------------------------------------------------------------------------

    The proposed review standard included a footnote which stated that 
``due professional care'' referred to in that paragraph was the same 
term in paragraph .40 of AT sec. 101. One commenter stated that while 
they did not disagree with the meaning of ``due professional care,'' 
they believe that referencing AT sec. 101 from the review standard may 
be confusing, especially as AT sec. 101 would not be applicable to 
engagements in which the review standard is applicable. In response, a 
note has been added to state that due professional care imposes a 
responsibility on each engagement team member to comply with the review 
standard and that the exercise of due

[[Page 68937]]

professional care requires critical review at every level of 
supervision of the work done and the judgment exercised by those 
assisting in the engagement, including the preparation of the report. A 
footnote to that note states that the auditor's responsibility to 
exercise due professional care is consistent with the description in 
paragraphs .40-.41 of AT sec. 101.
    With respect to documentation, the review engagement is subject to 
the requirements of Auditing Standard No. 3, which applies to 
engagements conducted pursuant to the standards of the PCAOB. Auditing 
Standard No. 3 states that as audit documentation is the written record 
that provides the support for the representations in the auditor's 
report, it should demonstrate that the engagement complied with the 
standards of the PCAOB.\112\ A note has been added to paragraph 5 of 
the review standard to remind auditors of their responsibility to 
comply with Auditing Standard No. 3.
---------------------------------------------------------------------------

    \112\ See paragraph 4 of Auditing Standard No. 3.
---------------------------------------------------------------------------

Review Procedures (Paragraphs 8-10 of Attestation Standard No. 2)
    The review standard requires the auditor to perform procedures 
consistent with a review engagement; however, the procedures have been 
tailored for the exemption report required by SEC Rule 17a-5.
Nature, Timing, and Extent of Procedures (Paragraph 9 of Attestation 
Standard No. 2)
    Under the proposed review standard, the nature, timing, and extent 
of the review procedures were dependent on certain risk factors and 
evidence about the broker's or dealer's compliance with the exemption 
conditions or about the effectiveness of controls over the exemption 
conditions obtained from the audit of the financial statements and the 
audit procedures performed on supplemental information. For example, 
one risk factor is potential non-compliance associated with related 
parties. Risks associated with related parties that are investment 
advisors or with which the broker or dealer has a custodial or clearing 
relationship may be especially relevant to the exemption provisions.
    Evidence about the broker's or dealer's compliance with the 
exemption provisions or about the effectiveness of controls over the 
exemption provisions obtained from the audit of the financial 
statements and the audit procedures performed on supplemental 
information also affect the nature, timing, and extent of the necessary 
inquiries and other review procedures. For example, if the broker or 
dealer claims an exemption under Rule 15c3-3(k)(1), the auditor, among 
other things, needs to obtain evidence that the broker's or dealer's 
transactions are limited to those in redeemable securities of 
investment companies or of interests or participations in an insurance 
company separate account.\113\ Audit procedures regarding the broker's 
or dealer's investment inventory or investment transactions related to 
the broker's or dealer's trading for its own account, including 
confirmation of investment inventory with the custodian and testing 
investment transactions, can provide evidence relevant to the broker's 
or dealer's compliance with these exemption conditions.
---------------------------------------------------------------------------

    \113\ Paragraph (k)(1) of SEC Rule 15c3-3, states that ``the 
provisions of [Rule 15c3-3] shall not be applicable to a broker or 
dealer meeting all of the following conditions:
    (i) His dealer transactions (as principal for his own account) 
are limited to the purchase, sale, and redemption of redeemable 
securities of registered investment companies or of interests or 
participations in an insurance company separate account, whether or 
not registered as an investment company; except that a broker or 
dealer transacting business as a sole proprietor may also effect 
occasional transactions in other securities for his own account with 
or through another registered broker or dealer;
    (ii) His transactions as broker (agent) are limited to: (a) The 
sale and redemption of redeemable securities of registered 
investment companies or of interests or participations in an 
insurance company separate account, whether or not registered as an 
investment company; (b) the solicitation of share accounts for 
savings and loan associations insured by an instrumentality of the 
United States; and (c) the sale of securities for the account of a 
customer to obtain funds for immediate reinvestment in redeemable 
securities of registered investment companies; and
    (iii) He promptly transmits all funds and delivers all 
securities received in connection with his activities as a broker or 
dealer, and does not otherwise hold funds or securities for, or owe 
money or securities to, customers.
    (iv) Notwithstanding the foregoing, this section shall not apply 
to any insurance company which is a registered broker [or] dealer, 
and which otherwise meets all of the conditions in paragraphs 
(k)(1)(i), (ii), and (iii) of this section, solely by reason of its 
participation in transactions that are a part of the business of 
insurance, including the purchasing, selling, or holding of 
securities for or on behalf of such company's general and separate 
accounts.''
---------------------------------------------------------------------------

    As another example, if the broker or dealer claims exemption under 
section (k)(1) of Rule 15c3-3, the auditor needs to obtain evidence 
about whether the broker or dealer promptly transmits all funds and 
delivers all securities received in connection with his activities as a 
broker or dealer, and does not otherwise hold funds or securities for, 
or owe money or securities to, customers.\114\ Audit procedures 
regarding customer trade and transaction activities can provide 
evidence relevant to these exemption provisions.
---------------------------------------------------------------------------

    \114\ See paragraph (k)(1)(iii) of SEC Rule 15c3-3.
---------------------------------------------------------------------------

    Other procedures performed during the audit that are relevant to 
the broker's or dealer's compliance with the exemption provisions 
include testing of specially designated cash accounts and reading 
clearing agreements between the broker or dealer and clearing brokers 
and dealers in connection with testing trade fee or commission revenues 
and expenses.\115\
---------------------------------------------------------------------------

    \115\ Refer to ``Relationship Between the Examination Engagement 
and the Audit of the Financial Statements and Audit Procedures 
Performed on Supplemental Information'' for further discussion.
---------------------------------------------------------------------------

    One commenter recommended incorporating the discussion in the 
proposing release relating to the risk of fraud into the review 
standard to provide further guidance. The proposing release stated that 
in considering the risk of fraud relevant to the exemption conditions, 
the auditor also considers whether the broker or dealer has 
misrepresented its activities, for example, the broker or dealer claims 
to be operating as a non-carrying broker or dealer but, based on other 
evidence appears to hold customer funds or securities. The Board 
considered this comment and determined, as it has done in other 
projects, to include performance requirements in the standard and to 
provide additional discussion and examples in the release. Therefore, 
the release discussion regarding the risk of fraud has not been 
incorporated into the review standard. The request for guidance 
regarding the risk of fraud may be taken into account if additional 
guidance is issued.
    The Board did not receive extensive comment on these requirements. 
Two commenters stated that the factors are appropriate. In general, 
these requirements are being adopted substantially as proposed.
Review Procedures (Paragraph 10 of Attestation Standard No. 2)
    Paragraph 10 of the review standard sets forth the required 
procedures for the review engagement. Specifically, the procedures 
required by the standard are consistent with a review engagement, 
including making inquiries of management and relevant personnel of the 
broker or dealer; reading relevant reports from internal auditors or 
regulatory correspondence; evaluating evidence from the audit of the 
financial statements and the audit procedures performed on supplemental 
information; and performing additional procedures for identified 
exceptions.
    While the review standard requires the auditor to perform 
procedures

[[Page 68938]]

consistent with a review engagement, the procedures in the standard 
have been modified in a number of ways to reflect changes made to SEC 
Rule 17a-5, including to reflect terms used in SEC Rule 17a-5. The 
following discussion highlights some of the key aspects of, comments 
on, and changes made to, the required review procedures.
    Commenters generally supported the requirements as proposed. 
However, one commenter stated the proposed review standard does not 
clearly describe the procedures or the extent of evidence necessary to 
obtain moderate assurance. Another commenter stated that the language 
in paragraph 10.h. of the proposed review standard, ``perform other 
procedures as necessary in the circumstances to obtain moderate 
assurance,'' is an overly broad requirement.
    As previously discussed, obtaining moderate assurance in a review 
engagement is consistent with both existing PCAOB standards and the SEC 
Release. AT sec. 101.55 describes a review as an attest engagement 
designed to provide a moderate level of assurance. The SEC Release 
states that a ``moderate level of assurance [is] contemplated by the 
required review.'' \116\ The procedures required by the review standard 
have been designed to assist the auditor in obtaining moderate 
assurance in a review engagement. These procedures largely focus on 
making inquiries and reading information relevant to the broker's or 
dealer's assertions. In the Board's view, such procedures are 
consistent with AT sec. 101.56, given that analytical procedures would 
not provide relevant evidence in light of the broker's or dealer's 
assertions required by SEC Rule 17a-5. For example, paragraph 10.g. of 
the review standard states that in performing the review engagement, 
the auditor should evaluate whether the evidence obtained and the 
results of the procedures performed in the audit of the financial 
statements and the audit procedures performed on supplemental 
information corroborate or contradict information in the broker's or 
dealer's assertions. Further, paragraph 10.h. of the review standard 
has been revised to state that in performing the review engagement, the 
auditor should perform other procedures as necessary in the 
circumstances to obtain moderate assurance regarding whether a material 
modification should be made to the broker's or dealer's assertions for 
the assertions to be fairly stated, in all material respects.
---------------------------------------------------------------------------

    \116\ See the SEC Release at 88.
---------------------------------------------------------------------------

    One commenter stated that, while the review procedures and the 
matters affecting their nature, timing, and extent are, for the most 
part, appropriate for an engagement to obtain a moderate level of 
assurance, they did have certain specific recommendations, including 
clarifying the note in paragraph 10.g. of the review standard to 
explicitly indicate that the examples of procedures are those that may 
be performed during the audit of the financial statements. The Board 
considered this comment and agrees that such a revision would clarify 
that the note is referring to examples of procedures performed during 
the audit of the financial statements that might provide relevant 
evidence to the review engagement. As such, the note to paragraph 10.g. 
of the review standard has been revised.
    In addition, if the broker or dealer has sent to or received 
correspondence from the SEC or the broker's or dealer's DEA that is 
relevant to compliance with the exemption conditions, the review 
standard includes a requirement for the auditor to read such 
correspondence and, when necessary in the circumstances, make inquiries 
of the regulatory agencies. These procedures can provide the auditor 
with relevant information about a broker's or dealer's compliance with 
the exemption provisions. Under the circumstances when a need arises to 
make inquiries of the regulatory agencies, the Board acknowledges that 
auditors may need authorization from the broker or dealer before 
contacting the regulatory authority.
    One commenter suggested that the Board provide guidance related to 
the interaction between auditors and a company's regulatory examiners 
consistent with the AICPA Audit and Accounting Guide for Depository and 
Lending Institutions: Banks and Savings Institutions, Credit Unions, 
Finance Companies and Mortgage Companies. The guidance in that 
publication is specific to the interaction between the auditor and 
federal bank examiners, and might differ from the DEAs of the broker or 
dealer. As such, additional requirements in this area have not been 
included in the review standard.
Evaluating the Results of the Review Procedures (Paragraphs 11-12 of 
Attestation Standard No. 2)
    Under paragraph 11 of the review standard, the auditor should 
evaluate whether information has come to the auditor's attention that 
cause one or more of the broker's or dealer's assertions not to be 
fairly stated, in all material respects. For example, a broker's or 
dealer's failure to disclose an exception in the exemption report would 
cause the assertion not to be fairly stated, in all material respects, 
which would require modification of the review report. This paragraph 
has been modified to align with the amendments to SEC Rule 17a-5.
    Additionally, the proposed standard required the auditor to perform 
additional procedures if information came to the auditor's attention 
that indicated that one or more instances of non-compliance might exist 
that might cause the broker's or dealer's assertion not to be fairly 
stated or if the auditor had substantial doubt about the assertion. The 
review standard has been revised to align with the requirements in SEC 
Rule 17a-5.
    One commenter requested clarification of the relationship between 
paragraphs 10.h. and 12 of the review standard. Those two requirements 
address different situations, as discussed below.
    As previously noted, paragraph 10.h. of the review standard 
requires auditors to perform other procedures as necessary in the 
circumstances to obtain moderate assurance. This applies when the 
auditor determines the nature, timing, and extent of review procedures 
to be performed, such as in planning the review.
    Paragraph 12 of the review standard applies when information comes 
to the auditor's attention during the engagement indicating that the 
broker's or dealer's assertions might not be fairly stated or if the 
auditor has substantial doubt about the assertion. Pursuant to 
paragraph 12, the auditor in those situations is required to perform 
additional procedures to address the matter. Performing the review with 
due professional care requires an auditor conducting a review to take 
appropriate actions when becoming aware of exceptions to the exemption 
provisions not included in the broker's or dealer's assertion or when 
substantial doubt remains. The phrase ``substantial doubt'' has the 
same meaning as the phrase ``substantial doubt'' in paragraph 35 of 
Auditing Standard No. 14, which states that if the auditor has not 
obtained sufficient appropriate audit evidence about a relevant 
assertion or has substantial doubt about a relevant assertion, the 
auditor should perform procedures to obtain further audit evidence to 
address the matter. In the context of a review engagement, these 
additional procedures could include, but are not limited to, making 
additional inquiries, reading documents, or

[[Page 68939]]

performing search and verification procedures, as necessary.\117\
---------------------------------------------------------------------------

    \117\ See, e.g., AT sec. 101.56.
---------------------------------------------------------------------------

    One commenter recommended incorporating the examples in the 
preceding paragraph, e.g., making additional inquiries, reading 
documents, or performing search and verification procedures, as 
necessary, and the discussion in AT sec. 101.56, into the review 
standard. That discussion and the examples have not been included in 
the review standard as they are provided to illustrate the nature of 
procedures that might be appropriate in such circumstances. Including 
these as examples in the review standard might limit auditors' 
consideration of additional procedures to only these procedures, when 
other procedures might be appropriate.
Obtaining a Representation Letter (Paragraphs 13-14 of Attestation 
Standard No. 2)
    The review standard includes a requirement for the auditor to 
obtain written representations from management of the broker or dealer 
that relate to the review engagement. The purpose of such 
representations is to provide the auditor with necessary information 
for, and context regarding, the engagement. The auditor should not rely 
inappropriately on management's representations.
    The review standard also provides that the failure to obtain 
written representations from management, including management's refusal 
to furnish them, constitutes a limitation on the scope of the review 
engagement. If a limitation on the scope of the review engagement 
exists, the auditor should withdraw from the engagement or should 
modify the review report.\118\ Additionally, the review standard also 
includes a list of written representations that the auditor should 
obtain from management.
---------------------------------------------------------------------------

    \118\ See paragraph 20 of the review standard for auditor 
requirements when a scope limitation exists.
---------------------------------------------------------------------------

    Commenters stated that obtaining representations from management is 
a necessary part of the auditor's ability to express an opinion. One 
commenter recommended that the list of required written representations 
include a representation from management that acknowledges its 
responsibility for the assertions in the exemption report. The 
suggested additional representation has been included in the review 
standard.
    Further, in the review standard, several of the representations 
were updated to align with the language in SEC Rule 17a-5.
Communication Requirements (Paragraph 15 of Attestation Standard No. 2)
    The review standard requires the auditor to communicate to 
management and to the audit committee any exceptions to the exemption 
provisions identified by the auditor or information that causes the 
broker's or dealer's assertions about its exemption provisions not to 
be fairly stated, in all material respects. In addition, rather than 
defining the term audit committee, the review standard states that the 
term ``audit committee'' has the same definition as that in Auditing 
Standard No. 16.
    The Board did not receive significant comments on the communication 
requirements included in the proposed review standard. However, the 
communication requirements in the standard have been modified to align 
closely with SEC Rule 17a-5. Additionally, a note has been added to 
paragraph 15 of the review standard reminding auditors of their 
obligation to comply with the requirements of paragraph (h) of SEC Rule 
17a-5.\119\
---------------------------------------------------------------------------

    \119\ See also the discussion of the notification requirements 
in the SEC Release at 101-107.
---------------------------------------------------------------------------

Reporting on the Review Engagement (Paragraphs 16-18 of Attestation 
Standard No. 2)
    The review standard includes requirements for the auditor's review 
report to include certain elements that are important for a reader of 
the review report to understand regarding the auditor's 
responsibilities. This includes a statement that the review was 
conducted in accordance with the standards of the PCAOB and, 
accordingly, includes inquiries and other required procedures to obtain 
evidence about the broker's or dealer's compliance with the exemption 
provisions. These are largely the same elements as in the proposed 
standard.
    The review standard includes an example of the auditor's standard 
review report when the broker or dealer asserted that it met the 
identified exemption provisions throughout the most recent fiscal year 
without exception and an example of the auditor's standard review 
report when the broker or dealer includes exceptions to the exemption 
provisions in the exemption report. A change was made to the review 
results paragraph in the example review report to align the reporting 
language more closely to the corresponding reporting element, which was 
not modified from the proposed review standard.
    Some commenters stated concerns similar to those for the 
examination report regarding the use of the review report as a legal 
determination, interpretation of rules and regulations, restrictions on 
use of the review report, and limitations of an engagement to obtain 
moderate assurance. When the auditor is engaged to perform a review 
engagement, it is necessary for the auditor to read and make judgments 
regarding the application of regulatory requirements, as applicable to 
the engagement. The review report issued pursuant to the review 
standard does not provide a legal determination, nor does it purport to 
provide a legal determination, of a broker's or dealer's compliance 
exemption provision. However, such a report may be useful to legal 
counsel or others in making such determinations.
Modifications of the Report (Paragraphs 19-20 of Attestation Standard 
No. 2)
    The review standard requires that if one or more of the broker's or 
dealer's assertions are not fairly stated, in all material respects, 
the auditor must modify the review report to describe the reasons why 
the assertions are not fairly stated, in all material respects. If the 
broker's or dealer's assertion is not fairly stated because of one of 
more omitted exceptions, the auditor's review report should disclose 
each omitted exception.
    Paragraph 20 of the review standard sets forth circumstances 
involving scope limitations. Under the review standard, if the auditor 
cannot perform the procedures required by the review standard or other 
procedures that the auditor deems necessary in the circumstances, the 
review is incomplete because of the scope limitation. An incomplete 
review is not a sufficient basis for stating a conclusion regarding the 
broker's or dealer's assertions. In the case of a scope limitation, the 
auditor should withdraw from the engagement or should modify the review 
report to:
    a. Describe the scope limitation and any review procedures deemed 
necessary by the auditor that have been omitted and the reason for 
their omission;
    b. State that the auditor does not express any form of assurance on 
the broker's or dealer's assertions; and, if applicable,
    c. Describe the circumstances which cause one or more of the 
broker's or dealer's assertions not to be fairly stated, in all 
material respects.
    One commenter stated that auditors should use judgment in drafting 
an appropriate modification to the review report. Other commenters 
stated that the attestation standards should contain

[[Page 68940]]

examples of report modifications. The standard sets forth the necessary 
reporting elements for modified reports. Additional report examples may 
be considered if guidance is issued in the future.
    One commenter questioned the appropriateness of the requirement in 
paragraph 20 of the proposed review standard for the auditor to 
describe the omitted procedures and the reason for their omission. The 
commenter stated that as the reason for the omission of the review 
procedures is required in the description of the scope limitation 
itself, describing the omitted review procedures might overshadow the 
scope limitation. The commenter recommended that it would be more 
appropriate to generally describe the effect of the scope limitation on 
the engagement, without providing a list of omitted procedures that may 
have been considered necessary. Including in the review report a 
description of the scope limitation, the omitted procedures, and the 
reason for their omission are important elements of a modified review 
report given the nature of the procedures and the specificity of the 
exemption provisions. The discussion of the omitted procedures 
generally would provide the reader with additional information beyond 
the description of the scope limitation. As such, this recommendation 
has not been incorporated into the review standard.
    The same commenter also recommended that the review standard 
address the auditor's responsibility as it relates to report 
modifications when management's assertion is improperly presented or 
contains additional information. That commenter suggested that, in such 
circumstances, an explanatory paragraph should be included in the 
auditor's report. Paragraph 19 of the review standard requires the 
auditor to modify the review report to describe the reasons the 
assertions are not fairly stated, in all material respects, if one or 
more of the broker's or dealer's assertions are not fairly stated. This 
would include circumstances in which management's assertion is 
improperly presented, and other PCAOB standards address additional 
information.\120\
---------------------------------------------------------------------------

    \120\ See, e.g., AU sec. 550, Other Information in Documents 
Containing Audited Financial Statements.
---------------------------------------------------------------------------

Amendments
Auditing Standard No. 3
    The Board is adopting certain amendments to Auditing Standard No. 
3, Audit Documentation, to clarify that its requirements apply to 
examination engagements and review engagements. Auditing Standard No. 3 
establishes general requirements for documentation the auditor should 
prepare and retain in connection with engagements conducted pursuant to 
standards of the PCAOB, including the attestation standards of the 
PCAOB. The Board is amending Auditing Standard No. 3 to help auditors 
properly apply the relevant requirements in Auditing Standard No. 3 to 
attestation engagements, including the attestation engagements covered 
by the attestation standards. For example, paragraph 6 of Auditing 
Standard No. 3 includes a requirement for the auditor to document 
procedures performed, evidence obtained, and conclusions reached with 
respect to relevant financial statement assertions. An amendment to 
footnote 2 of paragraph 6 clarifies that, with respect to an engagement 
conducted pursuant to the attestation standards of the PCAOB, the 
relevant assertions are the assertions expressed by management or the 
responsible party regarding the subject matter of the attestation 
engagement.
    In addition, paragraph 12 of Auditing Standard No. 3 includes 
requirements regarding significant findings or issues and provides 
certain examples of significant findings or issues. Further, paragraph 
13 of Auditing Standard No. 3 requires the auditor to identify all 
significant findings or issues in an engagement completion document.
    The Board did not receive comments requiring revision to the 
amendments to Auditing Standard No. 3. As such, the amendments are 
adopted largely as proposed.
Auditing Standard No. 7
    The Board is adopting certain amendments to Auditing Standard No. 
7, Engagement Quality Review, to extend the requirements for an 
engagement quality review and concurring approval of issuance for the 
examination engagements and review engagements of brokers and dealers 
covered by these attestation standards. The proposal also included 
amendments that set forth certain procedures to be applied in an 
engagement quality review of the examination and review under these 
attestation standards.
    Commenters expressed a range of views. Some commenters generally 
supported the engagement quality review requirement for these 
attestation engagements as well as the required procedures. One 
commenter did not support requiring an engagement quality review for 
either an examination engagement or a review. Other commenters did not 
support engagement quality reviews for review engagements. Some 
commenters stated that additional guidance is necessary to implement 
the proposed amendments.
    Other commenters stated that as the audit and attestation standards 
have been separate bodies of literature, audit and attest standards 
should be kept separate. Those comments stated that to promote 
compliance with PCAOB standards, they believe that the Board should 
continue to maintain this structure. They also believe that the use of 
an amendment to adopt such significant changes in the literature may 
not sufficiently take into account a broader consideration of the 
affected engagements. For those firms that do not audit brokers or 
dealers, such changes also may go unnoticed.
    The Board considered the comments received regarding the amendments 
to Auditing Standard No. 7 and is adopting the amendments as proposed 
for both a compliance examination and a compliance review.
    Given the importance of the attestation engagements to investor 
protection and the high level of deficiencies observed by PCAOB 
inspection staff in areas that would be covered by the attestation 
engagements,\121\ the Board believes that engagement quality reviews 
can enhance the consistency of compliance with the SEC's rule. An 
effective engagement quality review can increase the likelihood of 
identifying significant engagement deficiencies before the examination 
or review report is issued. Additionally, the Board took note of the 
fact that, in a February 2011 AICPA Peer Review Alert, the AICPA 
designated audits of carrying brokers or dealers as a ``must select'' 
for peer review, recognizing the significant public interest in audits 
of such firms.\122\
---------------------------------------------------------------------------

    \121\ See PCAOB Release 2013-006, 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.
    \122\ See AICPA Peer Review Alert 11-01 (February 2011).
---------------------------------------------------------------------------

    Also, the emphasis in the attestation engagements regarding the 
coordination of the attestation engagement with the financial statement 
audit should reduce the audit effort required to complete the 
engagement quality review. To emphasize the coordination of the

[[Page 68941]]

attestation engagement with the financial statement audit in performing 
an engagement quality review, the proposed amendment to paragraph 18A 
of Auditing Standard No. 7 was modified to reflect that to evaluate 
significant judgments made by the engagement team and the related 
conclusions reached in forming the overall conclusion on the 
attestation engagement and in preparing the engagement report, the 
engagement quality review should take into account the procedures 
performed in the engagement quality review of the financial statement 
audit. The knowledge that the engagement quality reviewer gains from 
the engagement quality review of the audit and the specific steps in 
paragraph 18A should enable the engagement quality reviewer to identify 
whether there are any significant engagement deficiencies, or any 
indications of potential significant engagement deficiencies that 
warrant further investigation.
Other Areas of Comment
    The Board requested comment from interested parties on all aspects 
of the proposal. Several commenters included additional recommendations 
that have not yet been discussed. Those suggestions are discussed 
below.
Scalability of the Attestation Standards
    The Board requested comment regarding whether the proposed 
attestation standards are tailored appropriately for examinations and 
reviews related to compliance and exemption reports of brokers and 
dealers. Commenters who responded to the question generally agreed that 
the proposed attestation standards are tailored appropriately for 
examinations and reviews related to compliance and exemption reports of 
brokers and dealers. One commenter stated that they generally support 
the proposals and noted that the proposed standards had been clearly 
aligned with the SEC's proposed rule amendments.
    The Board also requested comment regarding whether the proposed 
attestation standards were appropriately scalable based on the size and 
complexity of the broker or dealer. Some commenters stated that the 
standards are proportionate and appropriately scalable based on the 
size and complexity of the broker or dealer, noting that paragraphs 11 
and 12 of Attestation Standard No. 1 are particularly helpful. Some 
commenters recommended that the Board provide additional guidance, 
including specific examples, regarding the application of scalability 
to these examination engagements. Other commenters expressed concern 
that without such guidance, application of the audit scalability 
concept could vary greatly across the audit profession. The requests 
for guidance may be taken into account if additional staff guidance is 
issued.
Commodity Futures Trading Commission Rules
    One commenter stated that for brokers and dealers that are also 
registered as a Futures Commission Merchant with the Commodity Futures 
Trading Commission (``CFTC''), it will be necessary for the PCAOB to 
recognize and address the requirements related to CFTC Rule 1.16 for 
the auditor to report on compliance therewith. The Commission stated in 
the SEC Release that its staff ``is in discussions with the CFTC staff 
concerning ways to align the reporting and audit requirements for 
dually registered broker-dealers/Futures Commissions Merchants with the 
goal of coordinating these requirements.'' \123\
---------------------------------------------------------------------------

    \123\ See the SEC Release at 8.
---------------------------------------------------------------------------

Independence
    Several commenters recommended that the discussion in the proposing 
release stating that auditors of non-issuer brokers and dealers are not 
subject to PCAOB Rules 3521 through Rule 3526 be included in the 
attestation standards. On February 28, 2012, the Board proposed 
amendments to require that registered firms that audit brokers and 
dealers comply with certain of the Board's professional practice 
standards including the Board's Rules relating to independence.\124\ 
The Board will consider relevant comments applicable to the Board's 
independence rules in connection with adopting final amendments.
---------------------------------------------------------------------------

    \124\ See Proposed Amendments to Conform PCAOB Rules and Forms 
to the Dodd-Frank Act and Make Certain Updates and Clarifications, 
PCAOB Release No. 2012-002 (February 28, 2012).
---------------------------------------------------------------------------

Period of the Examination and Review
    Some commenters stated that brokers and dealers should be allowed 
to assert compliance with the financial responsibility rules if it can 
identify deficiencies, implement effective controls, and test their 
operating effectiveness prior to year-end, and if the auditor also can 
adequately test the operating effectiveness of the remediated controls. 
SEC Rule 17a-5 requires the broker or dealer to assert that Internal 
Control Over Compliance was effective during the most recent fiscal 
year and as of the end of the most recent fiscal year. While this would 
require a broker or dealer to identify in its report Material 
Weaknesses in internal control that occurred during the most recent 
fiscal year, if those Material Weaknesses are remediated, it would 
allow the broker or dealer to assert that Internal Control Over 
Compliance was effective as of the end of the most recent fiscal year.
    Some commenters requested clarification about the time period for 
the assertion regarding exemption from the requirements of SEC Rule 
15c3-3 and indicate that they believe a point-in-time assertion would 
be sufficient. SEC Rule 17a-5 requires the broker or dealer to assert 
that it met, or met with exception, the identified exemption provisions 
in paragraph (k) of SEC Rule 15c3-3 throughout the most recent fiscal 
year end. The review standard has been updated to reflect this time 
period.
Providing Additional Guidance and Including Examples From the Proposing 
Release in the Examination Standard
    Several commenters recommended incorporating the additional 
discussion and examples included in the proposing release into the 
standard. The examples are not included in the attestation standards. 
Those examples were illustrative and did not impose requirements or 
define engagement requirements. Additional report examples may be 
considered, if guidance is issued in the future.
Other Considerations
Agreed-Upon Procedures Engagements
    SEC Rule 17a-5 largely carries forward the requirement that the 
broker or dealer file with SIPC a supplemental report that includes an 
accountant's report on applying agreed-upon procedures based on the 
performance of the procedures outlined in SEC Rule 17a-5.\125\
---------------------------------------------------------------------------

    \125\ See paragraph (e)(4)(ii) of SEC Rule 17a-5.
---------------------------------------------------------------------------

    These attestation standards do not affect the requirements for 
those agreed-upon procedures engagements. Auditors should continue to 
look to AT sec. 101, AT sec. 201, Agreed-Upon Procedures, and AT sec. 
601,\126\ for the requirements applicable to those engagements.
---------------------------------------------------------------------------

    \126\ See paragraphs .16-.29 of AT sec. 601.
---------------------------------------------------------------------------

Relationship to the Interim Attestation Standards
    In general terms, the requirements in the examination standard are 
consistent with the requirements of AT sec. 101 and AT sec. 601. 
However, when an auditor performs an engagement pursuant to the 
examination standard, AT sec. 101 and AT sec. 601 would not apply. For 
this reason, the examination standard includes, for example, a

[[Page 68942]]

section on general requirements that are consistent with those in AT 
sec. 101.
    The examination standard focuses specifically on performing an 
examination of the statements made by a broker or dealer in a 
compliance report and allows auditors to perform such engagements 
without looking to multiple attestation standards. In addition, the 
emphasis in the examination standard on appropriately coordinating the 
examination engagement with the audit of the financial statements and 
supplemental information should avoid unnecessary redundancy in the 
auditor's work.
Economic Considerations, Including Audits of Emerging Growth Companies
Economic Considerations
    As noted above, in developing the attestation standards, the 
Board's objective was to consider the SEC's amendments to SEC Rule 17a-
5 and evaluate whether its standards were appropriate for the SEC's 
requirements for examinations of compliance reports and reviews of 
exemption reports.
    As part of its process, the Board also considered the SEC's 
economic analysis related to its amendments to SEC Rule 17a-5. The 
SEC's analysis considers the economic effects, including the benefits 
and costs, of the new examinations of compliance reports and reviews of 
exemption reports that are now required by the SEC to be filed by 
registered brokers and dealers pursuant to SEC Rule 17a-5 and includes 
considerations relating to efficiency, competition, and capital 
formation.\127\
---------------------------------------------------------------------------

    \127\ See the SEC Release, which discusses costs and benefits of 
the requirements for examined compliance reports and reviewed 
exemption reports at 226-245.
---------------------------------------------------------------------------

    The SEC's economic analysis considered the Board's proposed 
attestation standards. As described in the SEC Release, after 
considering the views of commenters relating to anticipated costs, 
including with respect to the Board's proposed attestation standards, 
the SEC concluded that, while the total costs associated with the new 
compliance and review requirements would depend on the final PCAOB 
standards for attestation engagements, ``as the PCAOB's proposed 
standards were tailored to the proposed amendments, nothing in those 
standards causes the Commission to change its estimates of the costs 
associated with these requirements, or to question that the benefits 
will justify the costs.'' \128\ The Board notes that, as adopted, the 
new attestation standards are aligned with SEC Rule 17a-5, and most of 
the differences between the proposed standards and the attestation 
standards, as adopted, result from changes to conform to the SEC's 
final amendments to SEC Rule 17a-5.
---------------------------------------------------------------------------

    \128\ See the SEC Release at 241.
---------------------------------------------------------------------------

    In addition to considering the SEC's requirements and economic 
analysis, the Board also took into account other related economic 
considerations as discussed below.
Economic Baseline
    The SEC made the determination to require brokers and dealers to 
include in their annual reports either a compliance report that is 
examined by an auditor or an exemption report that is reviewed by an 
auditor.
    Therefore, the SEC Release contains a discussion of the economic 
baseline in its economic analysis. Aspects of the SEC's discussion of 
the baseline that are relevant to the attestation standards include:
     Before the SEC's amendments, Rule 17a-5 required that the 
audit under GAAS include a ``review'' of the broker's or dealer's 
accounting system, internal accounting control, and procedures for 
safeguarding securities.\129\ The scope of the auditor's work was 
required to be sufficient to provide reasonable assurance that any 
material inadequacies \130\ existing as of the date of the examination 
would be disclosed.
---------------------------------------------------------------------------

    \129\ See the SEC Release at 70.
    \130\ Prior to the SEC's amendments, paragraph (g)(3) of Rule 
17a-5 described a ``material inadequacy'' in a broker's or dealer's 
accounting system, internal accounting controls, procedures for 
safeguarding securities, and practices and procedures to include 
``any condition which has contributed substantially to or, if 
appropriate corrective action is not taken, could reasonably be 
expected to: (i) Inhibit a broker-dealer from promptly completing 
securities transactions or promptly discharging its responsibilities 
to customers, other broker-dealers or creditors; (ii) result in 
material financial loss; (iii) result in material misstatements of 
the broker-dealer's financial statements; or (iv) result in 
violations of the Commission's recordkeeping or financial 
responsibility rules to an extent that could reasonably be expected 
to result in the conditions described in [(i) through (iii)] 
above.'' See the SEC Release at 70, footnote 287.
---------------------------------------------------------------------------

     Before the SEC's amendments, if the broker or dealer was 
exempt from the reserve requirements rule, the auditor was required to 
ascertain that the conditions of the exemption were being complied with 
as of the examination date and that no facts came to the auditor's 
attention to indicate that the exemption had not been complied with 
during the period since the last examination.
    Under the SEC's amendments, audits of brokers and dealers are now 
required to be conducted in accordance with PCAOB standards, the 
material inadequacy report has been replaced with an examination of the 
compliance report, and the requirement to ascertain compliance with the 
exemption conditions has been replaced with a review of the exemption 
report.
Consideration of Alternatives and Additional Considerations
    In general, the Board sought to evaluate whether its attestation 
standards were appropriate for performing and reporting on the newly 
required examinations and reviews. The SEC is a key user of the new 
reports, which serve to facilitate the SEC's compliance oversight 
function. Accordingly, the Board's standards for those engagements 
needed to reflect a compliance focus and needed to be aligned with the 
requirements in SEC Rule 17a-5.
    The Board considered two principal alternatives: (1) Issuing 
guidance on applying existing PCAOB attestation standards to the new 
examination and review engagements, or (2) developing standards 
tailored to the requirements of SEC Rule 17a-5. In considering the 
first alternative, the Board observed that auditors performing 
examinations of compliance reports would need to look to a patchwork of 
requirements in existing attestation standards, including AT sec. 101 
and AT sec. 601, and apply them to the new examination of the 
compliance report and review of the exemption report. This could lead 
to more inconsistencies in compliance with the SEC's rule as compared 
to a tailored standard that sets forth the necessary procedures for 
complying with the SEC's rule.
    The Board preliminarily determined that a broker and dealer 
specific approach to examining compliance reports and reviewing 
exemption reports that is tailored to the SEC's rule would promote 
consistent audit practices and compliance with the SEC's rule because 
auditors could more readily determine the procedures necessary to meet 
the requirements for reasonable assurance in the examination and 
moderate assurance in the review. The greater clarity also can help 
facilitate more efficient use of audit resources, which can help 
mitigate the associated costs. Since the Board's initial proposal, the 
high level of auditing deficiencies observed by PCAOB inspections of 
audits of brokers and dealers under pre-existing standards have 
underscored the Board's initial concerns about the need for

[[Page 68943]]

standards that facilitate more consistent compliance with the SEC's 
rule.\131\
---------------------------------------------------------------------------

    \131\ See PCAOB Release 2013-006, 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.
---------------------------------------------------------------------------

    In developing the new standards, the Board took into account 
economic considerations, including taking note of commenters' views on 
the proposed attestation standards. The Board's approach is intended to 
focus and streamline the auditor's work in order to promote overall 
audit effectiveness and avoid duplicative procedures. The Board sought 
to ease the transition to the new standards and help lessen the effect 
of associated costs by:
     Building on principles and concepts in existing 
attestation standards, such as the general requirements in AT sec. 101, 
and the risk-based principles for testing controls as set forth in 
Auditing Standard No. 5, An Audit of Internal Control Over Financial 
Reporting That Is Integrated with An Audit of Financial Statements, and 
Auditing Standard No. 13, The Auditor's Responses to the Risks of 
Material Misstatement;
     Focusing the auditor's attention on the most important 
matters related to the objective of the examination or review, as 
applicable, including addressing the risk of misappropriation of 
customer assets;
     Requiring coordination of the attestation standards with 
the audit of the financial statements and audit procedures on the 
supplemental information, to enhance the effectiveness of the 
coordinated work and avoid unnecessary duplication of work; \132\ and
---------------------------------------------------------------------------

    \132\ By its terms, SEC Rule 17a-5 requires the financial 
statement audit and the compliance examination or review to be 
performed by the same auditor. See paragraph (g) of SEC Rule 17a-5.
---------------------------------------------------------------------------

     Establishing risk-based approaches for the examination and 
review that are scalable--that is, the required audit effort is 
commensurate with the broker's or dealer's size and complexity \133\--
and that facilitate consistent compliance with SEC Rule 17a-5.
---------------------------------------------------------------------------

    \133\ This view is also analogous to the SEC's view for 
preparation of the compliance report discussed in the SEC Release. 
In the SEC Release, the SEC observed that the controls necessary for 
a carrying broker or dealer that engages in limited custodial 
activities generally should be less complex than the controls 
necessary for a carrying broker or dealer that engages in more 
extensive custodial activities, so a carrying broker or dealer with 
limited custodial activities should have to expend less effort to 
make the statements in the compliance report regarding Internal 
Control Over Compliance. See the SEC Release at 229. Similarly, the 
necessary audit effort related to test controls should be less for 
brokers and dealers with limited custodial activities.
---------------------------------------------------------------------------

    The Board also considered commenters' views. Commenters on the 
Board's proposed attestation standards generally agreed that the 
proposed standards were appropriately tailored for the SEC's proposed 
amendments to Rule 17a-5. Notably, when the attestation standards were 
proposed, the PCAOB requested comment on whether the standards were 
appropriately scalable based on the size and complexity of the broker 
or dealer. Some commenters specifically agreed that the standards are 
scalable, and no commenters asserted that the standards are not 
scalable. Additionally, several comments on the proposed standards were 
no longer relevant because of changes the SEC made when it adopted the 
amendments.
    Some commenters on the proposed standards expressed concerns about 
costs associated with extending the requirements for engagement quality 
reviews to encompass the attestation engagements covered by these 
standards. In light of the importance of the attestation engagements to 
investor protection and the high level of deficiencies observed by 
PCAOB inspection staff in areas that would be covered by the 
attestation engagements, the Board believes that engagement quality 
reviews can enhance the consistency of compliance with the SEC's rule. 
An effective engagement quality review can increase the likelihood of 
identifying significant engagement deficiencies before the examination 
report or review report is issued. Additionally, the Board took note of 
the fact that, in a February 2011 AICPA Peer Review Alert, the AICPA 
designated audits of carrying brokers or dealers as a ``must select'' 
for peer review, recognizing the significant public interest in audits 
of such firms.\134\
---------------------------------------------------------------------------

    \134\ See AICPA Peer Review Alert 11-01 (February 2011).
---------------------------------------------------------------------------

    Regarding the incremental costs of engagement quality reviews, 
because engagement quality reviews are required for audits of financial 
statements under PCAOB standards, the requirements for auditors to 
coordinate their audits of the financial statements and attestation 
engagements should facilitate the engagement quality review of the 
attestation engagement and help mitigate incremental costs. 
Furthermore, the Board anticipates that incremental costs for an 
engagement quality review of an attest engagement will vary with the 
nature of the attest engagement. For example, the required effort for 
an engagement quality review of a review engagement generally would be 
less than for an examination engagement, and the required effort for an 
examination of a smaller, less complex broker or dealer generally would 
be less than for a larger, more complex broker or dealer.
Applicability to Audits of Emerging Growth Companies
    The Board is adopting the attestation standards pursuant to its 
authority under the Sarbanes-Oxley Act.\135\
---------------------------------------------------------------------------

    \135\ 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.''
---------------------------------------------------------------------------

    Before rules adopted by the Board can take effect, they must be 
approved by the SEC. Pursuant to Section 107(b)(3) of Sarbanes-Oxley 
Act, the SEC shall approve a proposed rule if it finds that the rule is 
``consistent with the requirements of [the] 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'') \136\ amended 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'') \137\ 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''.\138\
---------------------------------------------------------------------------

    \136\ Public Law 112-106, 126 Stat. 306 (2012).
    \137\ Section 3(a)(80) of the Exchange Act defines the term 
``emerging growth company.''
    \138\ See Section 103(a)(3)(C) of the Sarbanes-Oxley Act (15 
U.S.C. Sec.  7213(a)(3)), as amended by Section 104 of the JOBS Act, 
Public Law 112-106 (2012).
---------------------------------------------------------------------------

    As previously discussed, the attestation standards will apply 
solely in connection with audits of registered brokers and dealers 
pursuant to SEC Rule 17a-5. PCAOB staff has discussed the applicability 
of the JOBS Act to this rulemaking with the SEC staff. The PCAOB is not 
aware of any EGCs that

[[Page 68944]]

are also registered brokers or dealers.\139\ Moreover, the reporting 
regimes for registered brokers and dealers under SEC Rule 17a-5 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 and stands ready 
to assist the SEC with any additional analysis that may become 
necessary.
---------------------------------------------------------------------------

    \139\ PCAOB staff has reviewed the reported industry 
classifications in the most recent filings of those companies and 
read SEC filings of self-identified EGCs as necessary to ascertain 
whether any EGCs were brokers or dealers. 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.
---------------------------------------------------------------------------

Effective Date
    The attestation standards will be effective, subject to approval by 
the SEC, for examination engagements and review engagements for fiscal 
years ending on or after June 1, 2014. This effective date coincides 
with the effective date for the corresponding amendments to SEC Rule 
17a-5.\140\
---------------------------------------------------------------------------

    \140\ See the SEC Release at 2.
---------------------------------------------------------------------------

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

    The proposed rules discussed in this release are related to the 
proposed rules discussed in SEC Release No. 34-70843 (the ``proposed 
rules relating to Auditing Standard No. 17''). Because the PCAOB has 
requested that the Commission determine that the proposed rules 
relating to Auditing Standard No. 17 apply to audits of emerging growth 
companies, the Commission has determined to extend to February 13, 2014 
the date by which the Commission should take action on those proposed 
rules. 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, the 
Commission has also determined to extend to February 13, 2014 the date 
by which the Commission should take action on the proposed rules 
discussed in this release.

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 rule-comments@sec.gov. Please include 
File Number PCAOB-2013-01 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-2013-01. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet 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-
2013-01 and should be submitted on or before December 6, 2013.

By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-27344 Filed 11-14-13; 8:45 am]
BILLING CODE 8011-01-P


