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Attestation Standard No. 2

Review Engagements Regarding Exemption Reports of Brokers and Dealers

Effective Date: For audits of fiscal years ending on or after June 1, 2014

 

Final Rule: PCAOB Release No. 2013-007

Summary Table of Contents

(1–2) Introduction
(3–4) Objective
(5–14) Performing the Review Engagement
(15) Communication Requirements
(16–20) Reporting on the Review Engagement

Introduction

1.     This standard establishes requirements that apply when an auditor is engaged to perform a review1/ of the statements made by a broker2/ or dealer3/ in an exemption report ("exemption report") prepared pursuant to Securities and Exchange Act of 1934 ("Exchange Act") Rule 17a-5, 17 C.F.R. § 240.17a-5 ("SEC Rule 17a-5") of the U.S. Securities and Exchange Commission ("SEC").4/

2.     SEC Rule 17a-5 requires a broker's or dealer's exemption report to contain the following statements by the broker or dealer:

  1. A statement that identifies the provisions in paragraph (k) of SEC Rule 15c3-35/ (the "exemption provisions") under which the broker or dealer claimed an exemption from SEC Rule 15c3-3 (the "identified exemption provisions");
  2. 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
  3. 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.6/

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 assurance7/ 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:

  1. 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;
  2. 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
  3. 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:

  1. Have adequate technical proficiency in attestation engagements;
  2. Obtain an understanding of the exemption conditions and other rules and regulations that are relevant to the broker's or dealer's assertions;
  3. Determine the auditor's compliance with independence and ethics requirements; and
  4. 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.8/

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.9/ 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.

Review Procedures

8.     A review engagement includes the following procedures:

  1. 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;
  2. Performing inquiries and other review procedures set forth in this standard; and
  3. 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:

  1. 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 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,10/ including related parties that are investment advisors or entities with which the broker or dealer has a custodial or clearing relationship;
    (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
  2. 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:

  1. 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.
  2. 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.
  3. 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:
    1. 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.
    2. 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.
  4. 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.
  5. 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.
  6. Read regulatory filings of the broker or dealer that are relevant to the broker's or dealer's compliance with the exemption provisions.
  7. 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.

  8. 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.11/ If a broker's or dealer's assertion is not fairly stated, in all material respects, the auditor should:

  1. Modify the review report, as discussed in paragraph 19 of this standard; and
  2. 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:

  1. Acknowledging management's responsibility for compliance with the identified exemption provisions throughout the fiscal year;
  2. Stating the broker's or dealer's assertions and that they are the responsibility of management;
  3. 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
  4. 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 committee12/ 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.

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 1920:

  1. A title that includes the word independent;
  2. An identification of the exemption report and the broker's or dealer's assertions;
  3. 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;
  4. 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;
  5. 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;
  6. 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;
  7. The manual signature of the auditor's firm;
  8. 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
  9. 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 C.F.R. § 15c3-3(k) under which Z Broker claimed an exemption from 17 C.F.R. § 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 C.F.R. § 15c3-3(k) under which Z Broker claimed an exemption from 17 C.F.R. § 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:

  1. Describe the scope limitation and any review procedures deemed necessary by the auditor that have been omitted and the reason for their omission;
  2. State that the auditor does not express any form of assurance on the broker's or dealer's assertions; and, if applicable,
  3. 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.


1/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.

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)(ii) of SEC Rule 17a-5.

5/See 17 C.F.R. § 240.15c3-3 ("SEC Rule 15c3-3").

6/See paragraph (d)(4) of SEC Rule 17a-5.

7/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.

8/The auditor's responsibility to exercise due professional care is consistent with the description in paragraphs .40.41 of AT sec. 101.

9/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.

10/The auditor should look to the definition in the applicable financial reporting framework with respect to the term "related parties."

11/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.

12/For purposes of this standard, the term "audit committee" has the same definition as that in Auditing Standard No. 16, Communications with Audit Committees.