AS 1201: Supervision of the Audit Engagement

Adopting Release:  PCAOB Release No. 2010-004
Guidance on AS 1201: Staff Audit Practice Alerts  No. 6,  No. 8, and  No. 10

Introduction

.01       This standard establishes requirements regarding supervision of the audit engagement, including supervising the work of engagement team1 members. 

Objective

.02       The objective of the auditor is to supervise the audit engagement, including supervising the work of engagement team members so that the work is performed as directed and supports the conclusions reached.

Responsibility of the Engagement Partner for Supervision

.03       The engagement partner1A is responsible for the engagement and its performance. Accordingly, the engagement partner is responsible for proper supervision of the work of engagement team members1B (including engagement team members outside the engagement partner’s firm). The engagement partner also is responsible for compliance with PCAOB standards, including standards regarding: using the work of specialists,2 internal auditors,4 and others who are involved in testing controls;5 and dividing responsibility with another accounting firm.5A Paragraphs .05–.06 of this standard describe the nature and extent of supervisory activities necessary for proper supervision of engagement team members. Paragraphs .07–.15 of this standard further describe procedures to be performed by the lead auditor with respect to the supervision of the work of other auditors in conjunction with the required supervisory activities set forth in this standard.6A

.04       The engagement partner may seek assistance from appropriate engagement team members (which may include engagement team members outside the engagement partner’s firm) in fulfilling his or her responsibilities pursuant to this standard. Engagement team members who assist the engagement partner with supervision of the work of other engagement team members also should comply with the requirements in this standard with respect to the supervisory responsibilities assigned to them. 

Note: When the engagement partner seeks assistance, the engagement partner nevertheless retains primary responsibility for the engagement and its performance. The assistance provided by appropriate engagement team members to supervise, including review, the work of other engagement team members does not replace or reduce the engagement partner’s responsibility. 

Supervision of Engagement Team Members

.05        The engagement partner and, as applicable, other engagement team members performing supervisory activities, should:

  1. Inform engagement team members of their responsibilities,7 including:
    1. The objectives of the procedures that they are to perform;
    2. The nature, timing, and extent of procedures they are to perform; and
    3. Matters that could affect the procedures to be performed or the evaluation of the results of those procedures, including relevant aspects of the company, its environment, and its internal control over financial reporting,8 and possible accounting and auditing issues;

  2. Direct engagement team members to bring significant accounting and auditing issues arising during the audit to the attention of the engagement partner or other engagement team members performing supervisory activities so they can evaluate those issues and determine that appropriate actions are taken in accordance with PCAOB standards;9

    Note: In applying due professional care in accordance with AS 1000, each engagement team member has a responsibility to bring to the attention of appropriate persons, disagreements or concerns the engagement team member might have with respect to accounting and auditing issues that he or she believes are of significance to the financial statements or the auditor’s report regardless of how those disagreements or concerns may have arisen.

  3. Review the work of engagement team members to evaluate whether:
    1. The work was performed and documented;
    2. The objectives of the procedures were achieved; and
    3. The results of the work support the conclusions reached.10

    Note 1: The review and evaluation must be completed prior to the report release date (see AS 1215.06 and .15).

    Note 2: Notwithstanding assistance from other engagement team members performing supervisory activities, the engagement partner, as the individual primarily responsible for the engagement and its performance, must review documentation sufficient to determine that (i) the engagement was performed as planned; (ii) significant judgments were appropriate and significant findings and issues, along with matters brought to the engagement partner’s attention pursuant to paragraph .05b, were appropriately addressed; (iii) the conclusions expressed in the auditor’s report are appropriate and supported by sufficient appropriate evidence; and (iv) matters requiring communication under applicable professional and legal requirements are appropriately identified and communicated. The engagement partner’s review should include review of documentation of significant findings or issues (see AS 1215.12) and review of documentation required to be reviewed by the engagement quality reviewer pursuant to the requirements of paragraphs .09-.10 and .14-.15 of AS 1220, Engagement Quality Review.

.06       To determine the extent of supervision necessary for engagement team members to perform their work as directed and form appropriate conclusions, the engagement partner and other engagement team members performing supervisory activities should take into account:

  1. The nature of the company, including its size and complexity;11
  2. The nature of the assigned work for each engagement team member, including:
    1. The procedures to be performed, and
    2. The controls or accounts and disclosures to be tested; 
  3. The risks of material misstatement; and

  4. The knowledge, skill, and ability of each engagement team member.12

    Note: In accordance with the requirements of AS 2301.05, the extent of supervision of engagement team members should be commensurate with the risks of material misstatement.13

Procedures to Be Performed by the Lead Auditor with Respect to the Supervision of Work Performed by Other Auditors14

.07       For engagements that involve other auditors, paragraphs .08–.15 further describe procedures to be performed by the lead auditor with respect to the supervision of the work of other auditors, in conjunction with the required supervisory activities set forth in this standard. The requirements in paragraphs .08–.15 supplement the requirements in paragraph .05 of this standard. In performing the procedures described in paragraphs .08–.15, the lead auditor should determine the extent of supervision of the other auditors’ work in accordance with paragraph .06 of this standard.

.08       The lead auditor should inform the other auditor in writing of the following matters:

  1. The scope of work to be performed by the other auditor; and
  2. With respect to the work requested to be performed:
    1. The identified risks of material misstatement to the consolidated financial statements that are associated with the location or business unit;15
    2. Tolerable misstatement;16 and
    3. The amount (if determined) below which misstatements are clearly trivial and do not need to be accumulated.17

Note: The lead auditor should, as necessary, hold discussions with and obtain information from the other auditor to facilitate the performance of procedures described in paragraph .08.

.09       The lead auditor should obtain and review the other auditor’s written description of the audit procedures to be performed pursuant to the scope of work described in paragraph .08a. The lead auditor should inform the other auditor of the necessary level of detail of the description (e.g., planned audit procedures for certain accounts and disclosures), which detail should be determined based on the necessary extent of supervision of the other auditor’s work by the lead auditor.

Note: As the necessary extent of supervision increases, the lead auditor (rather than the other auditor) may need to determine the nature, timing, and extent of procedures to be performed by the other auditor.

.10       The lead auditor should determine whether any changes to the other auditor’s planned audit procedures (see paragraph .09) are necessary, and if so, should discuss the changes with, and communicate them in writing to, the other auditor.

.11       The lead auditor should obtain and review a written affirmation as to whether the other auditor has performed the work in accordance with the instructions described in paragraphs .08–.10, including the use of applicable PCAOB standards, and if the other auditor has not, a description of the nature of, and explanation of the reasons for, the instances where the work was not performed in accordance with the instructions, including (if applicable) a description of the alternative work performed.

.12       The lead auditor should direct the other auditor to provide specified documentation concerning work requested to be performed, based on the necessary extent of its supervision of the other auditor’s work. This documentation should include, at a minimum, the documentation described in AS 1215.19. The lead auditor should review the documentation provided by the other auditor.

.13       The lead auditor should determine, based on a review of the documentation provided by the other auditor (pursuant to paragraphs .09, .11, and .12), discussions with the other auditor, and other information obtained by the lead auditor during the audit:

  1. Whether the other auditor performed the work in accordance with the lead auditor’s instructions received pursuant to paragraphs .08 and .10, including the use of applicable PCAOB standards; and
  2. Whether additional audit evidence should be obtained by the lead auditor or other auditor, for example, to address a previously unidentified risk of material misstatement or when sufficient appropriate audit evidence has not been obtained with respect to one or more locations or business units in response to the associated risks.18

Multi-tiered Audits

14       In multi-tiered audits,19 the lead auditor may seek assistance from a first other auditor in performing the procedures in paragraphs .08–.13 with respect to one or more second other auditors, if appropriate pursuant to the factors in paragraph .06. The lead auditor, in supervising the first other auditor, should evaluate the first other auditor’s supervision of the second other auditor’s work. If the first other auditor assists the lead auditor by performing procedures in paragraph .08, the lead auditor should obtain, review, and retain documentation that identifies the scope of work to be performed by the second other auditor.

Note: In multi-tiered audits, for purposes of complying with AS 1215.19 with respect to the work performed by a second other auditor, the lead auditor may request that the first other auditor both (i) obtain, review, and retain the audit documentation described in AS 1215.19 related to the second other auditor’s work and (ii) incorporate the information in that documentation in the first other auditor’s documentation that it provides to the lead auditor pursuant to AS 1215.19.

.15       If the first other auditor is assisting the lead auditor in supervising the second other auditor, the lead auditor should take into account the first other auditor’s review of the second other auditor’s work in determining the extent of its own review, if any, of the second other auditor’s work.20

Appendix A - Definitions

.A1       For purposes of this standard:

  1. The term “engagement partner” means the member of the engagement team with primary responsibility for the audit.

  2. The terms “engagement team,” “lead auditor,” “other auditor,” and “referred-to auditor” have the same meaning as defined in Appendix A of AS 2101, Audit Planning.

Appendix B - [Reserved]

Appendix C - Supervision of the Work of Auditor-Employed Specialists

.C1       For engagements in which a specialist employed by the auditor's firm ("auditor-employed specialist") assists the auditor in obtaining or evaluating audit evidence with respect to a relevant assertion of a significant account or disclosure, this appendix describes supervisory activities to be performed in conjunction with supervising the work of an auditor-employed specialist in an audit. The requirements in this appendix supplement the requirements in paragraphs .05–.06 of this standard.

Note:  For purposes of this standard, a specialist is a person possessing special skill or knowledge in a particular field other than accounting or auditing. Because income taxes and information technology are specialized areas of accounting and auditing, this appendix does not apply to situations in which a person with specialized skill or knowledge in income taxes or information technology participates in the audit. Paragraphs .03–.06 of this standard apply in those situations.

.C2       The necessary extent of supervision of an auditor-employed specialist depends on: (1) the significance of the specialist's work to the auditor's conclusion regarding the relevant assertion; (2) the risk of material misstatement of the relevant assertion; and (3) the knowledge, skill, and ability of the specialist.

Informing the Auditor-Employed Specialist of Work to be Performed

.C3       The engagement partner and, as applicable, other engagement team members performing supervisory activities should inform the specialist of the work to be performed, which includes establishing and documenting an understanding with the specialist regarding the following:

  1. The responsibilities of the specialist, including the objectives of the work to be performed;
  2. The nature of the work that the specialist is to perform or assist in performing (for example, testing the company's process used to develop an accounting estimate, including when a company's specialist is involved in developing the estimate, or developing an independent expectation of an estimate);
  3. The degree of responsibility of the specialist for:
  1. Testing data produced by the company, or evaluating the relevance and reliability of data from sources external to the company;
  2. Evaluating the significant assumptions used by the company or the company's specialist, or developing his or her own assumptions; and
  3. Evaluating the methods used by the company or the company's specialist, or using his or her own methods; and
  1. The responsibility of the specialist to provide a report, or equivalent documentation, to the engagement partner and, as applicable, other engagement team members performing supervisory activities that describes the work performed, the results of the work, and the findings or conclusions reached by the specialist.

.C4       Pursuant to paragraph .05a(3) of this standard, the engagement partner and, as applicable, other engagement team members performing supervisory activities should inform the specialist about matters that could affect the specialist's work. This includes, as applicable, information about the company and its environment, the company's processes for developing the related accounting estimate, the company's use of specialists in developing the estimate, relevant requirements of the applicable financial reporting framework, possible accounting and auditing issues, and the need to apply professional skepticism.1

.C5       The engagement partner and, as applicable, other engagement team members performing supervisory activities should implement measures to determine that there is a proper coordination of the work of the specialist with the work of other relevant engagement team members to achieve a proper evaluation of the evidence obtained in reaching a conclusion about the relevant assertion. This includes:

  1. If an auditor's specialist is used to develop (or assist in developing) an independent expectation of an accounting estimate, measures to comply with paragraphs .21–.26 of AS 2501, Auditing Accounting Estimates, Including Fair Value Measurements;
  2. If an auditor's specialist is used to test (or assist in testing) the company's process to develop an accounting estimate, measures to comply with AS 2501.09–.18; or
  3. If an auditor's specialist is used to evaluate the work of a company's specialist, measures to comply with Appendix A to AS 1105, Audit Evidence, and, for accounting estimates, AS 2501.19.

Evaluating the Work of the Auditor-Employed Specialist

.C6       The engagement partner and, as applicable, other engagement team members performing supervisory activities should review the report, or equivalent documentation, provided by the specialist pursuant to paragraph .C3d above and evaluate whether the specialist's work provides sufficient appropriate evidence, specifically whether:

  1. The specialist's work and report, or equivalent documentation, are in accordance with the auditor's understanding with the specialist; and
  2. The specialist's findings and conclusions are consistent with results of the work performed by the specialist, other evidence obtained by the auditor, and the auditor's understanding of the company and its environment.

.C7       If the specialist's findings or conclusions appear to contradict the relevant assertion or the specialist's work does not provide sufficient appropriate evidence, the engagement partner and, as applicable, other engagement team members performing supervisory activities should perform additional procedures, or request the specialist to perform additional procedures, as necessary to address the issue.

Note:  Examples of situations in which additional procedures ordinarily are necessary include: (1) the specialist's work was not performed in accordance with the auditor's instructions; (2) the specialist's report, or equivalent documentation, contains restrictions, disclaimers, or limitations that affect the auditor's use of the report or work; (3) the specialist's findings and conclusions are inconsistent with (i) the results of the work performed by the specialist, (ii) other evidence obtained by the auditor, or (iii) the auditor's understanding of the company and its environment; (4) the specialist lacks a reasonable basis for data or significant assumptions the specialist used; or (5) the methods used by the specialist were not appropriate.

Footnotes (AS 1201 - Supervision of the Audit Engagement):

1The term “engagement team,” as used in this standard, has the same meaning as defined in Appendix A of AS 2101, Audit Planning.

1AThe term “engagement partner” is defined in Appendix A, Definitions, and is set in boldface type the first time it appears.

1BSee also paragraph .10 of AS 1000, General Responsibilities of the Auditor in Conducting an Audit, for an additional description of due professional care as it relates to the engagement partner..

2 Appendix C describes further procedures to be performed with respect to the supervision of the work of auditor-employed specialists in conjunction with the required supervisory activities set forth below. AS 1210, Using the Work of an Auditor-Engaged Specialist, and Appendix A of AS 1105, Audit Evidence, establish requirements for an auditor using the work of an auditor-engaged specialist and a company’s specialist, respectively, in performing an audit of financial statements.

[3][Footnote deleted.]

4AS 2605, Consideration of the Internal Audit Function. 

5Paragraphs .16–.19 of AS 2201, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements.

5ASee AS 1206, Dividing Responsibility for the Audit with Another Accounting Firm. 

6[Footnote deleted.]

6AThe terms “lead auditor” and “other auditor,” as used in this standard, have the same meaning as defined in Appendix A of AS 2101.

7Paragraph .05 of AS 2301, The Auditor’s Responses to the Risks of Material Misstatement, establishes requirements regarding the appropriate assignment of engagement team members. See also AS 1000.10, for an additional description of due professional care as it relates to the engagement partner.

8AS 2110, Identifying and Assessing Risks of Material Misstatement, describes the auditor's responsibilities for obtaining an understanding of the company, its environment, and its internal control over financial reporting.

9See, e.g., AS 2101.15, AS 2110.74, and paragraphs .20–.23 and .35–.36 of AS 2810, Evaluating Audit Results.

10AS 2810 describes the auditor's responsibilities for evaluating the results of the audit, and AS 1215, Audit Documentation, establishes requirements regarding audit documentation.

11AS 2110.10.

12See also AS 2301.05a.

13AS 2301.05b indicates that the extent of supervision of engagement team members is part of the auditor's overall responses to the risks of material misstatement.

14AS 1206 sets forth the lead auditor’s responsibilities when dividing responsibility for the audit of the company’s financial statements and, if applicable, internal control over financial reporting with a referred-to auditor.

15See requirements in AS 2110.49–.53 with respect to discussions among key engagement team members (including those in differing locations) regarding risks of material misstatement including the potential for material misstatement due to fraud. See also requirements in AS 2110.59 regarding the auditor’s responsibility to identify and assess the risks of material misstatement at the financial statement level and assertion level.

16See paragraphs .08–.10 of AS 2105, Consideration of Materiality in Planning and Performing an Audit.

17See AS 2810.10–.11.

18See AS 2810.35–.36.

19Multi-tiered audits are those in which the engagement team is organized in a multi-tiered structure, e.g., whereby an other auditor assists the lead auditor in supervising a second other auditor or multiple second other auditors.

20See paragraph .14, regarding the lead auditor’s evaluation of the first other auditor’s supervision, including review.

Footnotes (Appendix C of AS 1201 - Supervision of the Audit Engagement):

1See paragraph .11 of AS 1000, General Responsibilities of the Auditor in Conducting an Audit, for further discussion of the concept of professional skepticism.