AS 1201: Supervision of the Audit Engagement

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

Introduction

.01       This standard establishes requirements regarding supervision of the audit engagement, including supervising the work of engagement team 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 partner1 is responsible for the engagement and its performance. Accordingly, the engagement partner is responsible for proper supervision of the work of engagement team members and for compliance with PCAOB standards, including standards regarding using the work of specialists,2 other auditors, 3 internal auditors,4 and others who are involved in testing controls.5 Paragraphs .05-.06 of this standard describe the nature and extent of supervisory activities necessary for proper supervision of engagement team members.6

.04       The engagement partner may seek assistance from appropriate engagement team members 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. 

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 1015, 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

.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


Appendix A - Definition

.A1       For purposes of this standard, the term listed below is defined as follows:

.A2       Engagement partner - The member of the engagement team with primary responsibility for the audit.


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):

1Terms defined in Appendix A, Definitions, are set in boldface type the first time they appear.

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.

3AS 1205, Part of the Audit Performed by Other Independent Auditors.

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.

6See also paragraph .06 of AS 1015, Due Professional Care in the Performance of Work.

7AS 1015.06 and paragraph .05 of AS 2301, The Auditor's Responses to the Risks of Material Misstatement, establish requirements regarding the appropriate assignment of engagement team members.

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., paragraph .15 of AS 2101, Audit Planning, 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 and AS 1015.06.

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.


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

1See AS 1015.07–.09.