AS 1201: Supervision of the Audit Engagement

AS 1201 is an auditing standard from the Public Company Accounting Oversight Board (PCAOB), the body that oversees public company audits to protect investors. Titled “Supervision of the Audit Engagement,” the standard provides the framework for supervising all members of an audit engagement team to ensure the work is performed effectively and complies with professional standards. This standard sets expectations for oversight throughout the engagement, outlining a system of control and review to promote audit quality. The requirements guide the audit’s leadership, ensuring that the work performed by every team member collectively supports the final opinion in the auditor’s report.

The Objective of Audit Supervision

The primary objective of audit supervision, as defined in AS 1201, is to ensure the audit engagement is conducted in a manner that supports an appropriate conclusion. This means the supervision process must be robust enough to confirm that the audit complies with all relevant PCAOB standards, rules, and regulations. Proper supervision directly influences the quality and reliability of the audit.

It involves directing the efforts of the engagement team members to ensure they understand their tasks and the objectives of the procedures they perform. This direction helps in focusing the team’s work on areas with higher risk of material misstatement. As team members complete their assigned work, supervisors review it to assess whether the evidence obtained is sufficient and appropriate, and if the results of the work support the conclusions reached.

Engagement Partner Responsibilities

The engagement partner holds the ultimate responsibility for the audit engagement and its performance. According to AS 1201, this individual is accountable for the proper supervision of every member of the engagement team. This overall responsibility cannot be delegated, even though the partner may seek assistance from other qualified members of the engagement team. The engagement partner retains ultimate accountability for the appropriateness of the work performed and the conclusions reached by the entire team.

A significant part of the engagement partner’s role is to foster an environment that promotes audit quality. This includes setting the right tone for the engagement, emphasizing the importance of professional skepticism, and encouraging team members to raise any concerns they may have. The partner is also responsible for ensuring the engagement team has the appropriate collective competence and time to perform the audit effectively.

The engagement partner is also specifically responsible for the issuance of the auditor’s report. This means they must be satisfied that sufficient appropriate audit evidence has been obtained to support the conclusions expressed in the report.

Required Supervisory Activities

AS 1201 specifies several distinct activities that must be performed to ensure proper supervision. A core requirement is to inform engagement team members of their responsibilities, which includes providing clear instructions. This involves making sure each team member understands their assigned tasks, the nature of the company’s business, and any potential risks relevant to their work.

A key supervisory activity is directing team members to bring significant accounting and auditing issues to the attention of their supervisors. Supervisors, in turn, are responsible for evaluating these issues and determining the appropriate actions needed to resolve them.

Reviewing the work of engagement team members is another supervisory activity. This review involves a careful evaluation of the work performed to assess whether the work was performed as directed, if the results are adequately documented, and if the objectives of the procedures were achieved. Supervisors are also responsible for resolving any differences in professional judgment among the members of the engagement team.

Documentation of Supervision

The requirements under AS 1201 mandate that supervisory activities are properly documented. Audit documentation, often referred to as workpapers, must provide clear evidence of the supervision that took place. This creates a record that can be reviewed by internal quality control personnel or PCAOB inspectors to verify compliance.

Specifically, the audit documentation must identify which person performed the work and the date the work was completed. It must also show who reviewed the work and the date of that review, creating a clear audit trail.

The extent of the documentation should be sufficient to enable an experienced auditor, having no previous connection with the engagement, to understand the nature, timing, extent, and results of the procedures performed. This includes understanding the evidence obtained and the conclusions reached. The workpapers serve as the primary evidence that the audit was not only properly planned and executed but also properly supervised.