How does the U.S. Securities and Exchange Commission decide to audit registered alternative investment companies?

Auditing Considerations for Brokers and DealersThe risk-based auditing approach set forth in PCAOB standards is designed to be scalable based on the facts and circumstances of the audit, including a company's size and complexity. The complexity of a broker or dealer is an important factor in the auditor's risk assessment and the determination of the necessary audit procedures to address the risks of material misstatement. In general, a smaller, less complex broker or dealer may have fewer lines of business, simpler processes, fewer employees, and fewer locations. A larger and more complex broker or dealer might have multiple lines of business, many branch locations, and decentralized accounting and compliance functions, which would necessarily require more time and attention by the auditor to understand its operations, environment, and the relevant controls. Also, a larger and more complex broker or dealer might enter into more complex transactions than a smaller, less complex broker or dealer. Regardless of the size of the broker or dealer, more complex transactions—for example, complex expense sharing and shared services agreements with related parties, less liquid harder-to-value securities, and international custody arrangements—generally warrant audit attention to address the associated risks of material misstatement.

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