Auditing Section Research Summaries Space

A Database of Auditing Research - Building Bridges with Practice

This is a public Custom Hive  public

research summary

    Current Practices and Challenges in Auditing Fair Value...
    research summary posted April 19, 2017 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards 
    179 Views
    Title:
    Current Practices and Challenges in Auditing Fair Value Measurements and Complex Estimates: Implications for Auditing Standards and the Academy
    Practical Implications:

    This study provides a more in-depth understanding of current audit practices related to auditors’ use of substantive approaches outlined in AS 2502. These results provide several important new insights, including more clearly distinguishing between auditors’ use of pricing services and valuation specialists and factors that drive this decision, as well as provide additional insights regarding differences in the use of valuation specialists for financial and nonfinancial FVMs. Finally, the results shed new light on whether audit challenges differ for financial versus nonfinancial FVMs.

    Citation:

    Glover, S. M., M. H. Taylor, and Y. Wu. 2017. Current Practices and Challenges in Auditing Fair Value Measurements and Complex Estimates: Implications for Auditing Standards and the Academy. Auditing: A Journal of Practice and Theory 36 (1): 63 – 84.

    Keywords:
    auditing fair value measurements and other complex estimates, pricing services, valuation specialists, financial fair value measurements, nonfinancial fair value measurements.
    Purpose of the Study:

    The subjectivity inherent in estimating future events, coupled with the potential high degree of measurement uncertainty, makes auditing fair value measurements and other complex estimates challenging for auditors. Because of this difficulty, auditors frequently rely on valuation specialists; however, the PCAOB has voiced criticisms as a result of such reliance. To provide a more complete picture of current practices and challenges encountered when auditing complex FVMs, this study has three primary objectives:

    • To obtain deeper insights into auditors’ use of substantive approaches to audit FVMs given criticisms of auditors’ substantive approaches
    • To provide improved understanding of auditors’ use of pricing services and valuation specialists (in-house and third-party) when auditing complex FVMs
    • To further explore challenges auditors encounter when auditing FVMs by distinguishing between financial versus nonfinancial FVMs and investigating how auditors respond when they encounter problems with management’s valuation expertise and knowledge
    Design/Method/ Approach:

    The authors employ a field-based survey that provides a channel for practitioners to openly express their opinions and views. 

    Findings:
    • The authors find that auditors are likely to use the first substantive approach (i.e., test management’s assumptions and underlying data) when auditing typical or lower-risk estimates, but as audit risk and complexity increase, they are more likely to use a combination of approaches.
    • The authors find that, despite AS 2502 allowing auditors to use management’s assumptions when developing an independent estimate, the results indicate that auditors typically opt instead to use the audit team’s own assumptions to derive independent estimates.
    • The authors find that a greater percentage of audit partners report using third-party valuation specialists to develop independent estimates for financial FVMs than for nonfinancial FVMs.
    • The authors find that a majority of the participants believe that challenges differ between financial and nonfinancial FVMs and the key reason is the lack of observable market information for nonfinancial FVMs. 
    Category:
    Standard Setting
    Sub-category:
    Changes in Audit Standards