The PCAOB adopted a new standard Thursday that will enhance the requirements for auditing accounting estimates, including fair value measurements.
The board also voted to adopt amendments that will strengthen requirements that apply when auditors use the work of specialists in an audit. The standards are subject to final approval by the SEC.
Auditing Standard 2501, Auditing Accounting Estimates, Including Fair Value Measurements, replaces three standards with a single standard that emphasizes auditors’ responsibility to apply professional skepticism when auditing accounting estimates. The standard requires auditors to address potential management bias and provides more specific direction on auditing fair values of financial instruments that are based on information from third-party sources.
The standard promotes a more uniform approach to substantive testing for estimates and more explicitly integrates requirements with the PCAOB’s risk assessment standards to focus auditors on estimates with greater risk of material misstatement.
The amendments related to the work of specialists strengthen the requirements for evaluating the work of a company’s specialist, whether the specialist is employed or engaged by the company. The amendments also require a supervisory approach by the auditor when working with specialists the auditor either employs or engages.
“The board’s action today comes after thoughtful analysis and extensive external engagement on the prevalent use of accounting estimates and the auditor’s use of the work of specialists, recognizing that these are both challenging areas of the audit that needed to be addressed,” PCAOB Chairman William Duhnke said in a news release.
The subjective nature of accounting estimates and fair value has made this a challenging area for auditors for many years. The complex nature of estimates and fair value also has resulted in auditors’ using the work of specialists more often. When the work of specialists is not overseen and evaluated properly, auditors are more at risk of producing work that does not detect a material misstatement.
Upon approval by the SEC, the new standards and amendments will take effect for audits of financial statements for fiscal years ending on or after Dec. 15, 2020.
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.