PCAOB updates requirements on auditing accounting estimates, using specialists

By Neil Amato

The PCAOB has issued new requirements for auditing accounting estimates and fair value measurements and using the work of specialists. The board is seeking comments on the new requirements.

As the use of sometimes complex accounting estimates and fair value measurements grows in financial reporting, such estimates become high-risk for auditors, the PCAOB said.

Likewise, the use of specialists is increasing in both frequency and significance. "If a specialist's work is not properly overseen or evaluated by the auditor, there may be a heightened risk that the auditor's work will not be sufficient to detect a material misstatement in accounting estimates," the PCAOB said.

Auditing accounting standards and fair value measurements

The new, single standard sets forth a uniform, risk-based approach, the PCAOB said. It emphasizes that auditors need to apply professional skepticism, including addressing potential management bias, when auditing accounting estimates.

The new standard also provides more direction on addressing certain aspects unique to auditing fair values of financial instruments, including the use of pricing information from third parties such as pricing services and brokers or dealers, according to the PCAOB.

Auditing Accounting Estimates (AS 2501) will be updated and retitled Auditing Accounting Estimates, Including Fair Value Measurements (AS 2501). Two other standards, Auditing Fair Value Measurements and Disclosures (AS 2502) and Auditing Derivative Instruments, Hedging Activities, and Investments in Securities (AS 2503), will be superseded.

Auditing the work of specialists

The PCAOB said its amendments strengthen the requirements for evaluating the work of a company's specialist, whether employed or engaged by the company. The amendments "are designed to increase audit attention in areas where a specialist is used and to align the applicable requirements with the PCAOB's risk assessment standards," the PCAOB said.

The amendments also apply a supervisory approach to both auditor-employed and auditor-engaged specialists.

The PCAOB amended two existing auditing standards, AS 1105, Audit Evidence, and AS 1201, Supervision of the Audit Engagement. It retitled and replaced AS 1210, Using the Work of a Specialist, with a new AS 1210, Using the Work of an Auditor-Engaged Specialist.

The PCAOB expects to produce a report in the fourth quarter of 2022 to communicate findings and provide stakeholders with early insights into the initial impact of the requirements.

Comments are due by June 10. Comments by email should refer to "Interim Analysis No. 2022-001, Estimates and Specialists Audit Requirements" in the subject line. They can be sent to comments@pcaobus.org.

The new requirements for auditing accounting estimates and using the work of specialists became effective for audits of fiscal years ending on or after Dec. 15, 2020.

— To comment on this article or to suggest an idea for another article, contact Neil Amato at Neil.Amato@aicpa-cima.com.

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