Updates to Auditing and the Use of Specialists

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Two new standards to improve audits of accounting estimates and the work of specialists were recently voted in by The Public Company Accounting Oversight Board (PCAOB). The new guidance applies specifically to public companies. The new guidance is more consistent and will likely affect the audits of private companies that use accounting estimates or rely on the work of specialists.

Estimates

Financial statements generally report assets at fair value or use other accounting estimates, such as allowances for doubtful accounts, credit-losses and, impairments of long-lived assets. Accounting estimates might involve some level of measurement uncertainty, which means they can be susceptible to misstatement and require more focus from auditors.

The goal of PCAOB Release No. 2018-005, Auditing Accounting Estimates, Including Fair Value Measurements is to improve the audits of estimates. The new standard is risk-based and promotes more consistency in application. The application emphasizes the importance of professional skepticism when auditors are evaluating management’s estimates and the need to place greater attention to the potential of management bias. Under the updated standard auditors consider both corroborating and contradictory evidence that is uncovered in an audit.

Use of Specialists

Many accounting estimates are inherently complex or subjective and require the use of accounting specialists. Examples of these specialists include:

• Actuaries to determine employee benefit obligations
• Engineers to determine obligations regarding environmental remediation
• Appraisers to determine the value of intangible assets or real estate

The audit guidance for the use of specialists has been changed minimally since it was originally published in the 1970s. The guidance deals with auditors’ oversight of third-party specialists, as well as the auditor’s use of the work completed by a professional hired by management. The existing guidance requires that auditors assess the relationship between a specialist to the client, including situations that could impair the specialist’s objectivity. However, the guidance does not include specific requirements.

PCAOB Release No. 2018-006, Amendments to Auditing Standards for Auditor’s Use of the Work of Specialists, would provide greater direction when it comes to carrying out the evaluation. The updated standard would extend the responsibility of the auditor for evaluating specialists beyond simply obtaining an understanding of their work. The standard would require that auditors perform additional procedures in the evaluation of the appropriateness of the company’s data, as well as significant assumptions and the methods used. However, the new standard does not require that auditors redo the work done by the company’s specialist.

Updates to Come

The PCAOB issued these standards at the end of 2018 and is aiming to have both effective for audits of financial statements for fiscal years ending on or after December 15, 2020. The updated guidance is still awaiting approval from the Securities and Exchange Commission.

We can help you determine how these standards will affect your company’s audit procedures in the future. Contact us at 818-334-8623 or click here, and we will contact you.

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