Sunday, October 8, 2017

Auditing Challenging Fair Value Measurements: Evidence from the Field

ABSTRACT

Concern about effective auditing of fair value measurements (FVMs) has risen in recent decades. Building on prior interview-based and experimental research, we provide an engagement-level analysis of challenging FVMs, using quantitative and qualitative data on audit phases from risk assessment to booking adjustments. Challenging FVMs have high estimation uncertainty, high subjectivity, significant/complex assumptions, and multiple valuation techniques. Estimation uncertainty is associated with higher inherent risk assessments, which are, in turn, predictive of client problems identified during the engagement. The use of a valuation specialist by auditors, associated with higher inherent risk and client specialist use, is a key decision: procedures performed by specialists have the highest yield in identifying problems. Auditor-client discussion of an adjustment increases with problem identification and auditors' expressions of residual concern about uncertainty post-testing. However, booked audit adjustments are infrequent; the only factors explaining income-decreasing adjustments are better evidential support and breadth of problems identified.

Keywords: auditing, fair value measurement, estimation uncertainty, materiality, valuation specialists

Article Citation:
Nathan H. Cannon and Jean C. Bedard (2017) Auditing Challenging Fair Value Measurements: Evidence from the Field. The Accounting Review: July 2017, Vol. 92, No. 4, pp. 81-114. 

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