An Interpretive Structural Modeling Approach to Analyze the Interaction between Factors of the Fair Value Measurement Audit Process

Abstract

Fair value measurements (FVM) have now emerged as an integral part of accounting and auditing standards. Many countries across the globe have initiated FVM-based standards and others are in the process of their adoption. The FVM audit process is, nevertheless, a tedious job for auditors, mainly because of the influence of numerous direct or indirect factors in the audit process and its outcome. A major issue for auditors is to identify and understand the complexity of these factors for a FVM audit. To the best of the authors' knowledge, extant literature discusses these factors independently but fails to identify and analyze their interrelationships and holistic impact on the FVM audit process. The authors strongly feel that a comprehensive study of these factors may help in a better understanding of the FVM audit process. With this backdrop, interpretive structural modeling (ISM) has been employed for studying and establishing the relationships among the factors in this article. While discussing the interdependence of factors, an attempt is also made to classify them as drivers (that affect others) and dependent (affected by driving) factors in the FVM audit process. Contextual areas of further research have also been identified. This study can be of use to practitioners, academicians, and standard-setting regulators to better understand the FVM audit process.

Prioritizing and Establishing Cause and Effect Relationships Among Financial Reporting Quality Metrics

“…The auditors face difficulty in auditing the fair value estimates due to estimation uncertainty and lack of reliable information. They rely on managerial estimates for determining fair values (Abdullatif, 2016; Doliya & Singh, 2016). Thus, in the context of FVA, the auditors’ report assumes special and extra significance, since auditors would, in general, not be expected to compromise on reliability of the information.…”

Effects of other comprehensive income on audit fees and audit report lag in Egyptian firms: does board gender diversity matter?

“…Early studies showed that earnings management practices increase the potential litigation risk and lead to higher AF (Abbott et al , 2006; Barron et al , 2001). Also, fair value under OCI increases the burden on auditors and require professional knowledge (Martin et al , 2006; Doliya and Singh, 2016), and it is difficult for auditors to obtain specialized valuation knowledge to effectively audit FV of certain financial assets and liabilities (Martin et al , 2006). Besides, OCI may require more audit effort as the investors react greatly to the OCI volatility.…”

“…Also, auditing the OCI may increase the audit effort to lower the detection risk. Moreover, auditors may find difficulties when auditing the FV under OCI and need professional knowledge (Doliya and Singh, 2016; Martin et al , 2006); in this line, the Egyptian Auditing Standard No (545): “a review of fair value measurement and disclosure” indicates that FV measurements are complex in nature and are characterized by a high degree of uncertainty (Egyptian Auditing Standards, 2008). Therefore, the auditor’s understanding of the FV measurement process and its complexity help him in identifying and assessing the risks of significant misstatement, to determine the nature, timing and extent of additional audit procedures.…”

Challenges Faced By Auditors When Estimating Fair Values. An Experiment in an Emerging Economy

“…Specific literature has identified several influential factors in the FV estimation audit, those often cited and transposed here in our own words being 'Fair value complexity', 'Estimation uncertainty', 'Managerial bias', 'Professional skepticism', 'Fair value estimate provider', 'Standards guidance', and 'Auditors understanding of the valuation process' (e.g. Bratten et al, 2013 or Doliya andSingh, 2016).…”