Current Practices and Challenges in Auditing Fair Value Measurements and Complex Estimates: Implications for Auditing Standards and the Academy

Abstract

SUMMARY:Auditing fair value measurements and other complex estimates (hereafter, FVMs) has received significant attention from regulators, practitioners, and researchers. Using a survey, we gather data from audit partners with FVM expertise to gain further insights in areas that have not been fully explored in the previous literature. Specifically, we extend the literature by providing a deeper understanding of the following areas: auditors' use of different substantive approaches to test higher-risk FVMs, auditors' use of pricing services and valuation specialists, and how challenges differ when auditing financial versus nonfinancial FVMs. In doing so, our findings and analyses extend prior research and coalesce pieces of several prior studies on auditing FVMs to provide a more complete picture of current auditing practices and challenges encountered by auditors. Our study provides insights useful in reconciling seemingly inconsistent findings in previous studies and provides important implications for future research, regulation, and standard-setting.

Mind the Gap: Why Do Experts Have Differences of Opinion Regarding the Sufficiency of Audit Evidence Supporting Complex Fair Value Measurements?

“…Our results have important implications for practitioners, researchers, regulators, standard setters, and inspectors worldwide as collective efforts continue to reduce reported deficiencies associated with audits of FVMs (e.g., IFIAR , ; PCAOB , ). Our findings suggest that the normative theory applied in most previous studies is necessary, but not sufficient to explain the level and extent of recurring deficiencies in audits of FVMs (Griffith, Hammersley, and Kadous ; Glover et al ). We find evidence of differences of opinion between auditor and inspector experts and the presence of the FVM gap.…”

“…Results presented in the current study are part of a larger survey, including results reported in Glover et al ().…”

“… Notes: The demographic information presented in this table is the same as that provided in Glover et al () because we used one survey to gather data for both studies. For certain questions, participants are able to select more than one option.…”

Prompting the Benefit of the Doubt: The Joint Effect of Auditor‐Client Social Bonds and Measurement Uncertainty on Audit Adjustments

“…In this setting, adding red marbles is analogous to upward distortion of a financial report, which, if left uncorrected by the auditor, increases the likelihood of audit failure and negative consequences for the auditor (e.g., Palmrose [], Chaney and Philipich [], Glover, Taylor, and Wu []). For simplicity, there is no literal value communicated by the reporter to the auditor, as the reporter's only action is to add red marbles.…”

External auditors' evaluation of a management's expert's credibility: Evidence from Australia

“…Previous research suggests that a lack of guidance from auditing standards on the use of experts (Griffith, 2013), a lack of availability of verifiable data and proprietary models used by experts in fair value measurements (Glover, Taylor, & Wu, 2017), and a coercive enforcement style adopted by the regulator (Dowling, Knechel, & Moroney, 2015) are contributing toward tension between auditors and regulators. Second, auditors perceive the ASIC's findings of inadequate audit evidence to stem from a lack of sufficient audit documentation and not necessarily from a lack of audit effort.…”