The Audit of Fair Values and Other Estimates: The Effects of Underlying Environmental, Task, and Auditor-Specific Factors

Bratten, Brian; Gaynor, Lisa Milici; McDaniel, Linda S.; Montague, Norma R.; Sierra, Gregory E.

doi:10.2139/ssrn.2027492

Cited by 137 publications

(160 citation statements)

References 67 publications

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“…Existing research suggests that in certain circumstances, auditors may lack the requisite knowledge and expertise to appropriately assess the reasonableness of management's FVMs (e.g., Smith-Lacroix et al 2012;Bratten et al 2013;Griffith et al 2015a). To cope with the challenges of auditing complex FVMs, auditors often turn to pricing services and valuation specialists to evaluate complex finance and economic models (Martin, Rich, and Wilks 2006;Bratten et al 2013;Griffith et al 2015a;PCAOB 2015).…”

Section: Background and Related Literaturementioning

confidence: 99%

“…To cope with the challenges of auditing complex FVMs, auditors often turn to pricing services and valuation specialists to evaluate complex finance and economic models (Martin, Rich, and Wilks 2006;Bratten et al 2013;Griffith et al 2015a;PCAOB 2015). However, extensive reliance on pricing services and valuation specialists has led to PCAOB criticisms (e.g., PCAOB 2010a(e.g., PCAOB , 2010b(e.g., PCAOB , 2012a(e.g., PCAOB , 2014bBratten et al 2013).…”

Section: Background and Related Literaturementioning

confidence: 99%

“…Research in the area of auditing FVMs is limited (Martin et al 2006;Bratten et al 2013); however, a number of concurrent studies are underway.…”

Section: Background and Related Literaturementioning

confidence: 99%

“…4 Both Martin et al (2006) and Bratten et al (2013), as well as the PCAOB (2014aPCAOB ( , 2015, encourage research to better understand the process of auditing FVMs and to identify major challenges encountered. Concurrent studies, using semistructured interviews and field-based surveys, are beginning to fill this void in the literature (Cannon and Bedard 2017;Griffith et al 2015a;Griffith 2016;Glover et al 2016).…”

Section: Background and Related Literaturementioning

confidence: 99%

“…T he subjectivity inherent in estimating future events, coupled with the potential high degree of measurement uncertainty, makes auditing fair value measurements and other complex estimates (hereafter, collectively, FVMs) challenging for auditors (Public Company Accounting Oversight Board [PCAOB] 2007a, 2007bBratten, Gaynor, McDaniel, Montague, and Sierra 2013;Christensen, Glover, and Wood 2012;Glover, Taylor, and Wu 2016). 1 The challenging nature of auditing FVMs is consistent with repeated and frequent PCAOB reported inspection deficiencies identified for both financial and nonfinancial FVMs (e.g., PCAOB 2008a, 2010a, 2012a.…”

Section: Introductionmentioning

confidence: 99%

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

Glover

Taylor

2016

Auditing: A Journal of Practice &Amp; Theory

115

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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.

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Section: Background and Related Literaturementioning

confidence: 99%

Section: Background and Related Literaturementioning

confidence: 99%

“…Research in the area of auditing FVMs is limited (Martin et al 2006;Bratten et al 2013); however, a number of concurrent studies are underway.…”

Section: Background and Related Literaturementioning

confidence: 99%

Section: Background and Related Literaturementioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

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

Glover

Taylor

2016

Auditing: A Journal of Practice &Amp; Theory

115

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An Analysis of Auditors' Perceptions Related to Fair Value Estimates

Hermanson¹,

Kerler²,

Rojas³

2017

J Corp Accounting Finance

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This study investigates auditors' understanding of Level 1, 2, and 3 fair value estimates (FVEs) and their perceptions of the adequacy of the associated auditing standards and internal firm guidance. The results indicate that Level 1 and Level 2 FVEs are encountered more frequently than Level 3 FVEs, and that auditors perceive themselves to have the greatest knowledge and comfort related to Level 1 FVEs followed by Levels 2 and 3, respectively. Auditors believe Level 3 FVEs are the most difficult to audit, while Level 1 FVEs are the least difficult to audit. While still overall confident, auditors are the least confident opining on financial statements with significant Level 3 FVEs, followed by financial statements with Level 2 and Level 1 FVEs, respectively. Auditors believe professional auditing standards, internal firm guidance, and required disclosures related to FVEs are all adequate. Finally, auditors believe determining whether they have done “enough” is the greatest challenge when auditing FVEs, while the cost–benefit consideration is perceived as the greatest cause of FVE testing failures. © 2017 Wiley Periodicals, Inc.

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Fair value, management discretion, and audit fees: An empirical analysis

Miah

2019

J Corp Accounting Finance

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The main objective of this study is to investigate the impact of complexity resulting from fair value adoption on audit fees. Using a sample of 9,619 firm‐year observations from the United States, this study finds that auditors charge higher audit fees for firms exposed to higher level of complexity due to fair value adoption. More specifically, this study focuses on research and development expenditure, intangibles, goodwill, and property, plant and equipment to compute the intensity of complexity as these items are heavily affected by the fair value which is subject to management discretion. The results suggest that the greater level of complexity arising from the above sources increase auditors' efforts and risks level, thereby, results in higher audit fees. Further analysis, however, shows that auditors do not charge additional audit fees for complexity arising from goodwill if they have intangibles. It is because of economies of scale by auditors, they design their audit program which covers goodwill audit when they do audit for intangibles. Overall, the results support the proposition that judgmental or discretionary choice available for management increases audit risks, and auditors, to compensate higher risks, charge greater audit fees.

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The Audit of Fair Values and Other Estimates: The Effects of Underlying Environmental, Task, and Auditor-Specific Factors

Cited by 137 publications

References 67 publications

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

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

An Analysis of Auditors' Perceptions Related to Fair Value Estimates

Fair value, management discretion, and audit fees: An empirical analysis

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