Use of Third Party Specialists’ Reports When Auditing Fair Value Measurements: Do Auditors Stay in their Comfort Zone?

• In Event: Specialists

Abstract

Recently, investors and regulators have shown significant interest in expanding and improving the role auditors play in contributing to the reliability of critical accounting estimates reported by their clients. Audits of critical accounting estimates require the effective evaluation of both the objective and subjective components of management’s estimate. Using the client’s 3rd party specialist report in the fair value (FV) auditing context, we examine the influence of the joint effects of the level of quantification in client evidence and client control environment risk on auditors’ planned substantive testing. While auditing standards and risk-based auditing do not support the selection of an audit approach based on the level of quantification in the client evidence, we find that in high client risk conditions, the level of quantification in audit evidence can influence auditors’ testing. In this study, auditors were least likely to test the subjective inputs of management’s FV estimate when the level of quantification in the client evidence was high in high client risk scenarios. In a second experiment, we provide evidence that the current regulatory approach of issuing practice alerts is not an effective way to motivate auditors to focus more attention on substantive testing of their clients’ subjective inputs. Thus, while prior studies find that attention to client risk can improve audit judgment, we show that auditor attention to client risk can exacerbate the influence of the quantification of client evidence on audit judgment, and that this effect is not remedied by simple interventions.

Authors

• Jennifer R. Joe, University of Delaware

• Scott David Vandervelde, University of South Carolina

• Yi-Jing Wu, Case Western Reserve University