United States

PCAOB proposes standard for auditing accounting estimates

FINANCIAL REPORTING INSIGHTS  | 

The Public Company Accounting Oversight Board (PCAOB) recently issued a proposed auditing standard, Auditing Accounting Estimates, including Fair Value Measurements, and Proposed Amendments to PCAOB Auditing Standards. The proposal would replace existing standards on auditing accounting estimates and fair value measurements with a single standard that:

  • Prompts auditors to devote greater attention to addressing potential management bias in determining accounting estimates and reinforces the need for professional skepticism
  • Extends certain key requirements in the existing standard on auditing fair value measurements to all accounting estimates to reflect a uniform approach to substantive testing. For estimates not currently subject to the fair value standard, this would:
    • Refine the three substantive approaches common to the existing accounting estimates standard to include more specificity, similar to the existing fair value standard
    • Describe the auditor's responsibilities for testing the individual elements of the company's process used to develop the estimate (i.e., assumptions, data and methods)
    • Set forth express requirements for the auditor to evaluate the company's method for developing the estimate
    • Require the auditor to take into account certain factors in determining whether significant assumptions that are based on the company's intent and ability to carry out a particular course of action are reasonable
  • Focuses auditors on estimates with greater risk of material misstatement
  • Provides specific requirements and direction to address certain aspects unique to auditing the fair value of financial instruments, including:
    • Establishing requirements for how to determine whether pricing information obtained from third-party pricing sources provides sufficient appropriate audit evidence
    • Requiring the auditor to understand, if applicable, how unobservable inputs were determined and evaluate the reasonableness of unobservable inputs
  • Makes other updates to the requirements for auditing accounting estimates to address particular aspects of auditing estimates, including:
    • Updating the description of what constitutes an accounting estimate
    • Setting forth specific requirements for testing data and pricing information used by the company or the auditor
    • Establishing more specific requirements for developing an independent expectation that vary depending on the source of data, assumptions or methods used by the auditor

The proposal is available for comment until August 30, 2017.