United States

PCAOB adopts standard for auditing accounting estimates

FINANCIAL REPORTING INSIGHTS  | 

The Public Company Accounting Oversight Board (PCAOB) recently adopted an auditing standard, Auditing Accounting Estimates, including Fair Value Measurements, and amendments to other PCAOB auditing standards. The new standard replaces 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, as part of applying professional skepticism
  • Extends certain key requirements in the existing standard on auditing fair value measurements to other accounting estimates in significant accounts and disclosures, reflecting a uniform approach for substantive testing for estimates. For estimates not currently subject to the fair value standard, this will:
    • 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., methods, data and significant assumptions)
    • 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 a special topics appendix to address certain aspects unique to auditing fair values of financial instruments
  • 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

Subject to approval by the SEC, the new standard and related amendments will be effective for audits of financial statements for fiscal years ending on or after December 15, 2020.