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

61 Pages Posted: 24 Mar 2012 Last revised: 26 Sep 2013

See all articles by Brian Bratten

Brian Bratten

University of Kentucky - Von Allmen School of Accountancy

Lisa Milici Gaynor

University of South Florida - School of Accountancy

Linda S. McDaniel

University of Kentucky - Von Allmen School of Accountancy

Norma R. Montague

Wake Forest University - School of Business

Gregory E Sierra

Southern Illinois University Edwardsville

Abstract

The rising prominence of fair values and other estimates (FVOEs) to financial reporting increases their significance to the audit. Based on inspections that report numerous deficiencies, the PCAOB is concerned that auditors are not sufficiently prepared for the challenges faced in evaluating fair value measurements. In this paper, we first analyze the possible sources for observed practice deficiencies by evaluating extant archival and experimental research. To organize our discussion, we rely on an established theoretical research framework that examines auditor judgment through an analysis of three critical and interactive factors of the judgment process — the environment, the task, and the person (Bonner 2008). We believe the framework is particularly useful in understanding judgments related to the audits of FVOEs given these areas have unique environmental and task factors such that addressing auditor characteristics alone to improve audit quality is likely to be insufficient. Second, considering the PCAOB-identified practice areas with direct implications for the audits of FVOEs, we develop and present future research lines of inquiry that take into account the important interactions among the three framework factors. We believe empirical evidence within these lines will help identify potential sources of and remedies for observed audit deficiencies.

Keywords: fair values, estimates, audit judgment, audit deficiencies

JEL Classification: M41

Suggested Citation

Bratten, Brian and Gaynor, Lisa Milici and McDaniel, Linda S. and Montague, Norma R. and Sierra, Gregory E., The Audit of Fair Values and Other Estimates: The Effects of Underlying Environmental, Task, and Auditor-Specific Factors. Auditing: A Journal of Practice & Theory, Vol. 32, No. Supplement-1, pp. 7-44, Available at SSRN: https://ssrn.com/abstract=2027492 or http://dx.doi.org/10.2139/ssrn.2027492

Brian Bratten (Contact Author)

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States
859-257-1947 (Phone)

HOME PAGE: http://gatton.uky.edu/faculty-research/departments/von-allmen-school-accountancy/directory

Lisa Milici Gaynor

University of South Florida - School of Accountancy ( email )

4202 E. Fowler Avenue, BSN 3403
Tampa, FL 33620-5500
United States

Linda S. McDaniel

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States

Norma R. Montague

Wake Forest University - School of Business ( email )

P.O. Box 7659
Winston-Salem, NC 27109
United States

Gregory E. Sierra

Southern Illinois University Edwardsville ( email )

Campus Box 1104
Edwardsville, IL 62026-1102
United States
618-650-2633 (Phone)

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