Auditing Challenging Fair Value Measurements: Evidence from the Field

The Accounting Review (Forthcoming)

Posted: 19 Feb 2013 Last revised: 15 Sep 2016

See all articles by Nathan H. Cannon

Nathan H. Cannon

Texas State University

Jean C. Bedard

Bentley University - Department of Accountancy

Date Written: May 1, 2016

Abstract

Concern about effective auditing of fair value measurements (FVMs) has risen in recent decades. Building on prior interview-based and experimental research, we provide an engagement-level analysis of challenging FVMs, using quantitative and qualitative data on audit phases from risk assessment to booking adjustments. Challenging FVMs have high estimation uncertainty, high subjectivity, significant/complex assumptions, and multiple valuation techniques. Estimation uncertainty is associated with higher inherent risk assessments, which are in turn predictive of client problems identified during the engagement. The use of a valuation specialist by auditors, associated with higher inherent risk and client specialist use, is a key decision: procedures performed by specialists have the highest yield in identifying problems. Auditor-client discussion of an adjustment increases with problem identification and auditors’ expressions of residual concern about uncertainty post-testing. However, booked audit adjustments are infrequent; the only factors explaining income-decreasing adjustments are better evidential support and breadth of problems identified.

Keywords: Auditing, Fair value measurement, Estimation uncertainty, Materiality

Suggested Citation

Cannon, Nathan Hatch and Bedard, Jean C., Auditing Challenging Fair Value Measurements: Evidence from the Field (May 1, 2016). The Accounting Review (Forthcoming). Available at SSRN: https://ssrn.com/abstract=2220445 or http://dx.doi.org/10.2139/ssrn.2220445

Nathan Hatch Cannon (Contact Author)

Texas State University ( email )

601 University Drive
San Marcos, TX 78666-4616
United States

Jean C. Bedard

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2410 (Phone)
781-891-2896 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
3,309
PlumX Metrics