Mind the Gap: Why do Experts Have Differences of Opinion Regarding the Sufficiency of Audit Evidence Supporting Complex Fair Value Measurements?

59 Pages Posted: 4 Oct 2014 Last revised: 4 Mar 2018

See all articles by Steven M. Glover

Steven M. Glover

Brigham Young University

Mark H. Taylor

University of South Florida, Muma College of Business, Lynn Pippenger School of Accountancy

Yi-Jing Wu

Texas Tech University - Rawls College of Business

Date Written: March 1, 2018

Abstract

Reported deficiencies continue to persist in audits of fair value measurements and other complex accounting estimates (hereafter, “FVMs”), despite improvements in auditor performance observed by regulators. The persistence of reported deficiencies in audits of FVMs suggests that factors underlying this trend may be more complicated and multidimensional than previously suggested by regulators and academic research, which has focused largely on auditors’ unsatisfactory performance as the principal source of reported deficiencies. Drawing from the judgment and decision-making expertise literature, we gather field-based data from audit experts to identify additional factors that are likely to be contributing to differences of opinions between audit and inspection experts and the persistence of reported deficiencies in audits of FVMs. We find evidence that audit experts interpret standards and evaluate audit evidence differently than inspectors, and thus perceive there to be a gap between what auditors and inspectors regard as sufficient appropriate audit evidence to support audits of FVMs (hereafter, “FVM gap”). Moreover, results highlight several areas in audits of FVMs where differences of opinion exist between auditor and inspector experts regarding what constitutes a reported deficiency. Within the contexts we examine, our results identify additional factors, beyond deficient auditor performance, that may contribute to the FVMs gap. We also report audit partners’ recommendations for ways to reduce the FVMs gap and suggest avenues for future research. Gaining a more complete understanding of sources contributing to reported deficiencies will help regulators, standard setters, audit firms, and academics to identify ways to reduce the FVMs gap and reported deficiencies in audits of FVMs.

Keywords: Auditing of Fair Value Measurements, PCAOB Inspections, Estimation Uncertainty

JEL Classification: M42, M48

Suggested Citation

Glover, Steven M. and Taylor, Mark H. and Wu, Yi-Jing, Mind the Gap: Why do Experts Have Differences of Opinion Regarding the Sufficiency of Audit Evidence Supporting Complex Fair Value Measurements? (March 1, 2018). Available at SSRN: https://ssrn.com/abstract=2504521 or http://dx.doi.org/10.2139/ssrn.2504521

Steven M. Glover

Brigham Young University ( email )

Provo, UT 84602
United States
801-422-6080 (Phone)
801-422-0621 (Fax)

Mark H. Taylor

University of South Florida, Muma College of Business, Lynn Pippenger School of Accountancy ( email )

4202 E. Fowler Avenue
Tampa, FL 33620
United States
(813) 974-6516 (Phone)

Yi-Jing Wu (Contact Author)

Texas Tech University - Rawls College of Business ( email )

703 Flint Avenue
Lubbock, TX 79409
United States
216-368-8895 (Phone)

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