Auditing Fair Values, written by Mark Kohlbeck, CPA, Ph.D., Assistant Professor at Florida Atlantic University, explains and analyzes the rules and best practices for auditing fair values under U.S. and international auditing standards. Principal U.S. auditing procedures are prescribed by AICPA Statement of Auditing Standards No. 101, Auditing Fair Values, which the Public Company Accounting Oversight Board has endorsed for audits of issuers (i.e., public companies). Internationally, procedures for auditing fair values are set forth in International Standard on Auditing No. 540 (Revised and Redrafted), Auditing Accounting Estimates Including Fair Value Accounting Estimates and Related Disclosures.
This Portfolio summarizes fair value accounting to the extent necessary to illuminate the users' understanding of auditing fair values.
Auditing Fair Values describes the major auditing procedures within the framework of three significant steps in the timeline of a typical audit—planning, interim procedures, and year-end procedures.
This Portfolio further explores other essential aspects of auditing fair values that transcend the audit timeline. These subjects include sources of audit evidence, using an expert in auditing fair values, auditing fair values in inactive markets, and issues in auditing fair values that tend to occur in particular industries. It also explores auditing sensitive items that generally are applicable to all industries, and it provides numerous sample audit workpapers to augment this discussion.
This Portfolio includes examples of how four public companies have disclosed their fair value accounting for particular items.
First, Auditing Fair Values alerts auditors and those interested in auditing to particular items on financial statements (or within financial reporting) that must or may be accounted for at fair value or rely on fair values in their measurement.
Second, a detailed analysis of the procedures involved in auditing fair values is provided. This analysis includes how to audit fair values; principle planning, interim, and substantive year-end procedures; and insight as to why these procedures are required. The analysis uses a combination of discussion, interpretation of accounting literature, examples and illustrations to fulfill this second purpose.
Finally, this Portfolio provides a link from the audit of fair values to the overall audit.
Auditing Fair Values allows you to benefit from:
This Portfolio is included in the Accounting Policy & Practice Series, a comprehensive series of titles which explain, explicate, and offer commentary on a wide range of accounting and financial management topics, including revenue recognition, income taxes, leasing, business combinations, debt instruments, risk management, internal controls and more.
Detailed Analysis
I. Scope, Focus, and Purpose of Portfolio
A. Scope and Focus-Auditing Fair Values
B. Purposes of Portfolio
C. Portfolio Content
II. Fair Value Accounting
Introductory Material
A. Evolution of Fair Values and Rationale for the Use of Fair Values
B. Fair Value Defined
C. Fair Values Used in Accounting
1. Recognition
2. Disclosure
3. Business Combinations
D. Fair Value Option Prescribed by FAS 159
III. Fair Value Estimation
A. Accounting Rules for Estimating Fair Values
1. Fair Value Measurement Under FAS 157
2. Other Measurements Rules Outside the Scope of FAS 157
a. Share-Based Payments
b. Software Revenue Recognition
c. Inventory Pricing
d. Lease Accounting
B. Alternative Approaches to Estimating a Fair Value
1. Cost Approach
2. Market Approach
3. Income Approach
4. Relationships of the Approaches and Auditors' Responsibility
C. International Financial Reporting Standards
IV. Fundamentals of Auditing Fair Values
A. Objective
B. Level and Quantity of Audit Procedures
C. Major Steps and Procedures
D. Comparisons and Contrasts Under International Auditing Standards
V. Planning
A. Importance and Objectives
B. Procedures
C. Auditor's Conclusion
D. Auditor's Documentation
VI. Interim Procedures
B. Internal Control Issues and Tests
C. Substantive Test Procedures
D. Auditor's Conclusion
E. Auditor's Documentation
VII. Year-End Procedures
B. Evaluating Fair Value Measurement Requirements
C. Procedures for Auditing Simple Fair Value Measurements
D. Procedures for Auditing Complex Fair Value Measurements
1. Testing Valuation Model, Assumptions, and Underlying Data
a. Understanding, Reviewing, and Evaluating Valuation Methodology
b. Clerically Test Client Valuation
c. Identifying and Evaluating Assumptions
d. Evaluating Underlying Data
e. Performing Sensitivity Analysis of Key Assumptions
2. Independent Valuation
3. Subsequent Events or Transactions
E. Client Uses a Pricing Service to Obtain Fair Value Measurements
F. Management's Representation
G. Auditor's Conclusion
H. Auditor's Documentation
VIII. Sources of Evidence
A. Major Classifications
B. Level 1 Inputs
C. Level 2 Inputs
D. Level 3 Inputs
IX. Using an Expert in Auditing Fair Value
A. Why Use an Expert?
B. Who Is an Expert for Auditing Fair Values
C. Auditing Procedures When Using a Valuation Expert
X. Auditing Fair Values Associated With Illiquid Markets
A. Fair Values and Illiquid Markets
B. Auditing Involving Illiquid Markets
XI. Auditing Sensitive Items Applicable to All Industries
A. Investments in Equity Securities
B. Investment in Privately-Held Bonds
C. Investment in a Partnership
D. Derivatives
E. Inventory
F. Stock-Based Compensation
1. Black-Scholes Method
2. Lattice (Binomial) Method
G. Impairments
H. Long-Term Debt
I. Asset Retirement Obligation
J. Investments in Collateralized Debt Obligation (Active Markets)
K. Collateralized Debt Obligations (Inactive Markets)
L. Fair Value Disclosures
XII. Industry Specific Issues
A. Banking
1. Consumer Loans
2. Commercial Loans
3. Loan Commitments
B. Insurance
C. Real Estate
Working Papers
TABLE OF WORKSHEETS
Worksheet 1 Glossary of Significant Terms and Acronyms
Worksheet 2 Sample Check List for Use of Fair Values Under GAAP
Worksheet 3 Sample Audit Workpapers: Investments in Equity Securities
Worksheet 4 Sample Audit Workpapers: Investment in Privately-Held Bonds
Worksheet 5 Sample Audit Workpapers: Investment in a Partnership
Worksheet 6 Sample Audit Workpapers: Derivatives
Worksheet 7 Sample Audit Workpapers: Inventory
Worksheet 8 Sample Audit Workpapers: Stock-Based Compensation
Worksheet 9 Sample Audit Workpapers: Stock-Based Compensation
Worksheet 10 Sample Audit Workpapers: Impairments
Worksheet 11 Sample Audit Workpapers: Long-Term Debt
Worksheet 12 Sample Audit Workpapers: Asset Retirement Obligation
Worksheet 13 Sample Audit Workpapers: Investments in Collateralized Debt Obligations (Active Markets)
Worksheet 14 Sample Audit Workpapers: Investments in Collateralized Debt Obligations (Inactive Markets)
Worksheet 15 Fair Value Disclosure Example: Abbott Laboratories
Worksheet 16 Fair Value Disclosure Example: Devon Energy Corporation
Worksheet 17 Fair Value Disclosure Example: Bank of America Corporation
Worksheet 18 Fair Value Disclosure Example: SunTrust Banks
Bibliography
OFFICIAL
Securities and Exchange Commission
SEC Releases
SEC Staff Accounting Bulletins
SEC Filings
Accounting Principles Board Opinions
American Institute of Certified Public Accountants
AICPA Statements of Position
AICPA Statements on Auditing Standards
AICPA Accounting Research Bulletins
AICPA Statement on Standards for Valuation Services
AICPA Audit and Accounting Guides
Financial Accounting Standards Board
Emerging Issues Task Force Issues
FASB Concepts Statements
FASB Statements of Financial Accounting Standards
FASB Staff Positions
International Accounting Standards Board (IASB)
International Accounting Standards
International Financial Reporting Standards
International Auditing and Assurances Standards Board (IAASB)
IAASB International Standards of Auditing
IAASB Releases
Public Company Accounting Oversight Board
PCAOB Rules
PCAOB Miscellaneous
UNOFFICIAL
BNA Portfolios
Articles
Books