Auditing Fair Values (Portfolio 5403)

Bloomberg BNA Tax and Accounting Portfolio 5403-2nd, Auditing Fair Values of Issuers (Accounting Policy and Practice Series), explains and analyzes the rules and best practices for auditing fair values under U.S. and international auditing standards.

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Bloomberg BNA Tax and Accounting Portfolio 5403-2nd, Auditing Fair Values of Issuers (Accounting Policy and Practice Series), explains and analyzes the rules and best practices for auditing fair values under U.S. and international auditing standards. Principal U.S. auditing procedures for auditors of issuers are prescribed by the Public Company Accounting Oversight Board. 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.
Detailed substantive analysis of fair value accounting deliberately lies beyond the scope of this Portfolio. Readers seeking analysis of the substantive U.S. rules are urged to consult Bloomberg BNA Tax and Accounting Portfolio 5127-2nd, Ketz and Zyla, Fair Value Measurements: Valuation Principles and Auditing Techniques (Accounting Policy and Practice Series). However, this Portfolio summarizes fair value accounting to the extent necessary to illuminate users' understanding of auditing fair values.
The Portfolio 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. It 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. The Portfolio also explores auditing sensitive items that generally are applicable to all industries, and it provides numerous sample audit workpapers to augment this discussion. Lastly, it includes examples of how four public companies have disclosed their fair value accounting for particular items.
This Portfolio may be cited as Bloomberg BNA Tax and Accounting Portfolio 5403-2nd, Kohlbeck and Zyla, Auditing Fair Values of Issuers (Accounting Policy and Practice Series).


Mark A. Kohlbeck, Ph.D., The University of Texas at Austin; M.B.A., Southern Methodist University; B.B.A. (Accounting), The University of Wisconsin—Whitewater. Dr. Kohlbeck is a former auditor and management consultant for Deloitte & Touche. His practice experience includes restructuring troubled financial institutions, mergers and acquisitions, and litigation support. Dr. Kohlbeck has written for numerous journals including Contemporary Accounting Research; Journal of Accounting, Auditing, and Finance; Auditing Horizons; and Issues in Accounting Education. Dr. Kohlbeck is an assistant professor with the School of Accounting at Florida Atlantic University in Boca Raton, Florida, where he teaches financial accounting. He has taught financial accounting courses at the University of Wisconsin—Madison, Southern Methodist University, and The University of Texas at Austin. Dr. Kohlbeck is a member of Beta Alpha Psi, Beta Gamma Sigma, and the American Accounting Association.

Mark L. Zyla, CPA/ABV, CFA, ASA is a Managing Director of Acuitas Inc., an Atlanta, Georgia-based valuation and litigation consultancy firm. Mark received a B.B.A. degree in Finance from the University of Texas at Austin and an M.B.A. degree with a concentration in Finance from Georgia State University. Mr. Zyla also completed the Mergers and Acquisitions Program at the Aresty Institute of The Wharton School of the University of Pennsylvania and the Valuation Program at the Graduate School of Business at Harvard University. He is a Certified Public Accountant, accredited in Business Valuation (CPA/ABV), a Chartered Financial Analyst (CFA), and an Accredited Senior Appraiser, certified in business valuation (ASA). Mr. Zyla is the author of “Fair Value Measurement: Practical Guidance and Implementation,” 2nd Edition, published by John Wiley & Sons. He also is the co-author of Bloomberg BNA Tax and Accounting Portfolio 5127-2nd, “Fair Value Measurements: Valuation Principles and Auditing Techniques” (Accounting Policy and Practice Series), and Bloomberg BNA Tax and Accounting Portfolio 5115-3rd, “Business Combinations: Goodwill and Other Intangible Assets” (Accounting Policy and Practice Series)


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

Introductory Material

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

Introductory Material

A. Objective

B. Level and Quantity of Audit Procedures

C. Major Steps and Procedures

D. Comparisons and Contrasts Under International Auditing Standards

V. Planning

Introductory Material

A. Importance and Objectives

B. Procedures

C. Auditor's Conclusion

D. Auditor's Documentation

VI. Interim Procedures

Introductory Material

A. Importance and Objectives

B. Internal Control Issues and Tests

C. Substantive Test Procedures

D. Auditor's Conclusion

E. Auditor's Documentation

VII. Year-End Procedures

Introductory Material

A. Importance and Objectives

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

Introductory Material

A. Major Classifications

B. Level 1 Inputs

C. Level 2 Inputs

D. Level 3 Inputs

IX. Using an Expert in Auditing Fair Value

Introductory Material

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

Introductory Material

A. Fair Values and Illiquid Markets

B. Auditing Involving Illiquid Markets

XI. Auditing Sensitive Items Applicable to All Industries

Introductory Material

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

Introductory Material

A. Banking

1. Consumer Loans

2. Commercial Loans

3. Loan Commitments

B. Insurance

C. Real Estate

Working Papers



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



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 Miscellaneous


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