Auditing Fair Values of Non-Issuers (Portfolio 5404)

Bloomberg BNA Accounting Policy and Practice Portfolio 5404, Auditing Fair Values of Non-Issuers, explains and analyzes the rules and best practices for auditing fair values under U.S. and international auditing standards. To access this Portfolio, visit Bloomberg Tax Financial Accounting Resource Center for a free trial. 

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This Portfolio is part of the Accounting Policy and Practice Series, an essential resource including more than 70 accounting Portfolios and the latest news and developments.


Bloomberg BNA Accounting Policy and Practice Portfolio 5404, Auditing Fair Values of Non-Issuers, 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 non-issuers are prescribed by the American Institute of Certified Public Accountants (AICPA). 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 Accounting Policy and Practice Portfolio 5127-2ndFair Value Measurements: Valuation Principles and Auditing Techniques. 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.

This Portfolio may be cited as Bloomberg BNA Tax and Accounting Portfolio 5404, Auditing Fair Values of Non-Issuers.


Mark Kohlbeck, CPA, Ph.D. Associate Professor,

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 associate professor with the School of Accounting at Florida Atlantic University in Boca Raton, Florida, where he teaches financial accounting.

Mark L. Zyla, CPA/ABV, CFA, ASA Managing Director,

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 BNA's Tax and Accounting Portfolio 5127 2nd, Fair Value Measurements: Valuation Principles and Auditing Techniques, and BNA's Tax and Accounting Portfolio 5115 3rd, Business Combinations: Goodwill and Other Intangible Assets (Accounting Policy and Practice Series).

Paul E. Pierson, CPA, Director,

Paul E. Pierson, CPA, BS, Accounting, Illinois State University. Mr. Pierson is the Director of Professional Standards and Peer Review at the Illinois CPA Society. He also provides staff support for the Society's technical committees. Prior to joining the Society, Mr. Pierson worked as an audit manager for a large local CPA firm in East Peoria, Illinois.

Table of Contents

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 ASC 825-10
III. Fair Value Estimation
Introductory Material
A. Accounting Rules for Estimating Fair Values
1. Fair Value Measurement Under ASC 820-10
2. Other Measurements Rules Outside the Scope of ASC 820-10
a. Share-Based Payments
b. Software Revenue Recognition
c. Inventory Pricing
d. Lease Accounting
B. Alternative Approaches to Estimating a Fair Value
1. Cost (or Asset) 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 a Specialist in Auditing Fair Value
Introductory Material
A. Why Use a Specialist?
B. Who Is a Specialist for Auditing Fair Values
C. Audit Procedures When Using a Valuation Specialist
X. Auditing Fair Values Associated With Inactive or Disorderly Markets
Introductory Material
A. Fair Values and Inactive or Disorderly Markets
B. Auditing Involving Inactive or Disorderly 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-Merton 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)
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: Investments 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 1 Audit Workpapers: Stock-Based Compensation
Worksheet 9— Sample 2 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)