June 19, 2017
On June 1, the Public Company Accounting Oversight Board (PCAOB) issued two proposed auditing standards for public comment that address auditing accounting estimates including fair value measurements (the Auditing Accounting Estimates Proposal) and using the work of specialists (the Work of Specialists Proposal) (collectively, the Proposals). Both proposals could impact NAREIT member companies based on the initial measurement of typical transactions at fair value (e.g., acquisitions of real estate) and subsequent measurement (e.g., fair value measurement of debt and equity securities). If you are interested in participating on a NAREIT Task Force that will evaluate the Proposals and consider whether NAREIT should develop a response, please contact Christopher Drula by June 30. Comments are due to the PCAOB by August 30.
The Auditing Accounting Estimates Proposal
The Auditing Accounting Estimates Proposal would replace three current auditing standards with a single auditing standard, and would:
- Add or revise requirements and provide direction to prompt auditors to devote greater attention to addressing potential management bias in accounting estimates, while reinforcing the need for professional skepticism;
- Extend certain key requirements in the existing standard on auditing fair value measurements to all accounting estimates in significant accounts and disclosures to reflect a more uniform approach to substantive testing;
- Integrate the risk assessment standards to focus auditors on estimates with greater risk of material misstatement;
- Make other updates to the requirements for auditing accounting estimates to provide additional clarity and specificity; and,
- Provide specific requirements and direction to address certain aspects unique to auditing fair values of financial instruments, including the use of information from pricing sources (e.g., pricing services and brokers or dealers).
The Work of Specialists Proposal
The Work of Specialists Proposal would amend existing audit requirements for audit evidence and the supervision of the audit engagement. The Work of Specialists Proposal articulates different auditing procedures for specialists employed by the company under audit and for the auditor’s specialist on the audit engagement.
For the auditor's use of the work of a company's specialist as audit evidence, the Work of Specialists Proposal would add additional audit requirements to:
- Obtain an understanding of the work and report of the company’s specialists and related company processes and controls;
- Obtain an understanding of and assessing the specialist’s knowledge, skill, and ability, as well as the specialist’s relationship to the company; and,
- Perform procedures to test and evaluate the work of the company’s specialist, including:
- Testing and evaluating data used by the specialist and evaluating whether the data was appropriately used by the specialist;
- Evaluating the appropriateness of methods and reasonableness of significant assumptions used by the specialist; and,
- Evaluating the relevance and reliability of the specialist’s work and its relationship to the relevant assertion.
For the auditor's use of the work of the auditor's specialist as audit evidence, the Work of Specialists Proposal would:
- Establish requirements for using the work of an auditor-engaged specialist to assist the auditor in obtaining or evaluating audit evidence;
- Propose requirements for reaching an understanding with the specialist and reviewing and evaluating the specialist's work;
- Provide factors for determining the necessary extent of review of the work of the auditor-engaged specialist;
- Amend requirements related to assessing the knowledge, skill, ability, and objectivity of the specialist;
- Describe objectivity as the specialist's ability to exercise impartial judgment on all issues encompassed by the specialist's work related to the audit and expand the list of matters that the auditor would consider when assessing whether the specialist has the necessary objectivity.