ACCA AAA ^INT Syllabus D. Audit of Historical Financial Information - Evidence for Assertions and Disclosures - Notes ^{4 / 9}

Fair value is "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date"

IFRS 13 gets the Fair values by using a 'fair value hierarchy', which categorises inputs into three levels:

Level 1 inputs: quoted prices in active markets for identical assets /liabilities

Level 2 inputs: Observable inputs (other than market prices)

Level 3 inputs: Unobservable inputs

Some FVs are easier to audit (those in a market) than others

Eg. An investment property in a market with other similar properties is easy - use the market price for the similar properties and adjust appropriately

Others though such as a big pension scheme is trickier. Lots of assumptions need to be made about the future (wages, length of service, death etc)

Here the auditor needs to consider:

• Management's past history of estimating FVs etc

• Reviewing budgets, minutes etc

• Management's reasons for the way they prepared the estimates

• Whether the method is consistent with other fair value measurements

The auditor should consider:

1. The length of time any assumptions cover (Longer is more subjective)

2. The number of assumptions made

3. The amount of subjectivity, uncertainty involved

4. Any lack of objective data

5. The timings of any valuations used

6. The reliability of third party evidence

7. The impact of subsequent events

8. Obtaining written representations from management that assumptions are reasonable

Accounting estimates can be difficult to audit: you need to look at management's controls AND how management has arrived at an estimate.So assess risks properly and apply professional scepticism.

ED 540 suggests:

1) Understanding the entity
2) Identify and assess risks of material misstatement 
3) Designing procedures to obtain evidence (Inherent risk depends on the complexity: amount of Management Judgment and estimation uncertainty)

The auditor then ‘stands back' from the evidence obtained, and applies further professional scepticism to evaluate the audit evidence obtained