Using the work of an auditor`s expert in the audit engagement

 

The risks of material misstatement of financial statements may increase when expertise in a field other than accounting is needed for management to prepare the financial statements, for example, because there is some complexity, or because management may not possess knowledge of the field of expertise. Besides, if the preparation of the financial statements involves the use of expertise in a field other than accounting, the auditor, who is skilled in accounting and auditing, may also not possess the necessary expertise to audit those financial statements.

An auditor’s expert is an individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence. An auditor’s expert may be either an auditor’s internal expert or   an auditor’s external expert.

Expertise in a field other than accounting or auditing may include in relation to such matters as:

·     The valuation of complex financial instruments, land and buildings, plant and machinery, jewelry, works of art, antiques, intangible assets, assets acquired, and liabilities assumed in business combinations and assets that may have been impaired.

·       The actuarial calculation of liabilities associated with insurance contracts or employee benefit plans.

·        The estimation of oil and gas reserves.

·        The valuation of environmental liabilities, and site clean-up costs.

·        The interpretation of contracts, laws, and regulations.

·        Analysis of complex or unusual tax compliance issues.

The auditor may test the financial information prepared by management` expert or use the work of auditor`s expert to compare it with management`s estimations.

The auditor plans to use the work of an auditor's expert

If the auditor plans to use the work of auditor’s expert (for example, actuary or valuer) the auditor shall evaluate the competence, capabilities and objectivity of the auditor’s expert and obtain an understanding of the field of expertise of the auditor’s expert.

 Evaluation of the competence, capabilities and objectivity of the auditor’s expert

Information about the competence, capabilities and objectivity of the auditor’s expert can be found in the following sources:

·     Personal experience with previous work of that expert.

·     Discussions with that expert.

·    Discussions with other auditors or others who are familiar with that expert’s work

·   Knowledge of that expert’s qualifications, membership of a professional body or industry association, license to practice, or other forms of external recognition.

·     Published papers or books written by that expert.

·     The auditor’s firm’s quality control policies and procedures

Obtaining an understanding of the field of expertise of the auditor’s expert

The aspects of the auditor’s expert’s field relevant to the auditor’s understanding may include:

·     Whether that expert’s field has areas of specialty within it that are relevant to the audit.

·     Whether any professional or other standards, and regulatory or legal requirements apply.

·     What assumptions and methods, including models where applicable, are used by the auditor’s expert, and whether they are generally accepted within that expert’s field and appropriate for financial reporting purposes.

·      The nature of internal and external data or information the auditor’s expert uses.     

When management has used a management’s expert in preparing the financial statements, the auditor’s decision on whether to use an auditor’s expert may also be influenced by such factors as:

·        The nature, scope and objectives of the management’s expert’s work.

·        Whether the management’s expert is employed by the entity, or is a party engaged by it to provide relevant services.

·        The extent to which management can exercise control or influence over the work of the management’s expert.

·        The management’s expert’s competence and capabilities.

·        Whether the management’s expert is subject to technical performance standards or other professional or industry requirements.

·        Any controls within the entity over the management’s expert’s work.         

 

Matters to be included in the agreement with an auditor`s expert

A written agreement with the auditor’s expert is drawn up if the work of the auditor's expert is used in the audit assignment. The agreement should include the following matters:

                (a)   Nature, scope and objectives of work

·        The nature and scope of the procedures to be performed.

·        The objectives of the auditor’s external expert’s work.

·  Any relevant technical performance standards or other professional or industry requirements the auditor’s external expert will follow.

·        The assumptions and methods, including models, where applicable.

(b)   Roles and Responsibilities

·        The nature and extent of the auditor’s review of the auditor’s external expert’s work.

·        Whether the auditor or the auditor’s external expert will test source data.

·        The auditor’s external expert’s access to the entity’s records.

(c)    Working Papers

·      Ownership and control of working papers during and after the engagement, including any file retention requirements.

·        The auditor’s and the auditor’s external expert’s access to each other’s working papers.

(d)   Communication and reporting

·        Methods and frequency of communications with the auditor

·     Identification of specific persons within the engagement team who will liaise with the auditor’s external expert.

(e)   Confidentiality

·        The confidentiality provisions of relevant ethical requirements that apply to the auditor.

·        Additional requirements that may be imposed by law or regulation, if any.

·        Specific confidentiality provisions requested by the entity, if any.

Evaluation of the adequacy of the auditor’s expert’s work

The auditor shall evaluate the adequacy of the auditor’s expert’s work by assessing the following matters:

(a)   The relevance and reasonableness of that expert’s findings or conclusions, and their consistency with other audit evidence.

(b) The relevance and reasonableness of significant assumptions and methods used by auditor`s expert.

(c)    The relevance, completeness, and accuracy of the source data used by the auditor`s expert.

Procedures to evaluate the adequacy of the auditor’s expert’s findings or conclusions for the auditor’s purposes may include:

·        Inquiries of the auditor’s expert.

·        Reviewing the auditor’s expert’s working papers and reports.

·        Confirming relevant matters with third parties.

·        Performing detailed analytical procedures; and

·        Reperforming calculations.

The relevance and reasonableness of significant assumptions and methods used by auditor`s expert.

·  When the auditor’s expert’s work is to evaluate underlying assumptions and methods used by management in developing an accounting estimate, the auditor’s procedures are to evaluate whether the auditor’s expert has adequately reviewed those assumptions and methods.

·     When the auditor’s expert’s work is to develop an auditor’s point estimate or an auditor’s range for comparison with management’s point estimate, the auditor’s procedures may be to evaluate the assumptions and methods used by the auditor’s expert.

Evaluation of the relevance, completeness, and accuracy of the source data used by the auditor`s expert include:

·        Verifying the origin of the data.

·        Reviewing the data for completeness and internal consistency.

Consequences of inadequate work of the auditor`s expert

If the auditor concludes that the work of the auditor’s expert is not adequate for the auditor’s purposes and the auditor cannot resolve the matter through the additional audit procedures which may involve further work being performed by both the expert and the auditor, or include employing or engaging another expert, it may be necessary to express a modified opinion in the auditor’s report.

Reference to the auditor’s expert in the auditor’s report

The auditor does not refer to the work of an auditor’s expert in an auditor’s report containing an unmodified opinion unless required by law or regulation to do so (could be required for the purposes of transparency in the public sector).

It may be appropriate in some circumstances to refer to the auditor’s expert in an auditor’s report containing a modified opinion, to explain the nature of the modification. In this situation the auditor shall indicate in the auditor’s report that such reference does not reduce the auditor’s responsibility for that opinion.