The PCAOB inspection staff has published Spotlight: Considerations for Audit Firms Using the Work of Specialists (Specialist Spotlight). This paper discusses considerations for audit firms that use the work of a specialist in public company or broker-dealer audits. The Specialist Spotlight highlights inspection staff observations, including common audit deficiencies and good practices. It is intended to help audit firms perform appropriate procedures when using the work of a specialist. However, the Specialist Spotlight notes that other stakeholders, including audit committees, may also find the information presented helpful in understanding how audit firms use specialists in obtaining or evaluating audit evidence. The publication includes suggested questions for audit committees to consider in connection with their auditor’s use of specialists. Below is an overview.
Background
A specialist is defined as a person or firm with special skills or knowledge in a field other than accounting or auditing. Companies may use specialists to assist in developing financial statement accounting estimates. Auditors frequently use specialists engaged or employed by the audit firm to evaluate significant accounts and disclosures. The types of specialists that companies and auditors use include actuaries, appraisers, and legal specialists. Audit areas in which specialists are commonly utilized include estimates and valuations (e.g., valuations in business combinations, financial instrument fair values, and asset impairment determinations), legal interpretations, and evaluation of physical characteristics of financial statement items such as inventories or mineral reserves.
Evaluating the Work of a Company Specialist
The auditor’s responsibilities for data, significant assumptions, and methods that a company specialist used to assist in developing financial statement amounts fall into four categories:
Company-produced data. Test the accuracy and completeness of company-produced data the company specialist used.
Data from sources external to the company. Evaluate the relevance and reliability of data from sources external to the company that the company specialist used.
Significant assumptions: Evaluate the reasonableness of significant assumptions that the company specialist used, including assumptions developed by the specialist, assumptions provided by company management, and assumptions based on the company’s intent and ability to carry out a particular course of action.
Methods: Evaluate whether the methods used by the company specialist are appropriate under the circumstances, taking into account the requirements of the applicable financial reporting framework.
Several factors that may affect the extent of the audit evidence necessary to support the auditor’s evaluation of the work of a company specialist:
The significance of the specialist's work to the auditor's conclusion.
The ability of the company to significantly affect the specialist’s judgments about work performed, conclusions, or findings.
The risk of material misstatement in the relevant assertion to which the specialist's work relates.
The specialist’s level of knowledge, skill, and ability.
The auditor should evaluate the relevance and reliability of the company specialist’s findings and perform additional procedures if those findings or conclusions appear to contradict the relevant financial statement assertion or if the work of the company specialist does not provide sufficient appropriate evidence to support the assertion. The auditor may also need to consider additional procedures when the company specialist’s report contains restrictions, disclaimers, or limitations regarding the auditor’s use of the report or if the auditor identifies a conflict of interest.
Using the Work of an Auditor-Employed Specialist
In the case of a specialist employed by the auditor, the extent to which the auditor must supervise the work of the specialist depends on (1) the significance of the specialist's work to the auditor's conclusions, (2) the risk of material misstatement of the relevant assertion, and (3) the specialist's knowledge, skill, and ability. Auditors can use the firm's quality control system to assess specialists, but the engagement partner remains responsible for determining if the specialist is qualified and independent. Auditor-employed specialists must be assigned based on their knowledge, skill, and ability, just like other team members, and must be independent of the audit client.
The auditor should establish and document an understanding with the specialist regarding the specialist’s responsibilities for testing company-produced data or evaluating external data, evaluating or developing significant assumptions, and evaluating methods used or using their own methods. The engagement partner or other engagement team members performing supervisory activities should inform the auditor-employed specialist about matters that could affect the specialist’s work, such as information about the public company and its environment, the public company’s processes for developing the related accounting estimate (including the role of company specialists), the relevant requirements of the financial reporting framework, possible accounting and auditing issues, and the need to apply professional skepticism.
Using the Work of an Auditor-Engaged Specialist
In the case of a specialist engaged by the auditor, the auditor's objective is to determine whether the specialist's work is suitable and supports the auditor’s conclusion about the relevant assertion. The auditor must assess the specialist's knowledge, skill, and ability, considering the nature and scope of the work. The auditor must also assess the specialist’s objectivity. If objectivity concerns arise, the auditor should either perform additional procedures or engage another specialist. With respect to informing the specialist of the work to be performed, determining the extent of review, and evaluating the specialist’s work, the requirements are parallel to those for an auditor-employed specialist.
Common Deficiencies Related to Use of Specialists
Examples of deficiencies that the PCAOB inspection staff has observed in the use of specialists include:
The auditor’s risk assessment failed to consider information in annual filings or other sources that were inconsistent with the company specialist's report.
The auditor merely included the company specialist's report in the audit file without performing procedures to evaluate the specialist’s work.
The auditor did not involve a specialist to assist in areas where the auditor lacked the necessary knowledge, skill, and ability.
The auditor performed appropriate procedures on financial data provided to the specialist and obtained an understanding of the specialist’s significant assumptions and methods but failed to test the completeness and accuracy of non-financial data, such as geological or engineering data used for extraction industry reserve reports or employee census data for actuarial calculations.
Reminders for Audit Firms
Key areas auditors should focus on when using the work of specialists include:
Continual risk assessment. Risk assessment should be a continual and iterative process. Auditors should reevaluate earlier risk assessments if contradicted by information from company specialists or auditor's specialists.
Knowledge, skills, and ability. The use of a company specialist might introduce data, significant assumptions, and methods that could be beyond the auditor’s knowledge, skill, and ability. The auditor must ensure it has or retains individuals with the necessary expertise to obtain sufficient and appropriate audit evidence.
Testing and evaluating specialist data. Auditors must test the accuracy and completeness of company-produced data used by company specialists. They must also evaluate the relevance and reliability of external data that company and auditor specialists used.
Supervising and analyzing specialist procedures. The engagement partner and supervisory team members should review the specialist's report or equivalent documentation and evaluate whether the specialist's work provides sufficient appropriate audit evidence.
Good Practices
The Specialist Spotlight provides examples of good practices in the use of specialists that the inspection staff has observed including:
Risk assessment. Many auditors involved firm specialists in the risk assessment process. Some firms create inventories of assumptions and methods, documenting risk assessments for each.
Consistency. Some auditors use a matrix to check that identified risks are consistent with other available information sources, such as annual filings, industry information, and the specialist’s report.
Coordination. Engagement teams establish a clear division of responsibilities between auditors and specialists to ensure that sufficient and appropriate audit evidence is obtained.
Contrary Evidence. Some firms use a matrix document to compare specialist assumptions and findings with comparable relevant assertions and information in the financial statements to identify differences that may require the auditor to perform additional procedures.
Competence. Some firms may send a questionnaire to the company specialist to obtain information regarding the specialist’s professional qualifications and the existence of relationships with the company that could impair the specialist’s objectivity.
Questions for Audit Committees
The Specialist Spotlight offers the following questions to aid audit committees in their consideration of their engagement team’s use of specialists:
How did the auditor ensure that the auditor’s specialist(s) (employed or engaged) is/are appropriately identified and utilized to test significant estimates requiring specialization in the audit?
Has the auditor engaged or employed specialists in the same field as the company’s specialist(s) that were used to develop accounting estimates?
How did the auditor identify and evaluate areas where a specialist would be used to perform or assist with audit procedures?
Did the audit firm employ or engage a specialist to help with (1) understanding the process by which the company makes accounting estimates and (2) how the audit firm assesses the risks of material misstatement related to those accounting estimates?
If auditor’s specialist(s) was/were not used to evaluate significant assumptions, critical estimates, or disclosures prepared by the company specialists, how did the auditor perform sufficient procedures?
What were the significant judgments discussed or challenged by the auditor’s specialist(s)? What was the outcome of those discussions?
Did the auditor’s specialist(s) (employed or engaged) have any significant differences in methodology or results when compared to the company specialist? If so, how did the auditor assess those differences?
Audit Committee Takeaways
The audit committee should discuss with the auditor its process for determining when to use specialists in the audit and consider whether the auditor has involved specialists in appropriate high-risk or complex areas where the engagement team may lack the necessary knowledge, skill, and ability. For auditor-engaged specialists, the committee may want to inquire about how the auditor evaluates the specialist's objectivity. For both auditor-engaged specialists and auditor-employed specialists, the audit committee may also want to inquire how the auditor has ensured that specialists meet the independence requirements.
The audit committee should also discuss how the auditor coordinates work between the core audit team and specialists and have a general understanding of the level of supervision and review applied to specialists' work. The committee should also review with the auditor any significant judgments or findings from specialists' work and understand how any differences between company specialists and auditor specialists were resolved.
The questions in the Specialist Spotlight report address these and other issues and can serve as a roadmap for audit committees in their oversight of the role of specialists in the audit process.
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