3092 Determining the need to use an auditor’s expert

Oct-2012

CAS Guidance

Areas of auditor’s expert involvement

An auditor’s expert may be needed to assist the auditor in one or more of the following (CAS 620.A4):

• obtaining an understanding of the entity and its environment, the applicable financial reporting framework, and the entity’s system of internal control.

• identifying and assessing the risks of material misstatement.

• determining and implementing overall responses to assessed risks at the financial statement level.

• designing and performing further audit procedures to respond to assessed risks at the assertion level, comprising tests of controls or substantive procedures.

• evaluating the sufficiency and appropriateness of audit evidence obtained in forming an opinion on the financial statements.

Risks of material misstatement

The risks of material misstatement may increase when expertise in a field other than accounting is needed for management to prepare the financial statements, for example, because this may indicate some complexity, or because management may not possess knowledge of the field of expertise. If in preparing the financial statements management does not possess the necessary expertise, a management’s expert may be used in addressing those risks. Relevant controls, including controls that relate to the work of a management’s expert, if any, may also reduce the risks of material misstatement (CAS 620.A5).

CAS Guidance

Use of expertise in a field other than accounting in the preparation of financial statements

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 not possess the necessary expertise to audit those financial statements. The engagement partner is required to determine that the engagement team, and any auditor’s experts who are not part of the engagement team, collectively have the appropriate competence and capabilities, including sufficient time, to perform the audit engagement. Further, the auditor is required to ascertain the nature, timing and extent of resources necessary to perform the engagement. The auditor’s determination of whether to use the work of an auditor’s expert, and if so when and to what extent, assists the auditor in meeting these requirements. As the audit progresses, or as circumstances change, the auditor may need to revise earlier decisions about using the work of an auditor’s expert. (CAS 620.A6)

See CAS 220.14 and OAG Audit 3061 for guidance on assignment of engagement teams.

See CAS 300.8(e) and OAG Audit 4021 for guidance on resources to perform the engagement.

Obtaining a sufficient understanding of that field

An auditor who is not an expert in a relevant field other than accounting or auditing may nevertheless be able to obtain a sufficient understanding of that field to perform the audit without an auditor’s expert. This understanding may be obtained through, for example (CAS 620.A7):

• Experience in auditing entities that require such expertise in the preparation of their financial statements.

• Education or professional development in the particular field. This may include formal courses, or discussion with individuals possessing expertise in the relevant field for the purpose of enhancing the auditor’s own capacity to deal with matters in that field. Such discussion differs from consultation with an auditor’s expert regarding a specific set of circumstances encountered on the engagement where that expert is given all the relevant facts that will enable the expert to provide informed advice about the particular matter.

• Discussion with auditors who have performed similar engagements.

Deciding to use an auditor’s expert

In other cases, however, the auditor may determine that it is necessary, or may choose, to use an auditor’s expert to assist in obtaining sufficient appropriate audit evidence. Considerations when deciding whether to use an auditor’s expert may include (CAS 620.A8):

• Whether management has used a management’s expert in preparing the financial statements (see paragraph A9).

• The nature and significance of the matter, including its complexity.

• The risks of material misstatement in the matter.

• The expected nature of procedures to respond to identified risks, including: the auditor’s knowledge of and experience with the work of experts in relation to such matters; and the availability of alternative sources of audit evidence.

Management’s expert used

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 (CAS 620.A9):

• 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.

CAS 500 includes requirements and guidance regarding the effect of the competence, capabilities and objectivity of management’s experts on the reliability of audit evidence.

See CAS 500.8 and OAG Audit 3110 for guidance on management’s experts.

CAS Guidance

Expertise in a field other than accounting or auditing may include expertise in relation to such matters as (CAS 620.A1):

• 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.

• The analysis of complex or unusual tax compliance issues.

In many cases, distinguishing between expertise in accounting or auditing, and expertise in another field, will be straightforward, even where this involves a specialized area of accounting or auditing. For example, an individual with expertise in applying methods of accounting for deferred income tax can often be easily distinguished from an expert in taxation law. The former is not an expert for the purposes of this CAS as this constitutes accounting expertise; the latter is an expert for the purposes of this CAS as this constitutes legal expertise. Similar distinctions may also be able to be made in other areas, for example, between expertise in methods of accounting for financial instruments, and expertise in complex modeling for the purpose of valuing financial instruments. In some cases, however, particularly those involving an emerging area of accounting or auditing expertise, distinguishing between specialized areas of accounting or auditing, and expertise in another field, will be a matter of professional judgment. Applicable professional rules and standards regarding education and competency requirements for accountants and auditors may assist the auditor in exercising that judgment. (CAS 620.A2)