3111 Management’s experts

Jun-2018

CAS Guidance

Management’s expert—An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the financial statements (CAS 500.5e).

CAS Guidance

The preparation of an entity’s financial statements may require expertise in a field other than accounting or auditing, such as actuarial calculations, valuations, or engineering data. The entity may employ or engage experts in these fields to obtain the needed expertise to prepare the financial statements. Failure to do so when such expertise is necessary increases the risks of material misstatement. (CAS 500.A45)

When information to be used as audit evidence has been prepared using the work of a management’s expert, the requirement in paragraph 8 of this CAS applies. For example, an individual or organization may possess expertise in the application of models to estimate the fair value of securities for which there is no observable market. If the individual or organization applies that expertise in making an estimate which the entity uses in preparing its financial statements, the individual or organization is a management’s expert and paragraph 8 applies. If, on the other hand, that individual or organization merely provides price data regarding private transactions not otherwise available to the entity which the entity uses in its own estimation methods, such information, if used as audit evidence, is subject to paragraph 7 of this CAS, being information from an external information source and not the use of a management’s expert by the entity. (CAS 500.A46)

The nature, timing and extent of audit procedures in relation to the requirement in paragraph 8 of this CAS, may be affected by such matters as (CAS 500.A47):

• The nature and complexity of the matter to which the management’s expert relates.

• The risks of material misstatement in the matter.

• The availability of alternative sources of audit evidence.

• 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.

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

• The nature and extent of any controls within the entity over the management’s expert’s work.

• The auditor’s knowledge and experience of the management’s expert’s field of expertise.

• The auditor’s previous experience of the work of that expert.

CAS Guidance

Competence relates to the nature and level of expertise of the management’s expert. Capability relates to the ability of the management’s expert to exercise that competence in the circumstances. Factors that influence capability may include, for example, geographic location, and the availability of time and resources. Objectivity relates to the possible effects that bias, conflict of interest or the influence of others may have on the professional or business judgment of the management’s expert. The competence, capabilities and objectivity of a management’s expert, and any controls within the entity over that expert’s work, are important factors in relation to the reliability of any information produced by a management’s expert. (CAS 500.A48)

Information regarding the competence, capabilities and objectivity of a management’s expert may come from a variety of sources, such as (CAS 500.A49):

• Personal experience with previous work of that expert.

• Discussions with that expert.

• Discussions with 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.

• An auditor’s expert, if any, who assists the auditor in obtaining sufficient appropriate audit evidence with respect to information produced by the management’s expert.

Matters relevant to evaluating the competence, capabilities and objectivity of a management’s expert include whether that expert’s work is subject to technical performance standards or other professional or industry requirements, for example, ethical standards and other membership requirements of a professional body or industry association, accreditation standards of a licensing body, or requirements imposed by law or regulation. (CAS 500.A50)

Other matters that may be relevant include (CAS 500.A51):

• The relevance of the management’s expert’s competence to the matter for which that expert’s work will be used, including any areas of specialty within that expert’s field. For example, a particular actuary may specialize in property and casualty insurance, but have limited expertise regarding pension calculations.

• The management’s expert’s competence with respect to relevant accounting requirements, for example, knowledge of assumptions and methods, including models where applicable, that are consistent with the applicable financial reporting framework.

• Whether unexpected events, changes in conditions, or the audit evidence obtained from the results of audit procedures indicate that it may be necessary to reconsider the initial evaluation of the competence, capabilities and objectivity of the management’s expert as the audit progresses.

A broad range of circumstances may threaten objectivity, for example, self–interest threats, advocacy threats, familiarity threats, self‑review threats and intimidation threats. Safeguards may reduce such threats, and may be created either by external structures (for example, the management’s expert’s profession, legislation or regulation), or by the management’s expert’s work environment (for example, quality control policies and procedures). (CAS 500.A52)

Although safeguards cannot eliminate all threats to a management’s expert’s objectivity, threats such as intimidation threats may be of less significance to an expert engaged by the entity than to an expert employed by the entity, and the effectiveness of safeguards such as quality control policies and procedures may be greater. Because the threat to objectivity created by being an employee of the entity will always be present, an expert employed by the entity cannot ordinarily be regarded as being more likely to be objective than other employees of the entity. (CAS 500.A53)

When evaluating the objectivity of an expert engaged by the entity, it may be relevant to discuss with management and that expert any interests and relationships that may create threats to the expert’s objectivity, and any applicable safeguards, including any professional requirements that apply to the expert; and to evaluate whether the safeguards are adequate. Interests and relationships creating threats may include (CAS 500.A54):

• Financial interests.
• Business and personal relationships.
• Provision of other services.

CAS Guidance

An understanding of the work of the management’s expert includes an understanding of the relevant field of expertise. An understanding of the relevant field of expertise may be obtained in conjunction with the auditor’s determination of whether the auditor has the expertise to evaluate the work of the management’s expert, or whether the auditor needs an auditor’s expert for this purpose. (CAS 500.A55) See CAS 620.7 Using the Work of an Auditor’s Expert for guidance on determining the need for an auditor’s expert.

Aspects of the management’s expert’s field relevant to the auditor’s understanding may include (CAS 500.A56):

• 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 are used by the management’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 management’s expert uses.

CAS Guidance

In the case of a management’s expert engaged by the entity, there will ordinarily be an engagement letter or other written form of agreement between the entity and that expert. Evaluating that agreement when obtaining an understanding of the work of the management’s expert may assist the auditor in determining the appropriateness of the following for the auditor’s purposes (CAS 500.A57):

• the nature, scope and objectives of that expert’s work;

• the respective roles and responsibilities of management and that expert; and

• the nature, timing and extent of communication between management and that expert, including the form of any report to be provided by that expert.

In the case of a management’s expert employed by the entity, it is less likely there will be a written agreement of this kind. Inquiry of the expert and other members of management may be the most appropriate way for the auditor to obtain the necessary understanding. (CAS 500.A58).

CAS Guidance

Considerations when evaluating the appropriateness of the management’s expert’s work as audit evidence for the relevant assertion may include (CAS 500.A59):

• the relevance and reasonableness of that expert’s findings or conclusions, their consistency with other audit evidence, and whether they have been appropriately reflected in the financial statements;

• if that expert’s work involves use of significant assumptions and methods, the relevance and reasonableness of those assumptions and methods;

• if that expert’s work involves significant use of source data and the relevance, completeness, and accuracy of that source data; and

• If that expert's work involves the use of information from an external information source, the relevance and reliability of that information.

In Canada, when the financial statements prepared by management include amounts determined by or with the assistance of an actuary, communications between the auditor and the actuary are guided by the “Joint Policy Statement Concerning Communications between Actuaries Involved in the Preparation of Financial Statements and Auditors”. This Joint Policy Statement is appended to this CAS. [This is a Canadian–only paragraph. There is no equivalent paragraph in corresponding ISA 500.] (CAS 500.CA59A)