The Audit of Fair Values and Other Estimates: The Effects of Underlying Environmental, Task, and Auditor-Specific Factors

TLDR

Fair‑value estimates are increasingly important in financial reporting, yet PCAOB inspections reveal auditors lack preparedness, highlighting the need for a framework that considers environmental, task, and auditor characteristics. The study aims to identify sources of audit deficiencies in fair‑value estimates and to propose future research directions that integrate the three key factors of the judgment process. The authors analyze archival and experimental evidence using Bonner’s framework of environment, task, and person to structure their discussion and outline research lines. They argue that empirical work following these lines will uncover causes and remedies for the observed audit shortcomings.

Abstract

The rising prominence of fair values and other estimates (FVOEs) to financial reporting increases their significance to the audit. Based on inspections that report numerous deficiencies, the PCAOB is concerned that auditors are not sufficiently prepared for the challenges faced in evaluating fair value measurements. In this paper, we first analyze the possible sources for observed practice deficiencies by evaluating extant archival and experimental research. To organize our discussion, we rely on an established theoretical research framework that examines auditor judgment through an analysis of three critical and interactive factors of the judgment process — the environment, the task, and the person (Bonner 2008). We believe the framework is particularly useful in understanding judgments related to the audits of FVOEs given these areas have unique environmental and task factors such that addressing auditor characteristics alone to improve audit quality is likely to be insufficient. Second, considering the PCAOB-identified practice areas with direct implications for the audits of FVOEs, we develop and present future research lines of inquiry that take into account the important interactions among the three framework factors. We believe empirical evidence within these lines will help identify potential sources of and remedies for observed audit deficiencies.