Fair Value Estimates

Question 1

What are examples of afar value estimates?

Answer 1

Property held for disposal

Certain assets or liabilities acquired in a business combination

Nonmonetary exchange of assets

Complex financial instruments (not traded in an open market)

Question 2

Are auditors in the prediction business?

Answer 2

NO, we are not responsible for predicting

Question 3

Do we have to obtain an understanding of how management came up with their estimate?

Answer 3

YES

Question 4

Do we have to perform substantive procedures to respond to risk of estimates?

Answer 4

YES- especially significant risks.

We need to understand the reasonableness and adequacy of disclosures as well.

Question 5

The best audit evidence of fair value is published price quotations in an open market?

Answer 5

TRUE TRUE TRUE

Question 6

What are observable inputs?

Answer 6

Assumptions that market participants would use in pricing or liability based on MARKET DATA from sources independent of the reporting entity

Question 7

What are unobservable

Answer 7

Entities OWN JUDGMENTS about what they believe market participants WOULD USE.

Question 8

What should the auditor consider in testing the use of estimation models?

Answer 8

• Whether the model is validated prior to usage
• Whether there are controls over changes
• Whether the model’s validity is periodically tested
• Whether adjustments are made to model’s output
• Whether the model is adequately documented

Question 9

What should the auditors consider with regard to inputs?

Answer 9

• Are the inputs reasonable
• Assumptions are interdependent
• Are they observable market conditions
• Significant assumptions may suggest high estimation uncertainty

Question 10

What documentation requirements for fair value estimates?

Answer 10

1) Basis for auditors conclusions regarding the reasonableness of the estimates
2) Any indications of possible management bias