Fair Value Estimates Flashcards
An auditor is assessing the appropriateness of management’s rationale for selecting a model to measure the fair value of debt securities. If, during the current year, an active trading market for the debt security was introduced, the auditor should validate each of the following criteria, except whether the valuation model is
Appropriate for the environment in which the entity operates.
Consistently applied from prior periods.
Evaluated and appropriately applied based on generally accepted accounting principles.
Appropriate for the debt security being valued.
Consistently applied from prior periods.
Correct! When an active trading market for debt securities has been introduced in the current year, the fair value of the debt securities would be based on that active trading market. However, the prior year’s financial statements presented for comparative purposes would still be based on the model selected by management. Hence, consistency in the model’s application would not be maintained.
The auditor’s responsibility to communicate with those charged with governance about fair value measurements and disclosure issues is best described by the following statement:
The auditor should determine whether those charged with governance are informed about management’s processes in developing material fair value estimates, including significant assumptions used by management.
The auditor should determine whether those charged with governance are actively involved in designing and taking responsibility for the adequacy of internal controls over fair value measurements and disclosures.
The auditor should determine whether those charged with governance were consulted by management and had adequate input in forming the entity’s estimates for fair value measurement and disclosures.
The auditor should determine whether those charged with governance take responsibility for the reasonableness of the entity’s fair value measurements and disclosures.
The auditor should determine whether those charged with governance are informed about management’s processes in developing material fair value estimates, including significant assumptions used by management.
The auditor will consider whether or not the nature of significant assumptions used in fair value measurements, the degree of subjectivity involved in the development of the assumptions, and the relative materiality of the items being measured at fair value need to be communicated to those charged with governance.
Which of the following statements describing the auditor’s responsibilities when evaluating an entity’s fair value measurements and disclosures is incorrect?
The auditor is responsible for obtaining an understanding of relevant controls related to fair value measurement and disclosures.
The auditor is responsible for determining that the entity’s fair value measurements and methods used meet the requirements of GAAP and are consistently applied.
The auditor is responsible for engaging a specialist to evaluate the reasonableness of the fair value measurements and disclosures whenever those fair value measurements are material to an entity’s financial statements.
The auditor is responsible for obtaining sufficient appropriate evidence to provide reasonable assurance that fair value measurements and disclosures meet the requirements of GAAP.
The auditor is responsible for engaging a specialist to evaluate the reasonableness of the fair value measurements and disclosures whenever those fair value measurements are material to an entity’s financial statements.
This is not an accurate characterization of the auditor’s responsibilities. The decision to engage a specialist is a matter of professional judgment. The auditor may have the necessary skill and knowledge to audit fair values or may decide to use a specialist.
When there are no observable market prices, the auditor is not obligated to consider whether
Management’s valuation method is appropriate in the circumstances.
Management’s selection of a specialist is appropriate for the audit engagement.
Management’s valuation method is appropriate relative to the industry and environment of the entity.
Management has appropriately applied criteria provided by GAAP.
Management’s selection of a specialist is appropriate for the audit engagement.
The decision to engage a specialist is an auditor judgment, not a management decision.
