SA 500 – Audit Evidence Flashcards
The auditor of C Ltd. accepted the gratuity liability valuation based on the certificate issued by a qualified actuary. However, the auditor noticed that the retirement age adopted is 65 years as against the existing retirement age of 60 years. The company is considering a proposal to increase the retirement age to 65 years.
Comment.
Evaluating the Work of Management’s Expert:
As per SA 500 “Audit Evidence”, when information to be used as audit evidence has been prepared using the work of a management’s expert, the auditor shall, to the extent necessary, having regard to the significance of that expert’s work for the auditor’s purposes,-
(a) Evaluate the competence, capabilities and objectivity of that expert;
(b) Obtain an understanding of the work of that expert; and
(c) Evaluate the appropriateness of that expert’s work as audit evidence for the relevant assertion.
The auditor may obtain information regarding the competence, capabilities and objectivity of a management’s expert from a variety of sources, such as 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; published papers or books written by that expert.
Aspects of the management’s expert’s field relevant to the auditor’s understanding may include 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 auditor may also consider the following while evaluating the appropriateness of the management’s expert’s work as audit evidence for the relevant assertion:
(i) 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 FS;
(ii) If that expert’s work involves use of significant assumptions and methods, the relevance and reasonableness of those assumptions and methods; and
(iii) If that expert’s work involves significant use of source data, the relevance, completeness, and accuracy of that source data.
In the instant case, C Ltd. accepted the gratuity liability valuation based on the certificate issued by an expert i.e., a qualified actuary who is management’s expert. Here basis for computation and valuation is taken as age 65 years by the actuary, which is not correct as company is considering proposal to increase the retirement age from existing age to 65 years.
Therefore, assumptions and methods used by the management’s expert are not appropriate for financial reporting purposes. Hence, auditor may qualify the report accordingly.
