Understanding the Entity’s Process for DUnderstanding the Entity’s Process for Determining Fair Value Measurements and Disclosures and Relevant Control Activities, and Assessing Risk

Understanding the Entity’s Process for Determining Fair Value Measurements and Disclosures and Relevant Control Activities, and Assessing Risk

15 As part of the understanding of the entity and its environment, including its internal control, the auditor shall obtain an understanding of the entity’s process for determining fair value measurements and disclosures and of the relevant control activities sufficient to identify and assess the risks of material misstatement at the assertion level and to design and perform further audit procedures.

16 Management is responsible for establishing an accounting and financial reporting process for determining fair value measurements. In some cases, the measurement of fair value and therefore the process set up by management to determine fair value may be simple and reliable. For example, management may be able to refer to published price quotations to determine fair value for marketable securities held by the entity. Some fair value measurements, however, are inherently more complex than others and involve uncertainty about the occurrence of future events or their outcome, and therefore assumptions that may involve the use of judgement need to be made as part of the measurement process. The auditor’s understanding of the measurement process, including its complexity, helps identify and assess the risks of material misstatement in order to determine the nature, timing and extent of the further audit procedures.

17 When obtaining an understanding of the entity’s process for determining fair value measurements and disclosures, the auditor ordinarily considers, for example:

• the relevant control activities over the process used to determine fair value measurements, including, for example, controls over data and the segregation of duties between those committing the entity to the underlying transactions and those responsible for undertaking the valuations;
• the expertise and experience of those persons determining the fair value measurements;
• the role that information technology has in the process;
• the types of accounts or transactions requiring fair value measurements or disclosures (for example, whether the accounts arise from the recording of routine and recurring transactions or whether they arise from non-routine or unusual transactions);
• the extent to which the entity’s process relies on a service organisation to provide fair value measurements or the data that supports the measurement. When an entity uses a service organisation, the auditor complies with the requirements of ASA 402 Audit Considerations Relating to Entities Using Service Organisations;
• the extent to which the entity uses the work of experts in determining fair value measurements and disclosures (see ASA 620 Using the Work of an Expert);