As an auditor, you often use the work of specialists such as actuaries, appraisers, and engineers. Such work can seem mystical, like something conjured up from a mathematical soup. And since we don’t always understand their incantations, we wonder, “Can we rely on the information?” Thankfully, the audit standards provide guidance.
A specialist can be hired by your audit firm or by management. If you audit banks, you might hire an appraiser to assist with loan collateral reviews–an example of an auditor’s specialist. If your client uses an actuary, then you will obtain audit evidence from a specialist hired by management. As we begin our look into the use of specialists, let’s define the terms auditor’s specialist and management’s specialist.
AU-C 620 provides the following definitions:
Auditor’s specialist. An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence. An auditor’s specialist may be either an auditor’s internal specialist (who is a partner or staff, including temporary staff, of the auditor’s firm or a network firm) or an auditor’s external specialist.
Management’s specialist. An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the financial statements.
Now let’s take a look at audit considerations for both the auditor’s specialist and management’s specialist.
AU-C Section 620–Using the Work of an Auditor’s Specialist provides guidance on the use of an auditor’s specialist.
AU-C 620.07 states, “If expertise in a field other than accounting or auditing is necessary to obtain sufficient appropriate audit evidence, the auditor should determine whether to use the work of an auditor’s specialist.” Before using the services of a specialist, consider the significance of the information for which you might need a specialist. If the (specialist) information has little impact on the financial statements, then the specialist issue will be of less importance.
AU-C 620.09 says, “The auditor should evaluate whether the auditor’s specialist has the necessary competence, capabilities, and objectivity for the auditor’s purposes.” So if you hire an investment pricing specialist, you want to know if she is reputable, what her experience is, whether she can perform the work appropriately, and whether she can be objective.
According to AU-C 620.A16, information regarding the competence, capabilities, and objectivity of an auditor’s specialist may come from the following:
If you’ve previously worked with the aforementioned pricing specialist, you have personal experience with her work. This helps. You might call her with regard to current year issues, and since you already know her, you probably already know her qualifications.
Regarding objectivity, the auditor should inquire about any relationships that the specialist may have with the client, and if necessary, obtain a signed representation letter– from the specialist–concerning their objectivity. Continuing with our pricing specialist illustration, you want to ask her if she has any business relationships with the auditee. Are there any family relationships? Is there any reason her objectivity might be lessened?
Does the audit firm need an engagement letter with its specialist?
Though not required, the auditor can use a written engagement letter to define the work of the specialist. AU-C 620.A45 provides suggestions for the engagement letter as follows:
When an engagement letter is not used, document the work of the specialist in a memorandum or other audit work papers such as an audit program.
Auditors must evaluate the adequacy of the specialist’s work.
AU-C 620.12 says:
The auditor should evaluate the adequacy of the work of the auditor’s specialist for the auditor’s purposes, including:
Bottom line: Does the work of the specialist provide sufficient and appropriate audit evidence with regard to the issue at hand (e.g., investment pricing)?
When should an auditor begin to think about the use of a specialist? Before the engagement is accepted. Why? If we accept an audit without the necessary skill sets, we have a problem. As we consider our acceptance of an audit, we should consider if there is a need to hire a specialist–and whether such a specialist is available at a reasonable price.
AU-C 620.14-15 says the following about references to a specialist’s work in an audit opinion:
The auditor should not refer to the work of an auditor’s specialist in an auditor’s report containing an unmodified opinion.
If the auditor makes reference to the work of an auditor’s external specialist in the auditor’s report because such reference is relevant to an understanding of a modification to the auditor’s opinion, the auditor should indicate in the auditor’s report that such reference does not reduce the auditor’s responsibility for that opinion.
What does this mean? Regardless of the use of a specialist, the opinion is the auditor’s (and not the specialist’s). We may use the specialist’s work as audit evidence, but the audit opinion is ours.
The audit standards do allow auditors to reference the work of a specialist when the opinion is modified, but if you do so, get the specialist’s permission (consider getting written authorization).
When an auditor hires an external specialist, should the audit engagement letter change?
When an audit firm hires an external specialist, the firm should follow the Code of Conduct section ET 1.700.040, Disclosing Information to a Third-Party Service Provider. How can you comply with this ethical requirement? By including additional language in your engagement letter advising the client that you might provide confidential information to an outside party; in effect, you are gaining consent to share client information. If you are not using an outside specialist, but someone who works for your firm, then no such consent is necessary.
AU-C Section 500–Audit Evidence provides guidance on the use of information from management’s specialist.
Your audit client might use their own specialist such as a pension plan actuary. To rely on the actuary, you need to know if she is competent and objective. You also need to understand–at least in a general sense–what the actuary is doing.
AU-C 500.08 states:
If information to be used as audit evidence has been prepared using the work of management’s specialist, the auditor should, to the extent necessary, taking into account the significance of that specialist’s work for the auditor’s purposes,
AU-C 500.A39 provides the following insights into evaluating competence, capabilities, and objectivity:
Information regarding the competence, capabilities, and objectivity of management’s specialist may come from a variety of sources, such as the following:
Exhibit B of AU-C 580, Written Representations, provides the following example of language that an auditor might include in the representation letter:
We agree with the findings of specialists in evaluating the [describe assertion] and have adequately considered the qualifications of the specialists in determining the amounts and disclosures used in the financial statements and the underlying accounting records. We did not give or cause any instructions to be given to specialists with respect to the values or amounts derived in an attempt to bias their work, and we are not otherwise aware of any matters that have had an effect on the independence or objectivity of the specialists.
So how do you document your use of a specialist? As you can tell, the audit standards provide a framework, and the documentation will vary depending on the type of specialist used and the importance of the information. At a minimum, consider documenting:
At the end of the day, auditing is all about obtaining reasonable assurance by obtaining audit evidence. As you consider the use of a specialist, ask yourself how their work impacts your risk assessment, your audit procedures, and finally your opinion.
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Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses.He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events.Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.
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