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?” and “How do I document my use of an expert?” Thankfully, the audit standards provide guidance in AU-C 500 (management’s specialist) and AU-C 620 (auditor’s specialist). Below I unpack these requirements.
Who Hires the Specialist?
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 experts, here are two definitions to help differentiate the types.
AU-C 620 defines an auditor’s specialist and management’s specialist. Both definitions include “expertise in a field other than accounting and auditing.”
An auditor’s specialist can include an internal person such as a partner or staff member or an external contract person. This person works for the audit firm.
Information from a management specialist is used by the entity in the preparation of their financial statements. This person works for the audit client.
Now, let’s take a look at each.
1. Auditor’s Specialist
AU-C Section 620–Using the Work of an Auditor’s Specialist provides guidance.
Is the Specialist Needed?
AU-C 620 states that auditors should consider the use of a specialist when expertise in a field other than accounting or auditing is needed. Before using the services of a specialist, consider the significance of the information for which you might need such a person. If the information has little impact on the financial statements, then usage of their reports or skills is of less importance.
AU-C 620 Considerations
AU-C 620 also says the auditor should evaluate the competence, capability, and objectivity of the specialist. So if you hire an investment pricing expert, you want to know if she is reputable, what her experience is, whether she can perform the work appropriately, and whether she is objective.
According to AU-C 620, information regarding the competence, capabilities, and objectivity may come from sources such as the following:
- Personal experience with previous work of the expert
- By talking to the specialist
- Talking with other auditors or others who are familiar with their work
- Knowledge of their qualifications, professional memberships, licenses to practice, or other forms of recognition (often available on their website)
- Books or other publications of the expert
If you’ve previously worked with the aforementioned pricing expert, 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 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 concerning their objectivity. Continuing with our pricing expert example, you want to ask her if she has any business relationships with the auditee. Are there any family relationships? Is there anything that might impair her objectivity?
Additionally, if the expert is hired by your firm, consider an engagement letter.
Engagement Letter with Specialist
Though not required, the auditor can use a written engagement letter to define the work of the specialist. AU-C 620 provides suggestions for the engagement letter such as:
- Nature, scope, and objectives of the assistance
- The roles and responsibilities of the auditor and the specialist
- How information will be communicated
- The need for confidentiality
Document the specialist’s work in a memorandum if an engagement letter is not obtained.
Adequacy of Work
Auditors must evaluate the adequacy of the work.
AU-C 620 requires that you evaluate the adequacy of the work, including the reasonableness of the findings and conclusions, the reasonableness of assumptions and methods, and the relevance and accuracy of the information.
Bottom line: Does the work of the expert provide sufficient and appropriate audit evidence with regard to the issue at hand (e.g., investment pricing)?
When should an auditor begin thinking about specialist usage? Before the engagement is accepted. Why? If we accept an audit without the necessary skill sets, we have a problem. As you consider the acceptance of an audit engagement, think about whether a specialist is needed, and whether such a person is available at a reasonable price.
Reference to a Specialist in an Auditor’s Opinion
AU-C 620 states that an auditor should not refer to the work of an auditor’s specialist in an unmodified audit opinion. The auditor can, however, make reference to a specialist when the opinion is modified (to explain the reason for the modification). But, if reference is made, the audit opinion should state the auditor’s responsibility is not lessened.
What does this mean? Regardless of the situation, the opinion is the auditor’s (and not the specialist’s). We may use the expert’s work as audit evidence, but the audit opinion (and the corresponding responsibility) belongs to us.
Confidentiality Language in the Client Engagement Letter
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 person, but someone who works for your firm, then no such consent is necessary.
Now, let’s take a look at management’s specialist.
2. Management’s Specialist
AU-C Section 500, Audit Evidence, provides guidance on the use of information from a management specialist.
Your audit client might use their own expert 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 does. You do not need to recompute the actuarial computations, for example. But a review of assumptions for reasonableness is appropriate.
AU-C 500 Considerations
AU-C 500 requires considerations similar to those of an auditor’s specialist. For instance, you need to evaluate the competence and objectivity of management’s expert. Obtain an understanding of their work, and evaluate it in light of relevant assertions. For example, is the pension disclosure, based on actuarial information, understandable and accurate?
As with an auditor’s specialist, the sources of information regarding a management specialist can come from prior experience with the person, discussions with the expert, and knowledge of their certifications and experience.
Additionally, consider including relevant language in management’s representation letter.
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 these experts? 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:
- Why you need the expert (or their work product)
- What they are doing
- Their abilities, reputation, and experience
- Their objectivity
- The adequacy of the work provided
Peer review checklists include questions regarding your documentation of such information. Therefore, you need to make sure you do so.
At the end of the day, auditing is all about obtaining reasonable assurance by obtaining audit evidence. As you consider the use of these experts, ask yourself how their work impacts your risk assessment, your audit procedures, and finally your opinion.
Thanks Armando. This one was difficult to write. I wrote it because I kept getting confused myself. Hopefully it will help others who read it.
Charles very well explained. Thanks very much.