In the US, the Public Company Accounting Oversight Board (PCAOB) released a new document Spotlight: Considerations for Audit Firms Using the Work of Specialists. As the scope of accounting and financial disclosures has evolved, the need for specialized knowledge has grown. This has been a challenge for financial auditors who must review, understand and apply this knowledge in audits. Specialists are used by both companies and auditors across several topics – including environmental remediation estimates, climate and other sustainability topics that are included in a company’s financial statements subject to audit.
“Auditors increasingly use the work of specialists in their audits to assist in obtaining and evaluating audit evidence… the specialist’s work is highly technical in nature and often is not entirely transparent to the auditor, who may not have complete access to the specialist’s work or the same level of knowledge and skill in the specialist’s field…
The auditor’s responsibilities with respect to data, significant assumptions, and methods used by the company specialist generally are:
- Company-produced data: Test the accuracy and completeness of company-produced data used by the company specialist.
- Data from sources external to the company: Evaluate the relevance and reliability of the data from sources external to the company that are used by the company specialist.
- Significant assumptions: Evaluate whether the significant assumptions used by the specialist are reasonable, including:
- Assumptions developed by the company specialist;
- Assumptions provided by company management and used by the company specialist; and
- Assumptions based on the company’s intent and ability to carry out a particular course of action.
- Methods: Evaluate whether the methods used by the company specialist are appropriate under the circumstances, taking into account the requirements of the applicable financial reporting framework.
… the auditor’s responsibility is to evaluate whether the work of the company specialist provides sufficient appropriate evidence to support a conclusion regarding whether the corresponding accounts or disclosures in the financial statements are in conformity with the applicable financial reporting framework.”
The Spotlight also discusses qualifications and supervision of auditor-employed specialists which are governed by PCAOB Auditing Standards.
Some expert topics are more apparent than others. Environmental remediation cost estimates and assumptions are obvious. But less so are climate/transition economy impacts on oil and gas reserve impairment estimates, or on real estate or mortgage companies. Experts who are unfamiliar with auditing practices/standards will face challenges in responding to auditor needs for sufficient and appropriate audit evidence.
The need for experts in companies and audit teams will only increase as sustainability, climate and other ESG matters are added to financial reporting.
Members can learn more about sustainability auditing/assurance here.
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