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PCAOB Adopts Stricter Standards for Auditing Estimates, Evaluating Specialists

The PCAOB adopted amendments to its standards for auditing accounting estimates and fair value measurements, replacing three existing standards with a single, updated standard. The standard aims to strengthen audit requirements and apply a more uniform, risk-based approach to an area of the audit that is of increasing prevalence and significance. “[A]ccounting estimates, including fair value measurements, generally involve subjective assumptions and measurement uncertainty, making them susceptible to management bias,” according to the PCAOB’s release. The PCAOB reported it has seen a recurring pattern of deficiencies in this area. The new standard will, among other things, provide direction to prompt auditors to devote greater attention to addressing potential management bias in accounting estimates. The PCAOB also is amending its standards for using the work of specialists (i.e., a person or firm possessing special skill or knowledge in a particular field other than accounting or auditing). The amendments are intended to enhance investor protection by strengthening the requirements for evaluating the work of a company's specialist, whether employed or engaged by the company, and applying a supervisory approach to both auditor-employed and auditor-engaged specialists. “These amendments should lead to more uniformly rigorous practices among audit firms of all sizes and enhance audit quality and the credibility of information provided in financial statements,” the PCAOB said. The new standards and amendments will apply to all audits conducted under PCAOB standards. Subject to approval by the SEC, the amendments take effect for audits for fiscal years ending on or after December 15, 2020.

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