Using the Work of an Auditor’s Specialist: Best Practices and Key Considerations

11.5 Using the Work of an Auditor’s Specialist

The modern business landscape hinges on technology-driven innovation, intangible assets, and increasingly complex transactions. In this environment, auditors frequently encounter areas where expertise beyond accounting or general auditing principles is required. Whether it’s an actuarial valuation of pension obligations, an engineering report assessing environmental cleanup obligations, or a legal interpretation of a complex contract, external specialists often play a pivotal role in providing insights and evidence that underpin the audit opinion. This section explores the reasons for engaging specialists, outlines how to select and evaluate specialists effectively, and provides guidance on incorporating a specialist’s work into the final audit conclusions.

Reasons to Engage Specialists

Auditors are tasked with forming an opinion on financial statements that may involve numerous specialized areas requiring advanced technical knowledge. The need for an auditor’s specialist typically arises under circumstances such as:

• Complex valuations of financial instruments (e.g., derivatives, embedded derivatives, convertible debt).
• Fair value assessments of intangible assets, patents, trademarks, or goodwill.
• Engineering or environmental matters (e.g., site restoration costs, environmental impact assessments).
• Actuarial computations relevant to pensions, insurance reserves, or claims liabilities.
• Legal or contractual analyses regarding mergers, acquisitions, or other intricate transactions.

When an auditor lacks sufficient technical expertise or when the area under review demands specific scientific, engineering, or legal knowledge, a specialist’s engagement ensures the accuracy and appropriateness of management’s assertions. By consulting an independent expert, auditors can more confidently evaluate whether management’s assumptions and estimates comply with the applicable financial reporting framework (e.g., GAAP or IFRS).

Selecting and Evaluating Specialists

1. Qualifications and Expertise

Before engaging any specialist, auditors must assess the individual or organization’s skill set and experience relevant to the subject matter. Key considerations include:
• Professional credentials (e.g., actuarial designations, engineering licenses, or legal certifications).
• Industry-specific experience and track record of analyzing similar engagements.
• Familiarity with the pertinent accounting standards (e.g., FASB Accounting Standards Codification “ASC” 820 for fair value measurements).

2. Objectivity and Independence

Independence is critical for ensuring the specialist’s conclusions are unbiased. The auditor should inquire about relationships that might compromise the specialist’s objectivity—such as financial interests in the client’s operations or any familial or employment connections. The AICPA’s Code of Professional Conduct, along with international and PCAOB guidelines, provides frameworks for assessing and maintaining independence.

3. Communication of Scope and Objectives

At the outset, communicate precisely:
• The nature and scope of the specialist’s engagement.
• The specific objectives or assertions to be tested.
• The form and content of the specialist’s final report or working documentation.

Clear, upfront communication helps ensure alignment on methodology, expectations, and timing. It also clarifies which aspects of the specialist’s work the auditor will rely on when forming the audit opinion.

4. Agreement on Deliverables

Formalize the engagement terms with a written agreement or letter. This agreement should outline:
• Roles and responsibilities of both the auditor and the specialist.
• The format of deliverables (written report, spreadsheet analysis, etc.).
• Deadlines, confidentiality arrangements, and a structure for addressing disputes or additional queries.

Assessing Specialist Findings

1. Review of Methodologies and Assumptions

Upon receiving the specialist’s findings, the auditor evaluates:
• Whether the methodologies are consistent with the applicable financial reporting framework (GAAP, IFRS, etc.).
• Whether the data inputs and key assumptions (e.g., discount rates, market risk premiums, or mortality rates) are reasonable and supported by market evidence or reliable sources.
• Whether any limitations in the specialist’s report might influence how the auditor interprets the results.

2. Reconciling Discrepancies

If the specialist’s conclusions differ significantly from management’s estimates or from the auditor’s expectations, additional steps may include:
• Discussion with the specialist to understand the rationale and any underlying data limitations.
• Seeking a second expert opinion, particularly for highly material or judgmental items.
• Inquiring further of management to verify assumptions or gather additional evidence.

These steps ensure the auditor addresses potential inconsistencies before finalizing the audit conclusions.

3. Documentation and Conclusions

The documentation of the auditor’s evaluation of a specialist’s work is critical. AU-C Section 620 requires auditors to document:
• The nature of the specialist’s involvement and the specific items they evaluated.
• The auditor’s assessment of the specialist’s competence and objectivity.
• The key assumptions and methods used, along with results and conclusions.

If the results of the specialist’s work significantly affect the auditor’s opinion, the audit file should include enough detail to demonstrate how the auditor relied on that work and how it informed the conclusions drawn in the financial statement audit.

    flowchart LR
	    A(Identify Need for Specialist) --> B(Select and Evaluate Specialist)
	    B --> C(Communicate Scope & Objectives)
	    C --> D(Obtain Specialist Findings)
	    D --> E(Assess Methodologies & Assumptions)
	    E --> F(Reconcile Discrepancies, If Any)
	    F --> G(Audit Documentation & Conclusions)

The diagram above illustrates the workflow for using an auditor’s specialist, from the initial recognition of a need to relying on the specialist’s findings during final audit conclusions.

Best Practices and Challenges

• Engage the specialist early: Late-stage involvement of a specialist may result in time pressures and increase the risk of inadequate examination.
• Maintain open lines of communication: Set regular checkpoints, so both the audit team and the specialist remain aligned on objectives.
• Beware of scope creep: Ensure any additional requests from the specialist or from the audit side are formally addressed to avoid misunderstandings.
• Evaluate data integrity: Confirm that all relevant data provided to the specialist is accurate and complete to avoid flawed conclusions.
• Consider cross-border regulations: If the specialist operates in a different jurisdiction, confirm their approach aligns with the client’s reporting framework and relevant local laws.

Glossary

• Auditor’s Specialist: An individual or organization with expertise in a field other than accounting or auditing, engaged by the auditor to provide specialized insight or evaluation of evidence.
• Actuarial Valuations: Calculations that quantify present and future liabilities for pensions, insurance claims, and other obligations over multi-year horizons.
• Engineering Reports: Documents assessing physical assets or environmental conditions, such as contamination cleanup costs or structural integrity, that carry financial reporting implications.

References and Resources

Official References

• AU-C Section 620: “Using the Work of an Auditor’s Specialist.”
• AICPA Code of Professional Conduct for guidelines on independence.

Additional Resources

• AICPA Forensic and Valuation Services for guidance on complex valuations.
• IFRS Guidance especially IFRS 2 (Share-Based Payments), IFRS 3 (Business Combinations), and IFRS 9 (Financial Instruments), which often require valuation specialists.

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Disclaimer: This course is not endorsed by or affiliated with the AICPA, NASBA, or any official CPA Examination authority. All content is created solely for educational and preparatory purposes.

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