Hope all is going great. This August blog which is one of two parts will address the never-ending saga of new standards for the fair value of financial instruments. In Part 1, I will discuss the Public Company Oversight Accounting Board’s (PCOAB) new auditing standards governing assessment risk. In next month’s blog, I will continue with their new auditing standard but focusing on third-party pricing services. PCOAB issued AS 2501- Auditing Accounting Estimates, Including Fair Value Measurements. The gist of it deals with identifying and assessing risks of material misstatement. In my humble opinion, there is nothing new under the sun with this pronouncement. It is just an amplification of techniques that should have been followed in the first place. With that said, this standard suggested that the auditor identifies and assess risks of material misstatements by:
- Reviewing the terms and characteristics of financial instruments
- Determining the extent to which the fair value of the type of financial instruments is based on inputs that are observable directly or indirectly.
- Comprehending the other factors affecting the valuation of the financial instruments, such as credit or counterparty risk, market risk, and liquidity risk.
As the list abbreviated list suggests, these procedures are nothing special or new. These factors should have always been considered but nevertheless, the PCOAB felt compelled to issue them for purposes of clarity for auditors who are conducting reviews and audits of financial instruments.
The September blog will continue on with a discussion of third-party pricing services which PCOAB has also elaborated upon. Until next time…………………………………………………..