Both in the United States and abroad, audit rule makers are developing new guidance on how to audit fair-value measurements.

The Public Company Accounting Oversight Board recently asked its Standing Advisory Group for its input on the board’s preliminary ideas around developing a new standard that would govern how to audit fair-value measurements. The board so far has given auditors staff guidance on auditing fair-value measurements, first in 2007 and again in 2009, but now is developing a standard that would carry more authority over the audit process.

The board asked its advisory group whether auditors should be instructed to automatically assume that if there’s heightened uncertainty a measurement, there must also be a heightened risk of fraud. In a small group discussion that was closed to the public, advisers said that’s probably taking it a bit too far, said Jennifer Rand, deputy chief auditor for the PCAOB.

Advisors generally agreed that there’s an inherent risk associated with measurements that are reached amid some uncertainty, said Rand, such as those that involve a great deal of estimation and judgment. Auditors should give those items some additional audit attention, but “there were pretty strong feelings that those types of measurements should not be labeled as fraud risks,” she said.

The staff told its advisory group that inspection and enforcement efforts indicate auditors typically aren’t skeptical enough when reviewing such measurements, which led the board to begin to develop an authoritative standard. A new standard could provide new direction on identifying and assessing risks of material misstatements, evaluating disclosures, and supervising specialists hired by auditors to help assess fair-value measurements.

Dan Goelzer, acting chairman for the PCAOB, said a fair-value measurement standard is being developed along with standards on auditing related-party transactions, communications with audit committees, risk assessments, and confirmations as part of a “very ambitious standard setting agenda” for the coming year. “The coming months are likely to see more activity with more potential impact on financial statement auditing than any similar period in the board’s existence,” he said.

While the PCAOB gets started on a fair-value measurement standard, the International Auditing and Assurance Standards Board has published a consultation paper looking for views on developing international guidance. The paper acknowledges strong demand from auditors and preparers for guidance on how to audit complex financial instrument measurements, especially in illiquid markets. The IAASB is looking for feedback that will help in the revision of its Practice Statement 1012 on auditing derivatives.

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