International audit experts are proposing some new guidance that should be added to the required reading list for U.S. companies and auditors involved with complex financial instruments.

The International Auditing and Assurance Standards Board is looking for comments on some draft guidance titled International Auditing Practice Statement 1000, Special Considerations in Auditing Complex Financial Instruments. The guidance highlights some of the practical issues auditors should keep top of mind when dealing with complicated financial instruments, especially around valuation and disclosure issues for instruments that are measured at fair value.

James Gunn, technical director for the IAASB, said the accounting around complex financial instruments, especially those measured at fair value, is tricky enough – making the auditing an even trickier proposition. The board wanted to address the issues in some practice guidance based on lessons learned during the credit crisis, he said.

Although the guidance is developed based on international standards, it can be useful to U.S. auditors, he said. “It’s certainly applicable to any audits,” he said.

The IAASB is the auditing standard setter for the International Federation of Accountants, a global network of professional accounting organizations. IAASB writes the professional standards known as International Standards on Auditing. Its U.S. equivalent is the Auditing Standards Board of the American Institute of Certified Public Accountants.

Gunn said the proposed guidance focuses primarily on valuation, especially at “Level 3” on the fair value hierarchy where valuations are based on estimates and judgment rather than objective evidence. It also focuses on audit evidence and how much of it auditors should seek, especially with regard to broker deal quotes and placement services.

Finally, it addresses disclosures, said Gunn. “There’s a universal recognition of the importance of robust disclosures around these types of instruments,” he said. “The guidance gives some areas to think about and what information to include to assure the disclosures are fair.”

The Public Company Accounting Oversight Board has touched on some of these issues in a variety of auditing alerts published over the past few years, including Audit Alerts No. 5, No. 4, No. 3 and No. 2. They cover concerns around significant unusual transactions, fair value measurements, disclosures, impairments, and risks that auditors should consider in a strained and unusual economic climate.

Gunn said he doesn’t see the PCOAB guidance as directly equivalent to the IAASB’s proposed practice statement. “The proposed practice statement is premised on IAASB’s risk standards, which have been around for several years,” he said. “They’re also premised on recent standards on estimates and fair value. The PCAOB is working on equivalent standards for the U.S. marketplace.”

The PCAOB’s risk assessment standards have been approved by the board but are awaiting approval by the Securities and Exchange Commission before they can become effective.

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