The chief auditor at the Public Company Accounting Oversight Board is preparing new guidance that would give auditors direction on how to audit fair-value measurements and disclosures.

The PCAOB is gathering its Standing Advisory Group next week in part to discuss the work undertaken so far by its Pricing Sources Task Force, formed in March to study how auditors audit the fair value of financial instruments when those instruments are not actively traded and how third-party pricing sources are used in the valuation and audit. Martin Baumann, chief auditor at the PCAOB, may recommend the board consider new guidance or possibly a new auditing standard based on the task force's findings. The board also plans to consult the SAG on auditor independence, audit firm rotation, the auditor's reporting model and other hot-button topics.l

The task force has so far studied a variety of issues related to financial instrument valuation, including the nature and extent of information pricing sources provide to issuers and auditors, the processes and controls over information gathered from pricing sources, and the auditor's procedures related to that information. Third-party pricing sources could include any number of sources from outside the company where companies might gather and rely on data to build a case for the fair value of an instrument that is not actively traded, and therefore not readily priced by the market.

According to a PCAOB presentation to be shared with the SAG, task force members have conducted their own pricing exercises on financial instruments within different classes of assets so they could compare their results. They examined how the pricing sources determined prices for individual instruments, what valuation techniques might be applied, and why the results are similar or different.

SAG members will hear that it's important for auditors to find the issuer's portfolio classified into separate categories according to risks and characteristics, so auditors can better understand the risks in each category and focus their attention on the instruments with greater risk of misstatement. The task force has determined that a service organization audit at the pricing source could help assure controls over the pricing information, but auditors would still need their own audit evidence to support the fair value of financial instruments.

The task force says companies and auditors rely on different types of pricing sources for a variety of services. Some issuers use third-party pricing information to check the results of their internal models, while others rely on the third-party data as direct evidence of fair value, and plenty more use a combination of those approaches.

Baumann and his staff plan to ask the SAG for their views on how the board should proceed based on the task force's findings.

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