An Analysis of Auditors' Perceptions Related to Fair Value Estimates

Abstract

This study investigates auditors' understanding of Level 1, 2, and 3 fair value estimates (FVEs) and their perceptions of the adequacy of the associated auditing standards and internal firm guidance. The results indicate that Level 1 and Level 2 FVEs are encountered more frequently than Level 3 FVEs, and that auditors perceive themselves to have the greatest knowledge and comfort related to Level 1 FVEs followed by Levels 2 and 3, respectively. Auditors believe Level 3 FVEs are the most difficult to audit, while Level 1 FVEs are the least difficult to audit. While still overall confident, auditors are the least confident opining on financial statements with significant Level 3 FVEs, followed by financial statements with Level 2 and Level 1 FVEs, respectively. Auditors believe professional auditing standards, internal firm guidance, and required disclosures related to FVEs are all adequate. Finally, auditors believe determining whether they have done “enough” is the greatest challenge when auditing FVEs, while the cost–benefit consideration is perceived as the greatest cause of FVE testing failures. © 2017 Wiley Periodicals, Inc.