Auditing Fair Value Measurements: a Conceptual Approach
Author:
Associate Prof. Carmen Giorgiana BONACI, Ph. D.; Associate Prof. Irimie Emil POPA, Ph. D.; Lecturer Alin Ionel IENCIU, Ph. D.
JEL:
M41, M42
DOI:
Keywords:
fair value, estimates, level 3 inputs, assumptions, fraud, materiality
Abstract:
Being seen as a shift in accounting paradigms, fair value is now being used within accounting research literature for a significant period of time. The concept’s theoretical and practical evolution has always raised significant debates. Still, the debates were enhanced even more through the recent turbulent times of the financial crisis. Issues related to fair value measurements in illiquid markets, fair value’s pro-cyclical effect and the volatility it includes within financial statements, only represent a few difficult tasks for both professionals in the field of economics and for the corresponding regulatory bodies. Moreover, fair value has regularly been on the agenda of different standard setting bodies for a few years now. While accounting regulators struggle with fundamental questions such as whether fair value accounting is useful from the faithful representation’s perspective and that of the stakeholders’ needs, fair value also makes financial auditors’ task quite difficult when having to express an opinion on financial statements and to audit accounting estimates, including fair value accounting estimates and related disclosures. This study tries to offer an overview on auditing fair value measurements and main aspects that should be considered under such circumstances. Determining fair value through the use of level 3 inputs, as they are called both within SFAS 157 Fair Value Measurements and IFRS 13 Fair Value Measurements, might represent a difficult task for preparers. This is also true for auditors having to audit them. Testing fair value measurements requires testing of the management’s significant assumptions, of the reliability of these assumptions, of the valuation model and also of the underlying data. All these aspects are being analyzed and discussed from a conceptual point of view. \r\n