An auditor is auditing the fair value of Level 3 assets (complex derivatives) for an issuer. Management has used a specialist to develop the valuation model. Under PCAOB standards, which of the following is the auditor's responsibility regarding the specialist's assumptions?

Answer options:

The auditor may rely on the specialist's assumptions without testing, provided the specialist is qualified and independent.

The auditor must evaluate the reasonableness of the significant assumptions used by the specialist.

The auditor must hire a separate auditor's specialist to re-perform the valuation in all cases.

The auditor should disclaim an opinion on the fair value portion of the financial statements.

How to approach this question

Auditor cannot blindly rely on a specialist. They must evaluate the 'inputs' (Data and Assumptions).

Full Answer

B.The auditor must evaluate the reasonableness of the significant assumptions used by the specialist.✓ Correct

The auditor is responsible for the opinion and must evaluate the specialist's work as audit evidence. This includes evaluating whether the assumptions make sense given the market and entity.

Common mistakes

Thinking the specialist takes full responsibility.

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