Audit procedures and confirmations - Using the work of an ex...

Learning Outcomes

After reading this article, you will be able to explain when and why an auditor may use the work of an expert, identify the steps required to assess the expert’s competence, capability and objectivity, and describe how to evaluate the adequacy of the expert’s work as audit evidence. You will understand the responsibilities of the auditor and expert under ISA 620 and know when to make reference to expert work in the auditor’s report.

ACCA Audit and Assurance (AA) Syllabus

For ACCA Audit and Assurance (AA), you are required to understand the circumstances in which auditors use the work of an expert and the correct procedures to follow. In your revision, focus on:

• When the use of an auditor’s expert is necessary during an audit. (ISA 620)
• The distinction between auditor’s experts and management’s experts.
• The procedures for assessing an expert’s competence, capability and objectivity.
• How auditors should agree and communicate the nature and scope of expert work.
• Evaluating whether the expert’s findings provide sufficient appropriate audit evidence.
• Reporting issues, including whether and how to refer to an expert in the auditor’s report.
• The limitations of relying on expert work and the continuing responsibility of the auditor.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What must an auditor consider when deciding to use the work of an auditor’s expert?
2. How does an auditor assess the objectivity of an external expert?
3. Is the auditor permitted to make reference to an expert's work in an unmodified auditor’s opinion? Explain.
4. Outline two procedures for evaluating the adequacy of the expert’s findings as audit evidence.

Introduction

Complex or specialised areas in an audit often require skills or knowledge beyond the auditor’s own specialised knowledge. In these situations, ISA 620 allows the auditor to obtain audit evidence by engaging an auditor’s expert. Typical areas include valuations of property, complex financial instruments, actuarial estimates, mineral reserves, and interpreting legal or regulatory matters.

Key Term: auditor’s expert
An individual or organisation outside the audit firm possessing specialised knowledge in fields other than accounting or auditing, whose work is used by the auditor to obtain sufficient appropriate audit evidence.

The auditor retains full responsibility for the audit opinion, even when using the work of an expert. They must assess whether the expert is suitable, clearly agree the scope of work, and critically evaluate the expert’s findings.

Using the Work of an Auditor’s Expert

When is an Auditor’s Expert Needed?

The auditor may decide to use an expert when:

• The subject matter requires technical input outside financial reporting, such as valuation of land and buildings, actuarial calculations, estimation of oil reserves, or legal interpretations.
• The complexity, judgement, or estimation uncertainty is high and specialist skills are needed to obtain reliable evidence.

Key Term: management’s expert
An individual or organisation engaged by the entity, not the auditor, to provide specialised knowledge relevant to the preparation of the financial statements.

Selecting and Assessing the Auditor’s Expert

ISA 620 requires the auditor to evaluate whether the expert has the necessary competence, capability and objectivity for the audit engagement.

Key Term: competence
The relevant qualifications, technical knowledge, skills, and experience needed to perform the assigned work appropriately.

Key Term: capability
The expert’s ability, including resources and availability, to undertake the required work in the specific circumstances.

Key Term: objectivity
Freedom from bias, conflicts of interest, or undue influence, ensuring the expert’s work is independent and reliable for audit purposes.

Common indicators of competence and capability include membership in a relevant professional body, appropriate qualifications, prior experience with similar assignments, and a track record of reliable work.

To assess objectivity, the auditor should enquire about the expert’s business, personal, or financial relationships with the client. Where doubt exists, further safeguards—such as written disclosures or using a different expert—may be necessary.

Agreeing on the Scope of Work

The auditor and expert must clearly agree, in writing where possible, on:

• The exact nature, scope, and objectives of the expert’s work.
• The auditor’s and expert’s roles and responsibilities.
• The methods and assumptions to be used, and any standards or criteria to be followed.
• The manner and timing of communication between both parties.
• Confidentiality obligations.

Evaluating the Expert’s Work

Once the expert’s report or findings are received, the auditor must:

• Assess whether the expert’s findings are reasonable and consistent with other audit evidence.
• Review the methods, significant assumptions, and data used by the expert.
• Determine if the work addresses the relevant audit assertions and suffices for audit purposes.
• Investigate any discrepancies or issues arising from the expert’s report.

If the expert’s findings appear inadequate or inconsistent, the auditor should discuss matters with the expert, request further explanations, or perform additional procedures as needed.

Worked Example 1.1

Scenario:
Sable & Co are auditing the financial statements of Tiger Estates Ltd. The company’s portfolio includes numerous investment properties, which must be measured at fair value under accounting standards. The directors have provided a recent external valuation report commissioned from Lion Valuers Ltd.

Question:
What steps should Sable & Co take before relying on Lion Valuers Ltd’s report as audit evidence for the property valuations?

Answer:
The auditors should:

• Assess whether the properties valued fall within Lion Valuers’ normal area of specialisation, and check qualifications.
• Enquire whether Lion Valuers Ltd has any business or family relationship with Tiger Estates’ directors.
• Agree the intended scope and method used in the valuation report.
• Consider whether the methodology and assumptions are appropriate and supported.
• Compare the valuation figures with market data and other audit evidence.
• Ensure any discrepancies or unusual assumptions are satisfactorily explained before placing reliance on the report.

Reporting and Reference to the Expert

The auditor remains solely responsible for the audit opinion, regardless of using an expert’s work. Normally, the auditor does not refer to the expert in an unmodified opinion. Reference may only be made when:

• The opinion is modified due to an issue relating to the expert’s work and reference is required to explain the circumstances.
• Law or regulation expressly requires such reference.

Reference to the expert does not reduce the auditor’s responsibility for the audit opinion. When included in a modified opinion, the reference should be clear and precise.

Worked Example 1.2

Scenario:
During the audit of Penguin Insurance Ltd, a material provision for insurance liabilities is calculated using actuarial techniques. An external actuary, Icy Actuarial Partners, is engaged by the audit firm.

Question:
If the actuary’s methods vary significantly from industry standards and cannot be reconciled with available data, what should the auditor do before issuing the audit opinion?

Answer:
The auditor should:

• Discuss the discrepancies with Icy Actuarial Partners to understand the rationale for their approach.
• Obtain additional explanations or supporting evidence.
• Engage another independent expert if necessary.
• Consider the implications for the audit opinion if the issues are not resolved, potentially leading to a qualified or adverse opinion with an explicit reference to the expert’s involvement.

Limitations and Continuing Responsibilities

• The auditor cannot delegate judgement to the expert, even when relying on their findings.
• Limitations exist where the subject matter is highly uncertain, or where the expert’s objectivity is in doubt.
• The auditor must perform sufficient procedures to confirm the competence, capability, and objectivity of the expert, and the adequacy and relevance of the expert’s work.

Exam Warning

Be able to distinguish clearly between a management’s expert (engaged by the client) and an auditor’s expert (engaged by the auditor). Do not confuse the assessment of audit evidence obtained from each.

Summary

Using the work of an auditor’s expert is necessary when audit evidence requires skills outside the auditor’s direct specialisation. ISA 620 sets out the steps: assess need, evaluate the expert’s competence, capability and objectivity, agree the work scope, and critically review the findings. The auditor maintains responsibility for the opinion and cannot simply accept the expert’s work without evaluation. Reference to the expert is only made in the auditor’s report in rare cases, usually where the opinion is modified on the basis of the expert’s work.

Key Point Checklist

This article has covered the following key knowledge points:

• The circumstances when an auditor’s expert is used and the types of subject matter involved.
• The process for selecting and assessing an expert’s competence, capability and objectivity.
• The importance of agreeing the scope and purpose of the expert’s work in advance.
• Procedures for evaluating whether the expert’s work provides reliable audit evidence.
• Limitations on relying on expert work and the auditor’s ongoing responsibility for audit opinion.
• Reporting rules for reference to experts in the independent auditor's report.

Key Terms and Concepts

• auditor’s expert
• management’s expert
• competence
• capability
• objectivity