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PCAOB Proposal to Address Auditing Accounting Estimates

A new proposal by the Public Company Accounting Oversight Board (“PCAOB”) seeks to strengthen the applicable requirements for auditing accounting estimates. Issued as Proposed Auditing Standard for Auditing Accounting Estimates, Including Fair Value Measurements, the proposal advises auditors to use professional skepticism and give added attention to possible management bias while auditing accounting estimates.

Auditors have had issues auditing some accounting estimates, causing PCAOB inspectors to flag deficiencies at both small and large audit firms. Such deficiencies have raised concerns on auditors’ application of professional skepticism and their consideration of possible management bias.

In response, the PCAOB proposes a new standard that would replace Auditing Accounting Estimates (AS 2501); Auditing Fair Value Measurements and Disclosures (AS 2502); and Auditing Derivative Instruments, Hedging Activities, and Investments in Securities (AS 2503). The standard would include an appendix of special topics covering guidance on auditing the fair value of financial instruments.

Comments on the proposal are due Wednesday, August 30.

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