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PCAOB Releases Consistent Approach to Auditing Accounting Estimates

In its first standard-setting move since undergoing a complete leadership change early last year, the Public Company Accounting Oversight Board (“PCAOB”) unanimously approved a standard to improve audits of accounting estimates. Issued as Release No. 2018-005, Auditing Accounting Estimates, Including Fair Value Measurements, the standard provides auditors a more consistent approach to auditing accounting estimates.

Previously, auditors used three standards to audit estimates: Auditing Standard (“AS”) 2501, Auditing Accounting Estimates; AS 2502, Auditing Fair Value Measurements and Disclosures; and AS 2503, Auditing Derivative Instruments, Hedging Activities, Investments in Securities. While the standards employ a common approach to testing estimates, they differ in explaining the auditor’s responsibilities. To prevent further inconsistencies, the new standard will replace the previous three.

PCAOB chairman William Duhnke said the objective is to have one standard for auditing accounting estimates that provides a clearer, consistent, risk-based approach. Duhnke noted Release No. 2018-005 addresses concerns and is tailored to address this challenging audit area. Additionally, PCAOB member Duane DesParte said the standard stresses why professional skepticism is important when auditors review a client’s accounting estimates, and more attention must be given to possible management bias.

Before the standard becomes effective, the Securities and Exchange Commission must give its approval. The PCAOB would like the standard to go into effect for audits of financial statements for fiscal years ending on or following December 15, 2020.

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