Evaluating a Specialist's Work: A Valuation Example Under AU-C 620

When an estimate depends on expertise the audit team lacks, the firm uses a specialist: a valuation professional for a goodwill impairment, an actuary for a pension, an engineer for reserves. Using a specialist does not move the responsibility for the opinion. The auditor still has to judge whether the specialist's work is good enough for the audit's purposes. This post walks one valuation through the evaluation. For the broader topic see using the work of a specialist, and for management's specialists, see auditing accounting estimates. Related: fair value measurement.

Distinguish the two kinds of specialist

An auditor's specialist is engaged or employed by the firm to help the auditor. A management's specialist is engaged by the client, and the auditor evaluates their work as audit evidence about the client's numbers. The requirements differ in detail but share the same core: competence, capability and objectivity, understanding of the field, and evaluation of the work. The example below uses an auditor's specialist engaged to test a client's valuation of acquired intangibles.

Step 1: Decide whether you need one

The need arises when the matter requires expertise the team lacks: valuation methods, actuarial assumptions, engineering. The auditor considers the nature and risk of the matter, the significance of the work in the audit, past experience with the specialist and whether the specialist is subject to the firm's quality management policies. The conclusion belongs in the planning file.

Step 2: Evaluate competence, capability and objectivity

Before relying on anyone, evaluate:

For a specialist that is part of the firm, objectivity is addressed by the firm's quality management policies and independence requirements. For an external specialist, document the inquiry, the answers and the conclusion. Safeguards may reduce a threat. If a threat cannot be reduced to an acceptable level, use someone else.

Step 3: Understand the field

The auditor needs enough understanding of the specialist's field to set the scope of the work and evaluate it. For a valuation, that means understanding income, market and cost approaches, discount rates and the data they require. The auditor does not have to be an expert, but must be able to ask informed questions.

Step 4: Agree the terms in writing

Agree with the specialist, in writing where appropriate:

• The nature, scope and objectives of the work.
• The respective roles and responsibilities of the auditor and the specialist.
• The nature, timing and extent of communication, including the form of the specialist's report.
• Confidentiality requirements.

The written terms also deal with access to client data, consent for the specialist to use client information, and any restrictions on what the specialist can say to the client. See AICPA confidentiality and AI tools with client data for the handling of client information in third-party hands.

Step 5: Evaluate the work

Evaluate the adequacy of the work for the audit's purposes, including:

1. Relevance and reasonableness of findings and conclusions, and consistency with other audit evidence.
2. Assumptions and methods: if significant assumptions and methods are used, the relevance and reasonableness of them in the circumstances.
3. Source data: if source data is significant to the work, the relevance, completeness and accuracy of that data.

Worked example

A client acquired a business for $18 million. Management's specialist valued acquired customer relationships at $4.2 million and trade names at $1.1 million, with goodwill as the residual. The auditor engages its own valuation specialist to evaluate the work.

Competence and objectivity. The firm's specialist is a credentialed valuation professional with relevant experience, employed by the firm and covered by its independence policies. The team records this in the file.

Scope agreed in writing. The specialist will (a) evaluate management's valuation report and models, (b) develop an independent range for the customer relationship asset, and (c) report in a written memo by a set date.

Source data. The specialist's work depends on the target's customer list, revenue by customer, attrition history and projected cash flows. The audit team tests the data:

Assumptions and methods. Management's specialist used a multi-period excess earnings method, a recognized method for customer relationships. The auditor's specialist assesses the discount rate, attrition curve and contributory asset charges. Management used a 14 percent discount rate and a 12 percent annual attrition rate. The auditor's specialist concludes the supportable ranges are 15 to 17 percent for the discount rate, reflecting the risk of an intangible asset, and 14 to 18 percent for attrition, based on the data tested. The specialist runs management's own model, a ten-year life with flat annual excess earnings scaled to management's $4.2 million, changing only those two inputs. At the best corner (15 percent discount rate, 14 percent attrition) the value is $3.76 million. At the worst corner (17 percent, 18 percent) it is $3.05 million.

Consistency with other evidence. The data shows that 4 of the top 10 customers left within 12 months of the acquisition, which is not consistent with a 12 percent annual attrition assumption. The specialist's range reflects this. Under the auditor's range, the customer relationship asset is $3.1 to $3.8 million versus management's $4.2 million, which falls outside the range.

Conclusion. The difference between management's amount and the nearest point of the auditor's range, about $0.4 million ($4.2 million less $3.76 million), is a judgmental misstatement, as the GAO Financial Audit Manual treats a range that excludes management's point estimate. The auditor asks management to revise. If management declines, the amount goes on the uncorrected misstatements schedule. The adjustment would also reduce amortization and, before deferred tax effects, increase goodwill by the same amount, about $0.4 million. The auditor also tells the client's governance about the estimation uncertainty in the completion communication.

Step 6: If the work is not adequate

The auditor agrees with the specialist on further work, or performs additional procedures. If the specialist's findings cannot be reconciled with other evidence, consider a second opinion or a different specialist. If sufficient evidence cannot be obtained, the opinion is affected.

Step 7: Reporting

The auditor does not refer to the work of the specialist in a report with an unmodified opinion unless law or regulation requires it. Where a reference is required by law or regulation, or is relevant to understanding a modification, the report says it does not reduce the auditor's responsibility for the opinion.

What the file needs

• Why a specialist was needed.
• Competence, capability and objectivity evaluation.
• The written terms of engagement.
• Evidence of the team's understanding of the field.
• Tests of source data.
• Evaluation of assumptions and methods.
• The specialist's report.
• The auditor's conclusion on adequacy and the effect on the audit.

Common gaps

• Evaluating the specialist's credentials and nothing else.
• No written scope.
• Accepting the specialist's report without testing source data.
• A management's specialist whose report relies on assumptions the auditor never evaluated.
• No documentation of objectivity inquiries for an external specialist.
• Reading the conclusion and not the assumptions.

CORAA prepares ready-to-review audit files for US CPA firms; the firm keeps the client, the review and the signature. See /us.

Sources

• AICPA, AU-C Section 620, Using the Work of an Auditor's Specialist; AU-C Section 540, Auditing Accounting Estimates and Related Disclosures
• AUASB, ASA 620 Using the Work of an Auditor's Expert (the international-standard equivalent of AU-C 620), paragraphs 9 to 14: standards.auasb.gov.au
• Open Exam Prep, using the work of specialists under AU-C 620: open-exam-prep.com
• FASB, Accounting Standards Codification Topics 820 (Fair Value Measurement) and 805 (Business Combinations)
• U.S. Government Accountability Office, Financial Audit Manual, Volume 1 (GAO-26-108577), June 2026, section 540 (treatment of differences between management's and the auditor's point estimate or range): gao.gov

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error