When the entity uses an actuary, appraiser or engineer to prepare a number in the financial statements, AU-C 501.27 applies. If information to be used as audit evidence has been prepared using the work of a management's specialist, the auditor, to the extent necessary and taking into account the significance of that work, evaluates the specialist's competence, capabilities and objectivity, obtains an understanding of the work, and evaluates the appropriateness of the work as audit evidence for the relevant assertion.
The requirement sits in AU-C 501, Audit Evidence, Specific Considerations for Selected Items, not in AU-C 500. AU-C 501.04 defines a management's specialist as an individual or organization with expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist in preparing the financial statements. The paragraph was added by SAS No. 142 for audits of periods ending on or after December 15, 2022, and amended by SAS No. 144 for periods ending on or after December 15, 2023. AU-C 500 still matters, because it defines what is not a management's specialist. Our guides to using the work of a specialist under AU-C 620 and a valuation example under AU-C 620 cover the auditor's own specialist.
Is this a management's specialist or an external information source?
AU-C 500.06 says that when an individual or organization provides information acting as a management's specialist, service organization or auditor's specialist, it is not an external information source for that information. The same organization can be both for different information. Appendix A to AU-C 500 (.A67) gives examples:
- An actuarial organization that publishes mortality tables for general use is an external information source. The same organization preparing pension liability information tailored to the entity's plans is a management's specialist.
- An organization that publishes real estate price data for a region is an external information source. The same organization preparing commissioned valuations of the entity's portfolio is a management's specialist.
- A firm that applies models to estimate fair value specifically for the entity is likely a management's specialist. A firm that only supplies prices of private transactions is likely an external information source (AU-C 501.A71 gives the same fair value example).
The label matters because an external information source gets the relevance and reliability evaluation in AU-C 500.07, while a management's specialist gets the three-part evaluation in AU-C 501.27.
How much work is "to the extent necessary"?
Paragraph .A72 lists what moves the extent up or down: the complexity of the matter, the risks of material misstatement, alternative sources of evidence, whether the specialist is an employee or engaged party, how far management can influence the specialist, whether the specialist is subject to technical performance standards, entity controls over the work, and the auditor's experience with the field and with this specialist. It ends with the rule that more persuasive evidence is needed as the significance of the work, the risk, or management's ability to affect the specialist's judgments increases, or as the specialist's competence, capabilities and objectivity decrease.
What do competence, capabilities and objectivity mean?
Paragraph .A73 separates the three:
- Competence: the nature and level of expertise.
- Capability: the ability to exercise that competence in the circumstances, which can depend on geographic location and the availability of time and resources.
- Objectivity: the possible effects of bias, conflict of interest or the influence of others on the specialist's professional or business judgment.
Sources of information include the auditor's experience with prior work, discussions with the specialist or others familiar with the work, qualifications, professional body membership, license and published work (.A74). Relevant matters include whether the work is subject to technical performance standards (.A75), the specialist's area of specialty, for example a property and casualty actuary with limited pension expertise, and the specialist's competence with the accounting requirements (.A76). The auditor reconsiders the evaluation as the audit progresses if events or evidence suggest it (.A76).
Paragraph .A77 lists threats to objectivity: self-interest, advocacy, familiarity, self-review and intimidation. An employed specialist cannot ordinarily be regarded as more likely to be objective than other employees (.A78). For an engaged specialist, paragraph .A79 suggests discussing interests and relationships and safeguards with management and the specialist, and using related party procedures under AU-C 550. Interests and relationships include financial interests, business and personal relationships with the entity and with the specialist's employer, and the provision of other services.
What does understanding the work require?
Paragraphs .A80 to .A83 call for an understanding of the relevant field, which may show whether the auditor needs an auditor's specialist. Relevant aspects include areas of specialty, applicable professional and regulatory standards, the assumptions and methods used and whether they are generally accepted in the field and appropriately applied under the framework, and the internal and external data used. For an engaged specialist there is ordinarily an engagement letter, and reading it helps the auditor judge the scope, roles and form of the report. For an employed specialist, inquiry may be the most appropriate way.
How is the work evaluated as audit evidence?
Paragraph .A84 points to AU-C 540.21 and lists: the appropriateness of significant assumptions and consistency with relevant information, the appropriateness of methods under the framework, the relevance and reliability of source data, and the relevance and reasonableness of findings and their consistency with other evidence. Paragraph .A86 adds procedures for a proprietary model: inquire of the specialist, read descriptions, test controls over management's evaluation, test mathematical accuracy where practicable, and assess inputs and outputs, possibly with an alternative model.
Paragraph .A88 lists the triggers for more procedures: findings inconsistent with other information or evidence, restrictions or disclaimers in the report, exceptions in data, assumptions or methods, doubts about competence, capabilities or objectivity, and a conflict of interest.
Worked example: an actuary's claims reserve
A self-insured employer records an incurred but not reported (IBNR) claims reserve of $1,840,000, prepared by an outside actuary. The work is significant to the reserve assertion and the risk is high, so the auditor documents as follows.
| Element | What the file records | Source in AU-C 501 |
|---|---|---|
| Competence | Credentialed actuary; specialty in health and welfare plans, matching the matter | .A74, .A76 |
| Capability | Team assigned, time available before the report date, access to claims data | .A73 |
| Objectivity | The actuary's firm also supplies benefits brokerage to the company; inquiry made of management and the specialist about safeguards and separation of teams; related party procedures checked | .A77, .A79 |
| Understanding of work | Engagement letter read for scope and report form; method is a lag-based projection accepted in the field; data are claims paid by month | .A81, .A82 |
| Data | Claims paid per actuary's data file $12,480,000 versus general ledger $12,495,000, difference $15,000 (0.12%), traced to a timing item | .A84 |
| Assumptions and method | Completion factors compared with prior-year experience and with subsequent claims paid | .A84, .A85 |
| Findings | Actuary's range $1,700,000 to $1,950,000; recorded $1,840,000 is within it, $140,000 above the low end and $110,000 below the high end | .A84 |
| Conclusion | Work is appropriate audit evidence for the reserve assertion | .27c |
The objectivity row is the one that draws questions. The standard does not say another service relationship disqualifies the actuary. It lists provision of other services among interests to evaluate and calls for judging whether safeguards are adequate. If the evaluation had left doubt, paragraph .A88 would call for additional procedures. The related estimate work is covered in auditing accounting estimates under AU-C 540.
How does this compare with the PCAOB?
For a company's specialist, AS 1105 Appendix A requires the auditor to assess knowledge, skill and ability and the company's ability to significantly affect the specialist's judgments, then test data, assumptions and methods. See our post on the auditor-engaged specialist under AS 1210 for the other PCAOB regime.
Frequently asked questions
Does the specialist's report replace our testing?
No. Paragraph .27c requires evaluation of the work as audit evidence, including data, assumptions and methods (.A84).
Does an in-house specialist need the same evaluation?
Yes. The requirement covers management's specialists whether employed or engaged, though the way to get the understanding differs (.A82 and .A83).
Sources
- AICPA, AU-C Section 501, Audit Evidence, Specific Considerations for Selected Items (paragraphs .03, .04, .27, .A70 to .A88): https://www.aicpa-cima.com/resources/landing/aicpa-professional-standards
- AICPA, AU-C Section 500, Audit Evidence (paragraph .06 definition of external information source and Appendix A, .A67): https://www.aicpa-cima.com/resources/landing/aicpa-professional-standards
- PCAOB, AS 1105, Audit Evidence, Appendix A, Using the Work of a Company's Specialist as Audit Evidence: https://pcaobus.org/oversight/standards/auditing-standards/details/AS1105
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