Some audit areas call for expertise outside accounting and auditing: valuing a business acquired during the year, estimating insurance reserves, measuring oil and gas reserves, appraising real estate, or evaluating a pension obligation. When the evidence rests on that expertise, the audit team needs a framework for deciding how far to rely on the specialist. In US GAAS, there are two cases and two sections.
- Auditor's specialist: an individual or organization the auditor uses to obtain sufficient appropriate evidence. This is governed by AU-C 620, Using the Work of an Auditor's Specialist.
- Management's specialist: an individual or organization the entity uses to help prepare the financial statements. The auditor's responsibilities for information prepared using that work are in AU-C 501.27 (AU-C 501, Audit Evidence, Specific Considerations for Selected Items), added by SAS 142 for periods ending on or after December 15, 2022 and amended by SAS 144 for periods ending on or after December 15, 2023.
This guide covers both, with the steps a firm should document.
Who counts as a specialist
A specialist has expertise in a field other than accounting or auditing. Valuation experts, actuaries, appraisers, geologists, engineers, environmental consultants and IT security specialists all qualify. Expertise in accounting or auditing, such as complex income tax accounting or the audit of a technical area like ASC 842, does not make someone a specialist under these sections, even if the person is unusually skilled.
An auditor's specialist may be internal (a partner or employee of the firm, or in a network firm) or external (engaged by the firm). The requirements differ slightly: for an internal specialist, the firm's own quality management system helps establish competence and objectivity, while for an external specialist the auditor evaluates those factors directly.
When to use a specialist
The decision comes from the risk assessment under AU-C 315, as revised by SAS 145, and from the planned response to assessed risks. Consider a specialist when:
- the area involves significant estimation uncertainty, complexity or subjectivity, such as a goodwill impairment test, share-based awards, or an investment without a readily determinable fair value
- the audit team lacks the knowledge to evaluate the methods, models or data
- the entity relies on a specialist whose work you cannot evaluate without equivalent expertise
- the nature, extent or timing of procedures would otherwise not be enough to address a significant risk
The audit team is expected to have, collectively, the knowledge needed to perform the engagement, and the engagement partner is responsible for determining that. That includes deciding whether the team can adequately understand the specialist's work and discuss it. For a small firm, that conversation often starts with the question: "Can we read this valuation report and challenge it intelligently?" If the answer is no, bring in help or consider whether the engagement is within the firm's competence.
Auditor's specialist under AU-C 620
Evaluate competence, capabilities and objectivity
Before relying on an auditor's specialist, evaluate:
- Competence: professional qualifications, licenses, memberships, experience in the type of work required.
- Capabilities: the specialist's ability to apply that competence in the circumstances, including access to the right tools and resources.
- Objectivity: the threats to objectivity and the safeguards in place. A specialist engaged by the audit firm but who also advises management on the same item has a self-review or advocacy threat that needs to be addressed.
Sources of information include prior experience with the specialist, discussions with them, their other auditors or colleagues, published papers, and the standards of the professional body. For an external specialist, document the evaluation and do it each engagement, not once.
Agree the scope of work
Agree with the specialist on the matters below. Putting the agreement in writing is good practice (the standard asks for agreement, not a particular form). The first four are matters AU-C 620 addresses; the fifth is practice:
- the nature, scope and objectives of the work
- the roles and responsibilities of the auditor and the specialist
- the nature, timing and extent of communication, including the form of the report
- the need for the specialist to observe confidentiality requirements
- as practice, the sources of data, assumptions and methods the specialist will use, and which are management's
Where the specialist is external, the engagement letter or statement of work is a good place for this. A short memo to file can serve for an internal specialist.
Evaluate the adequacy of the work
Read the specialist's report and evaluate whether the work is adequate for your purposes. Considerations include:
- the relevance and reasonableness of the findings and conclusions, and consistency with other audit evidence
- the significant assumptions and methods, and their reasonableness in the circumstances
- the relevance, completeness and accuracy of source data the specialist used
Source data deserves particular attention. A valuation can be technically sound and still wrong because the cash flow forecast came from management and was never tested. Where the specialist used management's data, the audit team tests it under AU-C 500's requirements for information produced by the entity. The IPE testing worksheet can support that.
If the work is not adequate, the options are to agree additional work with the specialist, or to perform further procedures, which may include engaging another specialist.
Reporting
The auditor's report on an unmodified opinion does not refer to the work of an auditor's specialist. Referring to one can be misread as a division of responsibility. The auditor takes sole responsibility for the opinion. If the opinion is modified and mentioning the specialist helps explain the modification, the report can refer to the specialist but should say that the reference does not reduce the auditor's responsibility for the opinion.
Management's specialist under AU-C 501
When information to be used as audit evidence has been prepared using the work of a management's specialist, the auditor does the following under AU-C 501.27, to the extent necessary given the significance of that work:
- Evaluate competence, capabilities and objectivity. The same factors as above, but the auditor is not choosing the specialist. A related-party relationship between the specialist and the entity, or an interest in the outcome, is a threat to objectivity.
- Obtain an understanding of the specialist's work. That includes the field of expertise, the nature of the work and the use made of it by management.
- Evaluate the appropriateness of the work as audit evidence for the relevant assertion, including relevance and reasonableness of findings, assumptions and methods, and the data used.
This applies to a very wide range of everyday evidence: an actuary's pension report, an appraisal supporting real estate carrying value, a third-party valuation of contingent consideration, an engineer's percentage-of-completion estimate, an environmental consultant's remediation cost estimate.
Impairment testing, covered in the ASC 360 and ASC 350 guide, is a common example. An auditor may evaluate a management's specialist's report and also engage a valuation specialist of the auditor's own to develop an independent range or critique. In that case, both sections apply: AU-C 501 to management's specialist, AU-C 620 to yours.
Accounting estimates and specialists
Accounting estimates under AU-C 540 frequently depend on specialists. The estimates standard asks the auditor to consider whether specialized skills or knowledge are needed in obtaining an understanding of the entity, evaluating the estimate, and developing an auditor's point estimate or range. The specialist sections give the mechanics for that.
What to document
Under AU-C 230, the file should show:
- the reasons for using the specialist and the risk addressed
- the evaluation of competence, capabilities and objectivity
- the scope agreed and the specialist's instructions
- the specialist's report, or a reference to where it is kept
- the procedures on the data, assumptions and methods
- the conclusion on whether the work supports the relevant assertion
- the engagement partner's conclusion on team competence and involvement
Keep specialist communications in the file. A phone call that changed the approach belongs in a memo.
Common problems
- No independent view on assumptions. The auditor reads the valuation report, confirms the credentials, and files it without evaluating the discount rate, growth rate or comparables.
- Source data untested. Management supplied the forecast or the fixed asset listing, and nobody tested completeness or accuracy.
- Objectivity gap. The valuation firm preparing management's analysis also prepared the audit firm's own work, or is paid on a contingent basis.
- Stale reports. A report dated well before the balance sheet date is used without evaluating changes since.
- Referencing the specialist in the opinion. The report on an unmodified opinion should not mention the specialist.
- Scope never agreed. The specialist answers a different question than the audit needed.
FAQ
What is the difference between an auditor's specialist and a management's specialist?
An auditor's specialist is used by the audit team to obtain evidence, and AU-C 620 applies. A management's specialist is used by the entity to prepare the financial statements, and the auditor's responsibilities for that work are in AU-C 501.27.
Can I use the same valuation firm as management?
It is risky. If the same firm prepares management's valuation and your work, the independence of the evidence is in doubt and objectivity is questionable. Generally, use a different specialist to challenge management's, or evaluate management's specialist under AU-C 501.27 without presenting the same firm's work as an independent audit specialist.
Does using a specialist reduce my responsibility?
No. The auditor has sole responsibility for the opinion. A specialist provides evidence; the auditor decides whether it is sufficient and appropriate.
Should the audit report mention the specialist?
Not in a report with an unmodified opinion; AU-C 620 does not allow it, because it could be read as dividing responsibility. A reference may be relevant in a report with a modified opinion, with a statement that it does not reduce your responsibility.
Do I need written terms with an external specialist?
The standard calls for agreement on the nature, scope and objectives of the work, roles, communication and confidentiality. A written engagement letter or statement of work is the usual way to show it, and the file should include it.
Sources
- AICPA, AU-C Section 620, Using the Work of an Auditor's Specialist
- AICPA, AU-C Section 501, Audit Evidence, Specific Considerations for Selected Items (paragraph .27, management's specialist; SAS No. 142 and SAS No. 144); AU-C Section 500, Audit Evidence (information produced by the entity)
- AICPA, AU-C Section 540, Auditing Accounting Estimates and Related Disclosures (SAS No. 143); AU-C Section 315 (as revised by SAS No. 145); AU-C Section 230, Audit Documentation
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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