When auditors use specialists.
In recent years, questions have been raised about whether auditors are using the work of specialists appropriately. Some of these questions concerned
* Whether auditors can assess the valuation of certain specialized inventories--pharmaceutical products and high-technology materials, for example--without using specialists.
* Whether, and under what circumstances, auditors can use the work of specialists related to a client.
* The applicability of Statement on Auditing Standards no. 11, Using the Work of a Specialist, to audits of special presentations and to financial statements not prepared according to generally accepted accounting principles.
In response to these and other concerns, SAS no. 73, Using the Work of a Specialist (AICPA Professional Standards, volume 1, AU section 336), was approved by the American Institute of CPAs auditing standards board (ASB) after three years of deliberations. Issued in July 1994, this standard supersedes SAS no. 11 and is effective for audits of financial statements for periods ending on or after December 15, 1994. Early application is encouraged. (For the full text of SAS no. 73, see Official Releases, page 101).
The new standard is not expected to change current practice dramatically for auditors who use specialists' work in audits performed in accordance with GAAS. It does, however,
* Clarify the guidance's applicability.
* Provide updated examples of situations that might require using a specialist's work and the types of specialists used today.
* Provide guidance on what to do when a specialist is related to the client.
WHEN TO APPLY SAS NO. 73
During the ASB's deliberations, concerns were raised that SAS no. 11 did not communicate effectively the types of situations in which auditors would be subject to its provisions. To clarify the matter, the ASB incorporated modified versions of two interpretations of SAS no. 11 into SAS no. 73. The interpretations addressed the standard's applicability when
* Management engages or employs a specialist.
* A specialist employed by the auditor's firm provides advisory services to the client and does not participate in the audit.
SAS no. 73 applies whenever auditors use a specialist's work as evidential matter in performing substantive tests to evaluate material financial statement assertions, regardless of whether management engages or employs the specialist, management engages a specialist employed by the auditor's firm to provide advisory services or the auditor engages the specialist.
The ASB was concerned about inadvertently specifying too many situations in the statement. During the loan origination process, for example, a lending institution might routinely obtain appraisals in support of new loans. If an auditor tests controls over the loan origination process, should the appraisers be considered specialists and SAS no. 73 applied to each loan being tested? The ASB concluded the standard does not apply when an auditor refers to an appraiser's report while performing tests of controls on an institution's loan origination process. It applies, however, if the auditor uses that appraiser's work in connection with substantive tests to evaluate the adequacy of the loan loss reserve.
Examples of specialists an auditor might use in performing financial statement audits are actuaries, appraisers, engineers, environmental consultants and geologists. SAS no. 73 clarifies that attorneys also may be considered specialists when they are engaged to provide services other than those involving the standard letter of inquiry regarding litigation, claims or assessments. One example is when an attorney is engaged to interpret the provisions of a contractual agreement.
SAS no. 73 does not apply, however, when specialists employed by an auditor's firm participate in an audit as members of the audit team. For example, if an auditor's firm employs an appraiser and decides to use that appraiser as part of its audit staff to evaluate real estate carrying values, SAS no. 73 does not apply. In such cases, auditors should refer to SAS no. 22, Planning and Supervision (AICPA Professional Standards, volume 1, AU section 311).
SAS no. 73 is broader in scope than SAS no. 11 in that it also applies to engagements performed under SAS no. 62, Special Reports (AICPA Professional Standards, volume 1, AU section 623), including special presentations and financial statements using a comprehensive basis of accounting other than generally accepted accounting principles.
WHEN TO USE A SPECIALIST
SAS no. 73 recognizes that an auditor's education and experience provide him or her with knowledge about business matters in general, but auditors are not expected to have the expertise of persons trained for or qualified to engage in the practice of another profession or occupation. Accordingly, when auditors encounter complex or subjective matters that may be potentially material to the financial statements and require special skill or knowledge, they may need to use the work of specialists to obtain sufficient competent evidential matter.
Specialists might be used in a variety of circumstances. For example, management may engage an environmental consultant to determine an entity's environmental remediation liability; the auditor also may use the consultant to evaluate the related financial statement accruals and disclosures. An engineer might be needed to evaluate the carrying values of high-technology materials or equipment, or an actuary's services might be employed to determine an entity's obligation for certain employee benefits.
IS THE SPECIALIST QUALIFIED?
SAS no. 73 requires auditors to evaluate a specialist's professional qualifications to determine whether he or she has the necessary skill or knowledge in the particular field. One of the new requirements SAS no. 73 added is for auditors to consider a specialist's experience in the type of work under consideration. For example, if an auditor uses an actuary in connection with an audit of a life insurance entity, he or she must consider not only the actuary's professional qualifications but also his or her experience in working with life-insurance-related actuarial issues.
Auditors also should understand the nature and purpose of a specialist's work. In some cases, that work may have been done for another purpose (such as an appraiser's report prepared for a loan origination). In such situations, auditors should consider the appropriateness of using the specialist's work to evaluate financial statement assertions. SAS no. 73 acknowledges that, in some cases, auditors may need to contact the specialist to determine if he or she is aware his or her work will be used to corroborate financial statement assertions.
SAS no. 73 does not preclude auditors from using specialists who have existing relationships with a client, including situations in which the client has the ability (through employment, ownership, contractual right, family relationship or otherwise) to directly or indirectly control or significantly influence the specialist. The standard, however, requires auditors to evaluate the relationship and consider whether it might impair the specialist's objectivity. If the auditor concludes the specialist's objectivity might be impaired, additional procedures should be performed, possibly including using another specialist.
In its deliberations, the ASB considered the provisions of AICPA Statement of Position no. 92-4, Auditing Insurance Entities' Loss Reserves. Because of the significance of loss reserves to the financial statements of property and liability insurance entities, as well as the complexity and subjectivity involved in estimating loss reserves, the SOP requires the use of an outside loss reserve specialist who cannot be an employee or officer of the company. The ASB was reluctant to extend this requirement to all entities but did acknowledge this specific situation.
HOW TO USE A SPECIALIST'S WORK
Auditors need to obtain an understanding of the methods and assumptions a specialist uses, make appropriate tests of data provided to the specialist and evaluate whether the specialist's findings support the related financial statement assertions. Under SAS no. 73, auditors are required to test all data
(not just accounting data) provided to a specialist; the extent of the testing depends on the auditor's assessment of control risk.
Ordinarily, auditors will accept a specialist's work unless the auditor's procedures lead to a conclusion that the specialist's findings are unreasonable or do not support the related financial statement assertions. In such an event, SAS no. 73 requires auditors to apply additional procedures, which may include obtaining another specialist's opinion.
The ASB considered eliminating or relaxing SAS no. 11's prohibition on referring to a specialist in the auditor's report. Because of the potential for misunderstanding, however, the ASB retained the prohibition except when the auditor's report is modified and reference to the specialist's work would help clarify the reason for the modification.
NO DRAMATIC CHANGE
While SAS no. 73 does not represent a dramatic change in GAAS, it should clarify the guidance's applicability to the expanding array of financial statement amounts and disclosures requiring the use of persons with specialized skills or knowledge. As companies find it increasingly necessary to use specialists to comply with reporting requirements, auditors also will discover their need for specialists' expertise.
* THE AUDITING STANDARDS board issued Statement on Auditing Standards no. 73, Using the Work of a Specialist, to provide auditors with guidance on how to use the work of specialists appropriately. It replaces SAS no. 11 of the same name.
* WHEN USING A SPECIALIST, auditors should evaluate the specialist's professional qualifications, understand the objectives and scope of the specialist's work, the appropriateness of using a specialist's work for the intended purpose and the form and content of the specialist's findings.
* AUDITORS SHOULD CONSIDER a specialist's relationship to the client, including circumstances that might impair the specialist's objectivity.
* IN USING A SPECIALIST'S WORK, auditors should understand the methods and assumptions used, perform appropriate tests of data provided to the specialist and evaluate whether the specialist's findings support related financial statement assertions.
* SPECIALISTS' WORK SHOULD not be referred to in the auditor's report unless such a reference would help report users understand the need for an explanatory paragraph or a departure from an unmodified opinion.
TIMOTHY E. DURBIN, CPA, is a partner of Arthur Andersen & Co. in Detroit. He is a member of the American Institute of CPAs auditing standards board and was chairman of its SAS no. 1 1 guidance task force. JEANNE M. SUMMO, CPA, is a technical manager in the AICPA auditing standards division.
Ms. Summo is an employee of the American Institute of CPAs and her views, as expressed in this article, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation.