ISA 620, “Using the Work of an Expert,” is a standard issued by the International Auditing and Assurance Standards Board (IAASB) that provides guidance to external auditors on how to effectively use the work of experts in the conduct of financial statement audits. This standard is applicable when the auditor needs to obtain audit evidence in areas that require special expertise, such as valuation of complex financial instruments, estimation of fair values, actuarial calculations, or specialized legal or tax matters.

 

Definitions:

Expert:

An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist in obtaining sufficient and appropriate audit evidence.

An auditor’s expert may be either an external specialist not employed by the auditor’s firm or an internal specialist who is part of the auditor’s firm but employed exclusively for their expert knowledge in a specific area. The use of such experts is common in areas such as valuation, actuarial calculations, legal opinions, and advanced technology systems, where the auditor does not possess the necessary expertise to perform certain audit procedures.

Key Elements

The key elements and guidance provided by ISA 620 can be summarized as follows:

1. Determining the Need for an Expert’s Work: The auditor should determine whether to use the work of an expert. This is based on the auditor’s assessment of the risk of material misstatement and whether the expertise is needed to obtain sufficient appropriate audit evidence.
2. Evaluating the Competence, Capabilities, and Objectivity of the Expert: The auditor should evaluate whether the expert has the necessary competence, capabilities, and objectivity for the auditor’s purposes. This includes considering the expert’s professional qualifications, reputation, and independence from the auditee.
3. Terms of Engagement: If the auditor decides to use an expert’s work, the terms of the engagement with the expert should be clearly agreed upon. This may include the nature, scope, and objectives of the expert’s work, the respective responsibilities of the auditor and the expert, and the form of the expert’s findings.
4. Understanding the Expert’s Field: While the auditor does not need to be an expert in the expert’s field of expertise, the auditor should have a sufficient understanding to evaluate the adequacy of the expert’s work for the auditor’s purposes. This includes understanding the nature of the work the expert is performing and its relevance to the financial statements.
5. Understanding the Expert’s Work: The auditor should obtain an understanding of the expert’s work that is sufficient to determine whether it is adequate for the purposes of the audit. This includes understanding the expert’s methods and assumptions, and the data used.
6. Evaluating the Appropriateness of the Expert’s Findings: The auditor should evaluate whether the expert’s findings are consistent with the auditor’s understanding of the matter and whether they are reasonable based on the auditor’s own findings and conclusions.
7. Use of the Expert’s Work in Conjunction with Other Audit Evidence: The auditor should consider the expert’s work in the context of other audit evidence obtained.
8. Documenting the Auditor’s Work: The auditor should document various aspects of the auditor’s expert’s work, including the evaluation of the expert’s competence, capabilities, and objectivity, the relevance and reasonableness of the expert’s findings, and how the expert’s work is used in reaching conclusions on the relevant financial statement assertions.
9. Communicating with the Expert: Effective communication with the expert is essential. The auditor should resolve any inconsistencies or doubts over the expert’s findings by discussion and agreement on the outcomes and their implications for the audit.
10. Audit Conclusions and Reporting: The auditor should assess the impact of the expert’s work on the audit conclusions and consider whether there is a need to make reference to the expert’s work in the audit report.

ISA 620 does not relieve the auditor of their responsibility to express an opinion on the financial statements. The auditor remains responsible for the audit opinion and for ensuring that sufficient appropriate audit evidence has been obtained to support the opinion. The standard also provides that if the auditor concludes that the work of the expert is not adequate for the auditor’s purposes, the auditor should perform additional procedures or seek evidence from other sources.

Explanations:

ISA 620 provides detailed guidance to external auditors on how to effectively use the work of experts in the audit process. The standard emphasizes the importance of understanding the expert’s qualifications, competence, and independence, as well as assessing the appropriateness of the expert’s work in relation to the audit objectives. The auditor is also required to evaluate the expert’s work and consider any limitations or uncertainties associated with it.

 

Examples:

Valuation of Complex Financial Instruments:

An external auditor engaged by a company that has complex financial instruments, such as derivatives or structured financial products, may need to use the work of an expert in valuing these instruments. The expert, who may be a specialist in financial instruments valuation, provides the auditor with valuation models, assumptions, and methodologies used in valuing the complex financial instruments. The auditor assesses the expert’s qualifications, competence, and independence, and evaluates the appropriateness of the expert’s work in relation to the audit objectives. The auditor may also perform procedures to test the inputs and outputs of the expert’s valuation models and consider any limitations or uncertainties associated with the expert’s work.

Actuarial Calculations:

An external auditor conducting the audit of an insurance company may need to use the work of an actuarial expert in estimating the liabilities for insurance claims and policyholders’ reserves. The actuarial expert provides the auditor with assumptions, models, and calculations used in estimating the insurance liabilities. The auditor assesses the expert’s qualifications, competence, and independence, and evaluates the appropriateness of the expert’s work in relation to the audit objectives. The auditor may also perform procedures to test the assumptions and calculations used by the actuarial expert, and consider any limitations or uncertainties associated with the expert’s work.

 

Case Studies:

Company X, a manufacturing company, engages Audit Firm A to conduct its annual financial statement audit. During the audit, the auditor identifies a significant amount of complex financial instruments, including derivatives, on the company’s balance sheet. The auditor determines that the valuation of these instruments requires special expertise and decides to use the work of a financial instruments valuation expert.

Audit Firm A obtains an understanding of the expert’s qualifications, competence, and independence. The expert provides the auditor with valuation models, assumptions, and methodologies used in valuing the complex financial instruments. The auditor reviews the expert’s work and performs procedures to test the inputs and outputs of the valuation models. The auditor also considers any limitations or uncertainties associated with the expert’s work, such as the reliability of the market data used in the valuation models.

As a result of using the work of the financial instruments valuation expert, Audit Firm A is able to obtain sufficient and appropriate audit evidence to support their opinion on the valuation of the complex financial instruments. The coordination and collaboration between the auditor and the expert enhance the overall quality of the financial statement audit.

Company Y, an insurance company, engages Audit Firm B to conduct its annual financial statement audit. During the audit, the auditor identifies a significant amount of insurance liabilities that require actuarial calculations for estimation. The auditor decides to use the work of an actuarial expert to obtain appropriate audit evidence for the estimation of the insurance liabilities.

Audit Firm B obtains an understanding of the actuarial expert’s qualifications, competence, and independence. The expert provides the auditor with assumptions, models, and calculations used in estimating the insurance liabilities. The auditor reviews the expert’s work and performs procedures to test the assumptions and calculations used by the actuarial expert. The auditor also considers any limitations or uncertainties associated with the expert’s work, such as the reliability of the data used in the calculations and the appropriateness of the assumptions made.

Through the collaboration between the auditor and the actuarial expert, Audit Firm B is able to obtain sufficient and appropriate audit evidence to support their opinion on the estimation of the insurance liabilities. The use of the expert’s work enhances the overall quality of the financial statement audit and ensures that the insurance liabilities are accurately stated in the financial statements.

 

Summary

In summary, ISA 620 provides guidance on how external auditors should use the work of experts in the audit process. This includes understanding the expert’s qualifications, competence, and independence, evaluating the appropriateness of the expert’s work, performing procedures to test the expert’s work, and considering any limitations or uncertainties associated with the expert’s work. Examples of using the work of experts include valuation of complex financial instruments, actuarial calculations, legal or tax matters, and other specialized areas. Through effective collaboration and coordination with experts, auditors can obtain sufficient and appropriate audit evidence to support their opinions on financial statements, thereby enhancing the overall quality of the audit.