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.
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.
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.