The Securities and Exchange Commission has approved final standards issued by the Public Company Accounting Oversight Board giving auditors new requirements for auditing estimates, including fair value measurements, and for relying on the work of specialists.

Auditing Standard 2501 replaces three historic standards to give auditors a uniform, risk-based approach for how to audit any number of estimates that management must make in arriving at financial statement assertions. Auditors’ work in auditing estimates is a common area of criticism in PCAOB inspections of major audit firms, which prompted the PCAOB to update its standards in that area.

The new guidance emphasizes auditors are expected to apply professional skepticism, especially with respect to the potential for management bias when assessing estimates. The standard also directs auditors to focus more attention on estimates with greater risk of material misstatement, and it provides some extra focus on certain aspects unique to auditing fair value in financial instruments, including the use of pricing information from third-party services.

Auditing Standard 1210 on using specialists also replaces three historic standards with new guidance to strengthen the requirements for evaluating the work of specialists, regardless of whether they are employed or engaged by the audit firm or the company.

Auditors often rely on information from specialists as part of auditing financial statement assertions. Valuation specialists, for example, are key to numerous valuation and impairment analyses that form the basis for financial statement assertions, and the work of engineering experts is often critical in understanding environment liabilities or mining reserves, among others.

The new standard sets forth factors for auditors to weigh to determine the necessary evidence to support an auditor’s conclusion when a relevant assertion relies on the expertise of a non-accountant or non-auditor specialist. The guidance sets forth supervisory principles and adds requirements for reviewing and evaluating the work of specialists. It also amends the requirements for assessing the knowledge, skill, and ability of an auditor-engaged specialist, as well as the specialist’s objectivity.

Both new standards take effect for audits of financial statements for fiscal years ending on or after Dec. 15, 2020. The PCAOB says its staff will perform outreach to monitor implementation of both new standards and will issue guidance if necessary. Staff is also considering the possibility of training and webinars to assist with implementation.