Fair Value Accounting and Auditing
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School of Business |
Bachelor's thesis
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Date
2017
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Mcode
Degree programme
Laskentatoimi
Language
en
Pages
25
Series
Abstract
The use of fair value accounting in financial statements has significantly increased in the last couple of decades. Standard-setters and preparers of financial information have both started to favor this accounting practice over cost-based methods like historical cost accounting. The increased use of fair value accounting has had significant impacts on the reliability and estimation uncertainty of financial statement information. This in turn affects auditors and their ability to provide the required level of audit assurance. The purpose of this thesis is to review earlier literature and studies of these themes. The examined literature includes articles about the reliability, decision usefulness and uncertainty of fair value accounting. I will also examine literature about the implications of the use of complex estimates and fair value accounting for the auditors, auditing processes and standards. Based on the previous studies and literature about fair value accounting, it can be argued that especially the values that don’t have observable market values and thus have to be measured using management’s assumptions and valuation models, contain a significant amount of estimation uncertainty and subjectivity. In consequence of this, it is very difficult to determine if these values are accurate and reliable. The previous literature about the effects of fair value accounting on auditors suggests, that currently auditors are not fully able to answer the challenges it presents. Improving auditors’ ability to provide the required level of audit assurance would require for instance broadening their knowledge (especially regarding valuation techniques), improving the current regulation and standards, and making changes to the format of financial statements. In light of the findings and conclusions of previous literature presented in this essay, it can be argued that the challenges of fair value accounting and especially its impacts on auditing need to be addressed by standard-setters, auditors and preparers of financial statements, so that the reliability of financial information and quality of audits would be ensured in the future.Description
Thesis advisor
Myllymäki, Emma-RiikkaKeywords
fair value accounting, auditing, audit assurance, reliability, estimation uncertainty