Session 18

Using the Work of an Expert

FOCUS
This session covers the following content from the ACCA Study Guide.

D. Audit Evidence
6. The work of others
a) Discuss why auditors rely on the work of others.
b) Discuss the extent to which external auditors are able to rely on the work
of experts, including the work of internal audit.
d) Explain the extent to which reference to the work of others can be made in
audit reports.

Session 18 Guidance
Note that this is a relatively straight-forward subject which can arise in a number of areas (e.g.
inventory, non-current assets, internal audit).
Learn the distinction between management's and the auditor's expert (s.1).
Understand the factors which affect the extent of reliance on the work of management's experts (s.2)
and attempt Example 2.
Return to the last section (s.4) when you have completed Session 30.

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OVERVIEW
Objective: To describe the extent to which auditors are able to rely on the work of experts.

EXPERTS

MANAGEMENT'S AUDITOR'S
EXPERT EXPERT
CONSIDERING
• Audit Evidence WORK OF • Need
• Competence, INTERNAL AUDIT • Competence,
Capability, (Session 33) Capability,
Objectivity Objectivity
• Understanding • Understanding
• Evaluation • Evaluation
• Reservations

REPORTING
• Insufficient or
Inconsistent
Evidence
• Reference to Expert
• Modified Opinions

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Session 18 • Using the Work of an Expert F8 Audit and Assurance (INT)

1 Experts (ISA 500 and ISA 620)*

Management's expert—An individual or organisation possessing *The expert may

expertise in a field other than accounting or auditing, whose work in be either internal
that field is used by the entity to assist the entity in preparing the or external (e.g. in
financial statements. (ISA 500) interpreting contracts
Auditor's expert—An individual or organisation possessing expertise and statute, he may
in a field other than accounting or auditing, whose work in that field be a partner in the
is used by the auditor to assist the auditor in obtaining sufficient audit firm's legal
appropriate audit evidence. (ISA 620) department, an
organisation's internal
solicitor, the client's
external lawyer or

2 Management's Expert (ISA 500) another unconnected

lawyer).

2.1 Audit Evidence

 Typical examples of management's use of an expert include:
 Asset valuations (e.g. land and buildings, plant and
equipment, works of art, precious stones, intangible assets).
 Quantities/physical condition of assets (e.g. mineral
reserves, stockpiles, work on contracts in progress).
 Legal services (e.g. expectation of a claim against the entity
being negligible, possible or probable).

Example 1 Considering the Work of an Expert

Describe the matters that would affect the nature, timing and extent of audit procedures when
considering the work of an expert.

Solution

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F8 Audit and Assurance (INT) Session 18 • Using the Work of an Expert

 Where the source of audit evidence to be relied on has been

generated by a management's expert, the auditor must
consider the following factors in determining the reliability of
the expert's work:
 competence, capabilities and objectivity of the expert
(see s.2.2);
 understandability of the expert's work (see s.2.3); and
 the appropriateness of the experts work as audit evidence
for the relevant assertion (see s.2.4).

2.2 Competence, Capabilities and Objectivity

Competence relates to the nature and level of expertise of

the expert.
Capability relates to the ability of the expert to exercise
his competence.
Objectivity relates to the possible effects that bias, conflict *As with the ACCA,
of interest or the influence of others may have on the expert's where the expert
professional judgement. is a member of a
professional body or
industry association,
2.2.1 Competence his licence to practice
or other form of
 When assessing the competence of management's expert, the external recognition
auditor considers: will be subject to
 Personal experience from previous work of the expert specific standards.
(e.g. through the same or another client—professional Consideration must
scepticism must still be applied). also be given as to
 Discussions with the expert (e.g. does he understand how
whether the expert
is a "generalist" or
his work relates to the audit?). a "specialist" and
 Discussions with others who are familiar with the if the specialism
expert's work. is appropriate to
 Knowledge of that expert's qualifications, membership the audit evidence
of a professional body or industry association, licence to required.
practice, or other forms of external recognition.*
 Published papers or books written by the expert.
 An auditor's expert, if any, assists the auditor in obtaining
sufficient appropriate audit evidence with respect to
information produced by the management's expert.
*Where the expert is
2.2.2 Capability directly employed by
the client (e.g. internal
 When assessing the capability of management's expert, the lawyer or surveyor),
auditor should assess the effect of any limitations placed on this does not
the expert's work by the client. automatically mean
that his work cannot
2.2.3 Objectivity be relied on. It just
means that the risk of
 Discuss with management and the expert if any interests and his objectivity being
relationships exist that may create threats to the expert's impaired is increased
objectivity.* (and therefore the
 Evaluate the adequacy of any applicable safeguards put in auditor's professional
place by management or the expert's professional body, scepticism).
association, etc.

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Session 18 • Using the Work of an Expert F8 Audit and Assurance (INT)

Example 2 Threats to Objectivity

List and give examples of threats that may affect the objectivity of a management expert.

Solution
Threats cover: Key examples are:

2.3 Understanding the Work of the Expert

2.3.1 Field of Expertise
An understanding of the field of expertise of management's expert
should be obtained, including:
 the relevance of the expert's work to the audit assertions;
 the auditor's ability to understand and evaluate the expert's
work and findings;
 professional standards, legal or other requirements that
may apply;
 assumptions and methods used by the expert (e.g. whether
generally accepted and appropriate for financial reporting
purposes);
 the nature of the internal and external data used by the
expert; and
 the need for the auditor (i.e. the client partner) to use an
auditor's expert.

2.3.2 Terms of Reference*

 The terms of reference between management and
management's expert (e.g. letter of engagement, written *Where no specific
terms of reference
instructions, internal procedures manual covering) should be
exist, the auditor may
reviewed, including: need to discuss directly
 the nature, scope and objectives of the expert's work; with management,
 the assumptions and methods to be used; those charged with
 access to appropriate records and personnel;
governance or the
expert in order to
 respective roles and responsibilities; obtain a sufficient
 the nature, timing and extent of communications; and understanding of his
 the form/content of the expert's report (in writing), work.
including limitations of use.

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2.4 Evaluation of Expert's Work

 The appropriateness of the expert's work should be assessed
with regard to the financial statement assertions being
considered. This may include evaluating:* *Wherever possible,
 the relevance and reasonableness of the expert's findings the auditor should
or conclusions, their consistency with other audit evidence verify that the scope
of the expert's work
and whether they have been appropriately reflected in the
is appropriate by, for
financial statements; example, observing the
 if the work involves use of significant assumptions and expert carrying out his
methods, the relevance and reasonableness of those work (e.g. attending
assumptions and methods; and a physical count
 if work involves significant use of source data, the (asserting existence)
relevance, completeness and accuracy of that source data. or a valuation of
WIP on a building
 Wherever possible, the expert's opinion should be site (existence,
corroborated, and consistency with other sources of evidence stage of completion
considered. For example: for valuation)).
 Correspondence (e.g. regarding legal disputes).
 Client or auditor "reasonableness" calculations (e.g. for
inventory valuations).
 Minutes of board meetings.

Illustration 1 Valuation of Land

and Buildings
When evaluating a surveyor's report on the revaluation of an office
building, the following matters would be considered relevant to the
auditor's knowledge:
 report addressed to client;
 building identified (e.g. address, photograph);
 terms of reference referred to;
 basis of valuation (freehold, leasehold, existing use);
 assumptions made;
 calculations re-performed; and
 valuation comparable to similar buildings in the local market.

2.5 Reservations
 Any reservations should be discussed with management and
documented.
 Additional audit procedures may be undertaken (i.e. evidence
is not sufficient) or the evidence of another expert sought.
 If the auditor is unable to obtain sufficient appropriate audit
evidence, the implications for the auditor's report of the
limitation on scope should be considered in accordance with
ISA 705 (see Session 30).

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Session 18 • Using the Work of an Expert F8 Audit and Assurance (INT)

3 Auditor's Expert (ISA 620)*

*The significant
difference between a
management's expert
and an auditor's expert
The objectives of the auditor are: is who employs/
 to determine whether to use the work of an auditor's expert; and engages them. Many
 if using the work of an auditor's expert, to determine whether that of the considerations
work is adequate for the auditor's purposes. are broadly the same.
In many complex
cases, both the client
and the auditors will
3.1 Need use their own experts.
 If specific expertise, other than accounting or auditing, is
required by an auditor in order to obtain sufficient appropriate
audit evidence, the auditor must determine whether to use the
work of an appropriate expert.*

*Note that it is a matter of professional judgement whether or not

the engagement partner uses his own expert or considers that he will
be able to obtain sufficient appropriate audit evidence from directly
auditing the work of the management's expert.

 Typically, an auditor's expert may be used where the client's

business involves:
 Valuations of land and buildings, plant and equipment,
jewellery, works of art, antiques, intangible assets,
and assets acquired and liabilities assumed in business
combinations.
 Interpretations of contracts, laws and regulations.
 Analysis of complex or unusual tax compliance issues.

 The auditor's expert may be needed to assist the auditor

(i.e. the engagement partner) in:
 Obtaining an understanding of the entity and its
environment, including internal control.
 Identifying and assessing the risks of material
misstatement.
 Determining and implementing overall responses to
assessed risks at the financial statement level.
 Designing and performing further audit procedures to
respond to assessed risks at the assertion level, comprising
tests of controls or substantive procedures.
 Evaluating the sufficiency and appropriateness of audit
evidence obtained in forming an opinion on the financial
statements.*

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F8 Audit and Assurance (INT) Session 18 • Using the Work of an Expert

*The auditor's expert may also be called upon when the engagement
partner determines that he cannot place reliance, for whatever
reason, on the management's expert.
Many of the major firms of auditors have separate departments and
expert staff that are integrated with audit teams or carry out audits
on specialised clients in their own right (e.g. extractive industries,
business combinations).
As with audit, such expertise is established through recruitment of
relevant experts and training them in relevant audit techniques,
training of audit partners and staff in the necessary "expert" skills or
raw recruitment and training in audit/specialist skills.

3.2 Competence, Capabilities and Objectivity

 The expert is considered to be a member of the audit team
and should therefore show the same competence, capability
and objectivity (and independence) as the auditor.* *Even where the
expert is from the
 The approach is very similar to that for a management's expert.
same firm, but a
Where the auditor's expert is an external agent, care must be different department,
taken to ensure that the expert is independent of the client. the audit partner
must be certain of
3.3 Understanding the Expertise of the Expert his competences,
capability and
 Again, the approach will be similar to that for the objectivity—just as he
management's expert. The difference is in the use that is must for any member
made of that understanding. of the audit team.
 Understanding the auditor's expert allows the engagement
partner to:
 determine the nature, scope and objectives of the expert's
work for the engagement partner's purposes; and
 evaluate the adequacy of the work carried out by
the expert. *Where the expert is
effectively "embedded"
 Where necessary, the engagement partner agrees in writing, in the audit firm, an
with the auditor's expert, the following: engagement letter
 the nature, scope and objectives of the expert's work; will not be issued.
 the respective roles and responsibilities of the auditor and The detail will usually
be included in the
the expert;
engagement planning
 the nature, timing and extent of communication between
memorandum or the
the auditor and the expert, including the form of any report established policies
to be provided; and and procedures in the
 the need for the auditor's expert to observe confidentiality firm.
requirements.* An "embedded" expert
will also be subject to
3.4 Evaluation of Expert's Work the ethical and quality
control procedures of
 Broadly the same approach as for the management's expert. the firm. Any external
Just because an auditor's expert may be part of the same firm auditor's expert will be
does not mean that his work can be accepted without review expected to "sign-off"
and understanding by the engagement partner. on similar provisions
 The expert is treated as is any member of the audit team if his own professional
standards are of a
(i.e. his work is reviewed).
lower requirement.

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Session 18 • Using the Work of an Expert F8 Audit and Assurance (INT)

4 Reporting*

4.1 Insufficient or Inconsistent Evidence *The reporting

considerations relate
 The reasons for the insufficiency or inconsistency must be to both the use of
ascertained (e.g. if the expert did not adhere to the terms of the management and
reference). Was the scope insufficient? auditor's experts.
 If insufficient, the auditor must consider other means of
obtaining the audit evidence needed. This includes the use of
other experts.
 If inconsistent, which evidence is reliable? Is there doubt
about the evidence obtained by the auditor from the entity
or the competence of the expert? Reasons for inconsistency
must be established and appropriate action taken (e.g. further
work carried out).
 In extreme cases, doubt may be cast over the integrity of
management and thus other representations made by them.

4.2 Reference to Expert

 The auditor must not refer to the use of an expert in
an unmodified report unless required to do so by law or *Referring to the
regulation.* use of an expert
in an unmodified
 It is the auditor's responsibility to provide his opinion based on
report might suggest
the work carried out, including that of the expert. The auditor qualification or division
assumes responsibility for the expert's work and his findings. of responsibility
 If the auditor's report is modified, reference to the auditor's (neither of which is
expert may be appropriate to explain the modification. If so, appropriate).
the auditor should obtain the expert's permission if necessary
to refer to them by name. If refused, the auditor should seek
legal advice.*

4.3 Modified Opinions

*Where the expert is
 Examples that may lead to modified opinions include:
an employee of the
 The auditor is unable to obtain all the evidence required auditor, it is highly
to be able to form an opinion—limitation of scope (e.g. unlikely that the audit
management is unable or unwilling to obtain expert report would refer
evidence when required or refuses to allow the auditor's to him.
expert access to confidential information).
 The auditor disagrees with an assertion made by
management—disagreement (e.g. management refuses to
accept the counter opinion of the auditor's expert).

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 Session 18

Summary
 Management's expert is an individual or organisation whose work in a field other than
accounting or auditing is used by the entity to prepare its financial statements.
 An auditor's expert is used to assist in obtaining sufficient appropriate audit evidence.
 When an expert is a source of audit evidence, the auditor must consider the expert's
competence and objectivity and the relevance of the expert's work to audit assertions.
 An auditor's expert is effectively a member of the audit team (i.e. competent,
independent, etc).
 The use of an expert is not mentioned in an unmodified report.
 If the auditor's report is modified, reference to management's expert may be appropriate.
However, the auditor must obtain the expert's permission to refer to the expert by name.

Session 18 Quiz
Estimated time: 20 minutes

1. Describe the considerations to take into account when looking at the competence and
objectivity of an expert. (2.2, 3.2)
2. List the contents of typical terms of reference that should be agreed with an auditor's
expert. (3.3)
3. True or false? The auditor should always refer to the expert in their audit report. (4.2)

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EXAMPLE SOLUTIONS

Solution 1—Considering the Work of an Expert

 The risks of material misstatement in the matter.
 The availability (and cost benefit) of alternative sources of audit evidence.
 The nature, scope and objectives of the management's expert's work.
 Whether the management's expert is employed by the entity, or is a party engaged
by it to provide relevant services.
 The extent to which management can exercise control or influence over the work of
the management's expert.
 Whether the management's expert is subject to technical performance standards or
other professional or industry requirements.
 The nature and extent of any controls in the entity over the management's
expert's work.
 The auditor's knowledge and experience of the management's expert's field of
expertise
 The auditor's previous experience of the work of that expert.

Solution 2—Threats to Objectivity

 Threats cover:  Key examples are:

 self-interest;  financial interests (e.g. shares, loans, overdue fees);

 self-review;  business and personal relationships (e.g. fee

dependence, family in key management positions); and
 familiarity;
 provision of other services (e.g. fear of losing client).
 advocacy; and

 intimidation.

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NOTES

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