Fact Sheet: Proposal for Auditing Accounting Estimates

June 1, 2017

The Public Company Accounting Oversight Board issued for public comment a proposal to enhance the requirements that would apply when auditing accounting estimates, including fair value measurements.

The proposal emphasizes that auditors need to apply professional skepticism and devote greater attention to potential management bias when auditing accounting estimates. The proposal is open for public comment through August 30, 2017.

What is Being Proposed?

The Board's proposal would replace three existing standards with a single standard.

Auditing Accounting Estimates (AS 2501) would be updated and retitled, Auditing Accounting Estimates, Including Fair Value Measurements (AS 2501). The following standards would be superseded:

  • Auditing Fair Value Measurements and Disclosures (AS 2502)
  • Auditing Derivative Instruments, Hedging Activities, and Investments in Securities (AS 2503)

The proposed single standard also would include a special topics appendix that addresses auditing the fair value of financial instruments, including the use of information from pricing sources.

Summary of Proposed Changes

The proposed single standard builds on the common approaches in AS 2501, AS 2502, and AS 2503 and strengthens existing requirements by:

  • Prompting auditors to devote greater attention to addressing potential management bias in accounting estimates, while reinforcing the need for professional skepticism;
  • Extending certain key requirements in the existing standard on auditing fair value measurements — the newest and most comprehensive of the existing standards on auditing accounting estimates and fair value measurements — to all accounting estimates to reflect a uniform approach to substantive testing;
  • Focusing auditors on estimates with greater risk of material misstatement;
  • Providing specific requirements and direction to address certain aspects unique to auditing the fair value of financial instruments, including the use of information from pricing sources; and,
  • Making other updates to the requirements for auditing accounting estimates to address particular aspects of auditing estimates.


The financial statements of most companies include amounts in accounts and disclosures that cannot be directly measured and therefore require estimation. Examples of accounting estimates include certain valuations of financial and non-financial assets, impairments of long-lived assets, allowances for credit losses, contingent liabilities, and revenues from contracts with customers.

Accounting estimates are becoming more prevalent and significant as financial reporting frameworks evolve and require greater use of estimates, including those based on fair value measurements.

Accounting estimates, including fair value measurements, generally involve subjective assumptions and measurement uncertainty, making them susceptible to management bias. Accounting estimates are some of the areas of greatest risk in the audit, requiring additional audit attention and appropriate application of professional skepticism.

Auditing accounting estimates has proven challenging for auditors. PCAOB inspectors continue to identify deficiencies at both larger and smaller audit firms in auditing accounting estimates, raising concerns about auditors' application of professional skepticism and consideration of potential management bias.

In a companion release, the PCAOB is proposing to amend its standards on the auditor's use of the work of specialists. Auditors often use the work of specialists in auditing certain accounting estimates.

Project History

As part of the Board's research and outreach on auditing accounting estimates, the PCAOB:

  • Discussed the paper and public comments at meetings of the Standing Advisory Group in October 2014 and June 2015, and at a meeting of the Investor Advisory Group in September 2015.