PwC has issued a paper describing the role of the audit committee in scrutinizing fair value in the context of its oversight of financial reporting. Because of the complexity and subjectivity of fair value estimates, the audit committee can ask questions regarding the valuation process for assets of material value.
Probing questions: One question the audit committee may ask is whether a third-party valuation specialist was used for fair value estimates. If so, how was the valuator chosen and what are his or her qualifications? The committee can also ask about the process and controls related to the valuations. What valuation models were used? What were the key assumptions?
The regulators (SEC and PCAOB) have made it clear that fair value estimates are an important part of a company’s financial statements and management must develop and maintain internal controls with respect to these valuations.
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