Auditor’s Duty on Valuations

This article examines an auditor’s duty on valuations in light of a recent disciplinary decision involving the failure to properly audit valuation information used in financial reporting.

The decision concerned the audit of financial reports for a property development investment entity. In that context, the auditor was required to audit the valuation, recoverability and impairment of loan and equity investments in development projects.

For auditors, the case reinforces how standards such as ASA 200, ASA 500 and ASA 540 are expected to operate in practice when valuations and impairment assessments involve judgement and estimation uncertainty. For valuers and advisers, it provides important insight into how auditors are expected to approach, test and challenge valuation work used in financial reporting.

Auditors cannot “accept” valuations — they must audit them

The decision makes one point clear: auditors have an active duty when auditing valuations and accounting estimates.

In practice, an auditor cannot rely on management‑prepared valuations or adviser‑prepared spreadsheets simply because they appear reasonable or internally consistent. Instead, the auditor must obtain and evaluate audit evidence.

The Board confirmed that auditors must:

• design and perform audit procedures that respond specifically to valuation risk;
• obtain sufficient and appropriate audit evidence, rather than relying on explanations or summaries; and
• ensure that audit evidence supports valuation methods, assumptions and data, not just the final number.

Failure to do so breaches ASA 500 and ASA 330, and ultimately undermines compliance with ASA 200.

Valuations are inherently high risk — professional scepticism is mandatory

Valuations and impairment assessments involve uncertainty and judgement by their nature. As a result, they attract heightened audit risk.

The Board emphasised that this risk triggers an enhanced duty of professional scepticism. In the case under review, the auditor:

• accepted management explanations at face value;
• relied on entity‑prepared valuations without independent corroboration; and
• failed to follow up on impairment indicators and contradictory evidence.

The decision reinforces that professional scepticism is not optional when auditing valuations. It is a core obligation under ASA 200 (paragraph 15) and ASA 540.

ASA 540 sets a minimum standard — not a checklist

The decision provides one of the clearest recent regulatory explanations of how ASA 540 is expected to operate in practice.

When auditing valuations or accounting estimates, auditors must do more than confirm that a process exists. In particular, the auditor must:

• test how management made the estimate;
• evaluate the valuation method, significant assumptions and data used;
• assess whether assumptions are internally consistent and consistent with other audit evidence; and
• consider whether disclosures about estimation uncertainty are adequate.

Importantly, auditors must also:

• consider contradictory evidence, and
• determine whether the valuation is reasonable in the context of the applicable financial reporting framework.

In this case, failure to perform these steps breached ASA 540 paragraphs 22–26, 33(c), 35 and 36.

“Sufficient appropriate audit evidence” requires independent corroboration

A central theme of the decision is that audit evidence must stand on its own. It cannot consist solely of management representations or internally generated schedules.

The auditor failed because he did not:

• re‑perform or test valuation calculations;
• corroborate forecast cash flows, discount rates or risk assumptions;
• examine underlying agreements and security arrangements;
• reconcile impairment amounts to journals and financial statements; or
• follow up on funding, feasibility and recoverability concerns.

The Board stressed that audit evidence must be sufficient to reduce audit risk to an acceptably low level, as required by ASA 200 paragraphs 11 and 17 and ASA 500 paragraph 6.

Related‑party valuations demand greater scrutiny

Where valuations involve related‑party transactions, audit responsibility increases rather than diminishes.

If management asserts that transactions are conducted on an arm’s length basis, auditors must:

• obtain evidence supporting that assertion; and
• evaluate the completeness and adequacy of related‑party disclosures.

In this case, failure to audit related‑party valuations properly and to assess disclosures breached ASA 550 and compounded valuation failures under ASA 500 and ASA 540.

Documentation is part of the auditor’s duty

The Board treated poor documentation as evidence of poor auditing, not as a mere administrative shortcoming.

Audit documentation must allow an experienced auditor, with no prior involvement, to understand:

• what valuation procedures were performed;
• what audit evidence was obtained;
• what professional judgements were made; and
• how contradictory information was addressed.

Failure to document valuation work breached ASA 230 and reinforced findings that audit duties were not performed adequately and properly.

No dishonesty is required for disciplinary action

Importantly, the decision confirms that:

• serious and repeated failures to audit valuations properly can render an auditor not fit and proper;
• actual client loss or fraud is not required; and
• lack of professional scepticism and insufficient audit evidence alone can justify deregistration.

This highlights how seriously regulators view failures involving valuations in financial reporting.

Conclusion

This decision reinforces that an auditor’s duty on valuations goes to the heart of audit quality. Valuations and accounting estimates sit at the centre of audit risk, not at its margins.

Auditors must actively test, corroborate and evaluate valuation information, applying professional scepticism and obtaining sufficient appropriate audit evidence across methods, assumptions, data and disclosures. Reliance on management‑ or adviser‑prepared valuations without independent scrutiny is inconsistent with the Auditing Standards and exposes auditors to regulatory risk.

For those preparing valuations for financial reporting purposes, the message is equally clear. Audit scrutiny has intensified because regulators expect valuation judgements to be transparent, coherent and capable of independent review. Where valuation work clearly articulates scope, basis, methodology, assumptions and limitations, it supports not only financial reporting outcomes, but also the auditor’s ability to discharge their duties properly