The Impact of Inherent Risk Factors Related to Fair Value Estimates on Inherent Risk Assessment: Evidence from the Canadian Context

DOI: https://doie.org/10.10399/ABPI.2026924750

Authors:

Syrine Rahmouni, Emna Boumediene

Keywords:

Audit, Fair Value Measurements, Estimation Uncertainty, Risk Assessment, Inherent Risk.

Abstract:

Auditing fair value measurements has faced significant challenges over the past two decades. Economic volatility, subjective assumptions, and complex financial assets contribute to estimation uncertainty, which increases the risk of management bias and misstatements. This uncertainty makes the audit process harder, especially when it comes to figuring out risks by gathering evidence. In 2018, ISA 540 was revised to address these issues by introducing 'inherent risk factors' related to accounting estimates that auditors must consider in their risk assessments. Additionally, the revision requires separate assessments of inherent and control risks. Our study aims to analyze the association statistically between estimation uncertainty and other factors on inherent risk assessments within the Canadian context. Furthermore, we investigate whether auditors comply with the requirements outlined in ISA 540 (2018) by examining the impact of control risks on inherent risk assessments. To conduct this research, we distributed a questionnaire to Canadian Chartered Professional Accountants (CPAs) auditors with experience and expertise in auditing fair value measurements. We asked them to describe a specific engagement experience involving auditing a particularly challenging fair value measurement (FVM). We show that estimation uncertainty and level 3 fair values positively and significantly impact inherent risk assessment. Additionally, our study finds that auditors tend to assess a higher inherent risk when control risk increases, which contradicts the standards requiring separate evaluations of inherent and control risks. We also find that the auditee's use of a valuation specialist does not affect the inherent risk assessment.

PDF