Two Interpretations of Statements on Auditing Standards have been issued by the AICPA. These interpretations concern the auditing of fair values or more specifically Auditing Interests in Trusts Held by a Third-Party Trustee and Reported at Fair Value; and Auditing Investments in Securities Where a Readily Determinable Fair Value Does Not Exist.
The interpretations illuminate situations where simply receiving a confirmation of fair value from a third party is not enough audit evidence for a complete valuation. The interpretations reiterate the responsibility for management to institute accounting and financial reporting processes for determination of fair value measurements.
In summary, the interpretation concerning Auditing Interests in Trusts Held by a Third-Party Trustee and Reported at Fair Value is one view of fair value. A third party trustee may hold assets and the interest on the assets may be beneficial interest that may have to be estimated because a ready estimate may not available. An auditor can usually confirm the assets and any interest easily but the auditor or management may not have been given the details concerning the basis or measurement method for these assets. Trustee confirmation on an aggregate basis is not adequete audit evidence but by a investment-by-investment confirmation by a trustee does constitute adequete audit evidence with respect to an existence claim as noted in Section 328. Section 508 covers an auditor's actions when they are unable to audit existence or account for interest paid.
In summary, the interpretation concerning Auditing Investments in Securities Where a Readily Determinable Fair Value Does Not Exist is another view of fair value. In this situation, a hedge fund has an investment that exists but does not have a determinable fair value. Also the hedge fund will not provide detailed information to auditors or management. Aggregate or security-by-security does not constitute adequete audit evidence with respect to a valuation claim as noted in Section 332. Section 508 covers an auditor's actions when they are unable to audit existence or account for securities interest.