The need to consider and, if necessary, involve internal or external experts in the audit of specialist areas is increasing for firms of all shapes and sizes. What this evaluation can mean in practice for firms is something we explore in a separate article, with the aid of four example scenarios.

When the auditor has determined that the most appropriate source of assurance is to involve an expert, there are some key do’s and don’ts to consider. This article explores: who to call on; when; how to use the expert’s work; good practices for documentation; and how to evaluate the direct and indirect costs associated with involving an expert. 

Who to call on? 

Depending on the size of the firm and the nature of specialist expertise required, there are two main options: either an internal or external expert. Regardless of who the auditor uses, the audit requirements are the same.

A common quality challenge is that as internal experts are often easier to call on, the auditor’s professional guard may be dropped. A water cooler chat with an expert colleague supported by a comment to that effect on the audit file won’t cut it under International Standards on Auditing (ISAs).

Any expert, whether internal or external, needs to: 

• be independent to the same standards, as set out in relevant ethical codes and standards such as the UK Financial Reporting Council’s Ethical Standard for Auditors; 
• have demonstrable skills and expertise relevant to the area of audit risk where their input is required; and 
• understand the context of the financial statement audit, be objective and apply professional scepticism. 

Regardless of what sort of expert is used, the audit engagement partner still needs to own the audit risk area. This is essential so they can brief the expert on the nature of the risk(s), the assurance that is required, the expected outputs and timing.

It is essential that the briefing is a two-way process, as the expert may be alert to risks and other challenges that the audit team was not alert to at the initial planning phase. In keeping with an ISA 315 risk assessment, the engagement team should form its own preliminary expectations as this will be essential when reviewing the output from the expert to ensure that it provides sufficient and appropriate audit evidence. 

The involvement of an internal expert raises another challenge regarding whether the colleagues providing support are either auditor-appointed experts or, rather, members of the audit team. The former is at the heart of this article. The latter is less onerous because, when an audit team includes internal experts, they should benefit from involvement in the various planning and associated briefing activities. 

The distinction between the role or status of the auditor’s expert should be a question of fact based on the nature of the matter driving the need to involve an expert. For example, support on the audit of an impairment of a material asset is likely to be a discrete issue and dealt with by an auditor’s expert. By contrast, a business that is heavily dependent on information technology (IT) may require that an IT expert be embedded within the audit team.

When to call on them? 

Engagement with the expert should be first considered at the acceptance and continuance stage as, quite simply, a firm should not take on an engagement where it does not have the access to the required skills or where management may impose a limitation on the extent of their work. However, audit risk assessment is dynamic and the need for an expert may emerge later, during the planning phase, or during the fieldwork.

Early identification and involvement of an expert will allow for a more informed scope of work to be developed, the identification of information requirements from management and those charged with governance and a better understanding of the time needed by the expert to complete their work.

How to use the expert’s work? 

“The expert has specialist knowledge, so let them get on with it!” is a dangerous mindset to adopt and would compromise audit quality. The audit team must retain ownership of the risk. Once the audit team has received the expert’s output, they will need to: 

• ensure it is consistent with the planning briefing and test objectives;
• use their planning knowledge and own independently formed expectations to critically appraise the work done and findings arising from this; 
• ensure that any key assumptions used are consistent with their understanding of the entity and the environment in which it operates; 
• discuss the findings with the expert and apply professional scepticism; 
• where there is a range of reasonably plausible assumptions and outcomes, ensure that there is well-documented reasoning as to why certain assumptions and outcomes are given more weight than others; and 
• be alert to any caveats or other limitations referred to by the expert and consider the need for any follow up procedures and the impact, if any, on their audit opinion. 

What good may look like – getting the evidence right 

The audit team needs to ensure that the audit file tells the story of this element of the audit and that the evidence gathered stands up to the rigour of para 8 of the audit documentation standard, ISA 230. It is not sufficient to simply attach a copy of the expert’s report to the audit file and answer ‘done’ and ‘considered’ in the audit programme.

From a good practice perspective there is no substitute for having a succinct, well-reasoned document on the audit file that records the audit team’s critical thinking and deals with the issues referred to above and demonstrates how the audit team have exercised professional scepticism and challenge.

The following is one possible framework for such a document. 

Completion of such a document would be proportionate to the complexity of the area. 

Thoroughly evaluate the cost 

The firm’s ability to recover the cost of involving an expert is a common concern, particularly for an existing audit engagement where an expert has not been used in prior years. Risk and best practice change over time and what was done previously is not necessarily a guide to the current audit. 

To draw on a key message from the International Standard on Quality Management, ISQM 1, commercial pressures should never adversely impact audit quality. This is a decision of the audit firm and engagement partner expressing the opinion, and not a decision for the management of an audit entity or those charged with its governance. 

When evaluating the direct and indirect cost associated with involving an expert, the audit team (ISA 220 – Engagement quality) and the firm (ISQM 1) should make sure that they are factoring in all relevant costs. 

Often the focus is on the direct cost charged by the expert and the ability to recover that cost. This is not an unreasonable starting point. However, if a team is tempted to conclude that the cost associated with involving an expert is disproportionate to the value of the additional assurance gained, they should check that they are not a victim of confirmation bias and double check they have factored in the opportunity cost of not involving the expert. 

For example, should their audit ever be challenged by a regulator or litigator, chargeable time will be spent dealing with queries and defending what was done. The firm will, most likely, incur its own legal costs. There is also the not so small matter of reputational and emotional (stress) costs. The aggregate of these opportunity costs will be a significant multiple of the indirect and direct costs of appointing an expert in the first place. 

It is easy to focus on the costs as they are tangible and easy to quantify. It is important not to lose sight of the benefit of having the insight of an expert. The greater robustness of assurance should provide greater confidence to those charged with governance and management over their company’s financial results and reduce the risk of unpleasant surprises when, for example, applying for lending, raising equity finance or during a realisation event. 

Early engagement with management and those charged with governance should reduce potential barriers to agreeing to the appointment of an expert. If the additional costs cannot be recovered and/or management will not cooperate with the expert, a modified audit opinion or even resignation may be the only feasible outcome. 

Further reading

This is the second of two articles on auditing specialist areas. The first focuses on key considerations when deciding whether an expert is required and uses four scenarios to explore what this can mean in practice. 

Peter Herbert is Director at Insight Training and Rhodri Whitlock is Founder of HPL Associates Limited, a specialist Assurance & Advisory Consultancy.