TAKEAWAYS
For entities that hold property, it is usually among the most significant assets on the balance sheet. Especially where such properties are measured at fair value in accordance with FRS 113 Fair Value Measurement, valuations often sit at the heart of the audit, given their materiality and the degree of estimation involved.
Property valuations rely heavily on professional judgement. Key assumptions and inputs – such as comparable transactions, capitalisation rates, discount rates and rental projections – can significantly affect the valuation outcome and require careful and robust evaluation.
Where valuations are material to the financial statements or carry a risk of material misstatement, auditors must apply heightened scrutiny to the valuation approach, the reasonableness of significant assumptions and the sufficiency of supporting evidence.
In accordance with the auditing standards1, the auditor is not required to reperform the valuation exercise but instead, the auditor’s responsibility is to evaluate, based on the audit procedures performed and the audit evidence obtained, whether the valuation used in accounting estimates and related disclosures is reasonable in the context of the applicable financial reporting framework, or is materially misstated. This evaluation includes assessing the methods, significant assumptions and underlying data used by management and, where appropriate, developing an auditor’s point estimate or range to evaluate the reasonableness of the accounting estimate.
This article is intended to support more effective collaboration among auditors, management and management’s expert (that is, valuers who are typically engaged due to the complexity and subjectivity inherent in the valuation of properties) by addressing practical issues that arise in the audit process, such as information requests and communication gaps. Further guidance on auditing property valuations will be provided in an audit bulletin that is currently being developed.
Management sits at the centre of the valuation process and is ultimately responsible for the valuation, including the use of external valuers. As such, management needs to ensure that the valuation approach and key inputs and assumptions are reasonable and supported. This includes ensuring that the terms of reference for valuation engagements are appropriately designed for financial reporting, with clear expectations on the information and analyses required to support compliance with the accounting standards.
In order to achieve this, management would need to:
As management is ultimately responsible for the valuation for financial reporting, management should be able to clearly articulate the valuation approach, and provide the key assumptions and supporting information for the key inputs and assumptions to the auditors. This reduces the need for repeated requests to valuers for basic clarifications that management should already be able to provide.
There may be specific aspects of the valuation process where management appropriately relies on a valuer for specialist valuation input. In these situations, it is particularly important for management to be actively involved and facilitate and coordinate those discussions with auditors. This is important, as there may be implications on the audit report if sufficient evidence regarding the valuation techniques and underlying assumptions for material valuations cannot be obtained.
External valuers play a crucial role in the valuation process by issuing a valuation report in compliance with the relevant professional standards (for example, SISV Valuation Standards And Practice Guidelines, or International Valuation Standards, etc) and guidance3, and the applicable financial reporting framework with sufficient information clearly explaining the key assumptions, judgements, methodologies and accompanying calculations underpinning the valuation, and engaging constructively with management and auditors.
Examples of how valuers can effectively support the process include clearly articulating:
In enabling the auditors to understand the above, auditors may request valuers to provide further information, such as workings or accompanying calculations in deriving the valuation.
Incorporating and explaining these aspects well in valuation reports facilitate the auditors in fulfilling their responsibilities of understanding the basis for judgements, applying professional scepticism, and assessing whether assumptions are reasonable and supported by evidence.
A common source of concern for valuers is receiving lengthy lists of questions on basic information or repeat information already included in the report. This can be avoided when senior audit personnel familiar with valuation concepts lead the discussions. When auditors prepare thoroughly by reviewing the valuation report in detail and understanding the valuer’s background and expertise, auditors can minimise unnecessary repetition.
Below are some suggestions to enable more productive engagement with valuers during an audit:
The auditor may also involve its expert (an “auditor’s expert”) when property valuations are subject to heightened risk, complexity or judgement, such that specialist valuation expertise may be required to support the auditor’s assessment of the valuation.
Engaging auditor’s experts early helps ensure alignment on the scope of work, methodology, and key assumptions from the outset. It also enables auditors to identify high-risk areas early, reduce rework, and strengthen audit evidence. Early involvement also facilitates clearer communication between management, valuers and the audit team, supporting a smoother and more robust valuation process.
Auditor’s experts act as interpreters between technical valuation work and audit judgement. They help the audit team understand complex methodologies, challenge assumptions constructively, and identify areas needing further evidence. While they provide technical input, auditors remain responsible for the conclusion and must integrate the expert’s findings into their audit judgement4.
The nature and extent of audit procedures will vary between engagements in response to the assessed risks of material misstatement. The auditor exercises judgement in determining the extent of work to be performed on the expert’s work, in order to obtain sufficient and appropriate audit evidence. This helps avoid a “tick-box” approach to questioning that does not address material risk, reduces time spent challenging immaterial details that do not affect the valuation outcome, and prevents unnecessary duplication of the valuer’s work.
Auditing property valuations does not have to be painful. When all parties work towards the same goal – high-quality, reliable financial reporting – the result is a more efficient audit and better outcomes for everyone.
This article was written by the ISCA Auditing and Assurance Standards Committee (AASC), with the support of the Singapore Institute of Surveyors and Valuers (SISV).
1 See SSA 540 (Revised) Auditing Accounting Estimates and Related Disclosures.
2 ISCA Financial Reporting Guidance (FRG) 1: Real Property Valuation for Financial Reporting – Best practices when engaging valuers: Considerations for Scope Of Work (SOW) and Valuation Report facilitates the valuation process among the valuer, reporting entity and the auditor for real property valuation that is intended to be used for financial reporting under SFRS(I)s, International Financial Reporting Standards (IFRSs) or FRS issued by the Accounting Standards Committee. Appendix A of FRG 1 contains a recommended workflow of the engagement process among the three parties. Auditors are encouraged to engage early in the valuation process, particularly for properties that are material or assessed as higher risk.
3 For example, Singapore Institute of Surveyors and Valuers (SISV) Practice Guide for Valuation Reporting for REITs, Listed Companies and Initial Public Offerings (IPOs) including inclusion in Prospectus and Circulars specifies detailed disclosure requirements for valuation reports, forms part of the SISV standards and should be adhered to by valuers.
4 The auditor is still required to evaluate the adequacy of the auditor’s expert’s work in accordance with paragraph 12 of SSA 620 Using the Work of an Auditor’s Expert.
