IMPAIRMENT TESTS - AUDITOR SCOPE?

[RBM]

I would be grateful if forummers with External Auditing know-how can help me. I know there are a few highly skilled auditors amongst the forummer community although I sense they are too modest too admit it.

My questions are with regard to Impairment Tests and the scope for External Auditors to probe into the calculations of listed companies:

1. Are external auditors able to challenge a) the Impairment Test calculation itself? and b) the input parameters used in the Impairment Test calculation? Or do they have to take, as givens, the input parameters - and I'm specifically thinking of predictions of future revenue drivers and future cost drivers - as used by the auditee?

2. If an External Auditor suspects that an asset should be financially impaired and hence a write-down taken, and the auditee refuses to undertake the necessary Impairment Test analysis, shouldn't the External Auditor make a formal qualification to the accounts?

3. What are the duties of an External Auditor when it comes to Impairment Tests of listed companies?

Forgive me for bring audit related questions into the weekend of forummers. And no, I'm not going to divulge which company I have in mind when asking these questions.

Thanks in advance.

[adamteng]

Short answer to your question is "No".

When auditors assess impairment analysis, they usually focus on the reasonableness of the key assumptions of the valuation (i.e. cashflow forecasts, discount rate, terminal value assumption.) Should they have a different view on the reasonableness of these parameters, they will challenge the input parameters. They will have discussions on the underlying assumptions behind the inputs with the Management and the party who did the impairment analysis but its not up to the external auditors to make any changes to the impairment analysis.

In actual practice, the party doing the impairment analysis may change their assumptions after hearing the auditors view. But ultimately they are not obliged to change the value.

In the event that there is a difference in opinion of whether an asset should be impaired (management thinks no, auditor thinks yes) auditors will assess the materiality of it in against the size of the company and if it falls below the materiality threshold, it may still pass the audit.

~ Personal disclaimer, I'm not an auditor but do have many auditor friends who have such experience. The above is what I understood from them.

cheers

I would be grateful if forummers with External Auditing know-how can help me. I know there are a few highly skilled auditors amongst the forummer community although I sense they are too modest too admit it.

My questions are with regard to Impairment Tests and the scope for External Auditors to probe into the calculations of listed companies:

1. Are external auditors able to challenge a) the Impairment Test calculation itself? and b) the input parameters used in the Impairment Test calculation? Or do they have to take, as givens, the input parameters - and I'm specifically thinking of predictions of future revenue drivers and future cost drivers - as used by the auditee?

2. If an External Auditor suspects that an asset should be financially impaired and hence a write-down taken, and the auditee refuses to undertake the necessary Impairment Test analysis, shouldn't the External Auditor make a formal qualification to the accounts?

3. What are the duties of an External Auditor when it comes to Impairment Tests of listed companies?

Forgive me for bring audit related questions into the weekend of forummers. And no, I'm not going to divulge which company I have in mind when asking these questions.

Thanks in advance.

[RBM]

Dear Adam Teng - thank you so much for your answers to my questions. I very much appreciate your clarity and the thought you have put into your response. Best Regards, RBM