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Auditing fair
Challenges in auditing fair value value
measurement and measurement

accounting estimates
Some evidence from the field 51
Babajide Oyewo Received 5 January 2019
Revised 6 May 2019
Department of Accounting, University of Lagos, Lagos, Nigeria 3 July 2019
22 July 2019
Ebuka Emebinah Accepted 28 July 2019
School of Public Policy, Syracuse University, Syracuse, New York, USA, and
Romeo Savage
Department of Accounting, Charisma University,
West Indies, British Indian Ocean Territory

Abstract
Purpose – Following the issuance of International Financial Reporting Standard 13 on fair value
measurement (which became operational from January 2013), this study aims to investigate post-
implementation challenges in the audit of fair value measurement and accounting estimates in the Nigerian
context.
Design/methodology/approach – Data-collection was through a structured-questionnaire administered
on 400 auditors from diverse backgrounds in terms of audit firm size, international affiliation and global
presence.
Findings – Empirical data obtained from 277 auditors were analysed using descriptive statistics, factor
analysis, one-way ANOVA, cluster analysis, independent sample t-test and one-way multivariate analysis of
co-variance. It was observed that the two highest-ranking and most-prevalent challenges of auditing fair
value measurement and accounting estimates are the tendency for managers to manipulate earnings owing to
the inability of auditor to effectively test fair value estimates; and the difficulty in testing unobservable inputs
due to the application of assumptions and judgement in arriving at estimates by preparers of financial
reports.
Originality/value – While there is no significant difference in the perception of auditors on the audit
challenges associated with fair value measurement and accounting estimates, there is a significant difference
in the magnitude of audit challenges faced in verifying fair value measurements and accounting estimates
across industry sectors. Concerned stakeholders (including but not limited to accounting regulators, auditing
standard setters, audit firms, researchers) are importuned to come up with robust and pragmatic measures to
curtain these challenges, as the inability of auditors to rigorously verify fair value estimates may jeopardize
the very essence of fair value measurement which is to elevate financial reporting quality.
Keywords Accounting estimates, Fair value, Financial reporting,
Historical cost accounting, IFRS 13
Paper type Research paper

Journal of Financial Reporting and

1. Introduction Accounting
The International Accounting Standards Board (IASB) in May 2011 issued International Vol. 18 No. 1, 2020
pp. 51-75
Financial Reporting Standard (IFRS) 13 on fair value measurement in a bid to address © Emerald Publishing Limited
1985-2517
concerns about historical cost accounting on one hand, and assuage the expectations of the DOI 10.1108/JFRA-01-2019-0002
JFRA public for high-quality accounting information on the other hand. This was against the
18,1 backdrop that accounting information are usually released through the issuance of financial
reports by organisations to communicate performance to stakeholders (Oyewo and
Ajibolade, 2018). Owing to the multifarious functions, which accounting information
performs, such as planning, controlling and decision making, it is important that they are of
high quality if they are to serve the purposes for which they are provided. To serve the
52 information needs of users, accounting information are expected to possess certain
qualitative characteristics such as relevance, verifiability, freedom from bias, comparability,
consistency and fruitful representation (Riauhi-Belkaoui, 2004; Deloitte, 2012). In achieving
these qualitative characteristics, several approaches have been put forward to measure the
elements of financial statements, including historical cost, replacement cost and fair value
measurement (Deloitte, 2012).
Historical cost accounting, which purports that items or transactions should be recorded
based on the original, nominal monetary value, has been conventionally applied in the
rendition of financial statements. The replacement cost approach, which supports the
valuation of items based on the amount an entity would pay to replace the asset or settle a
liability at its current worth, is less popular than the historical cost method. While
accounting information users favour an approach that would reflect the real-world value of
items, scholars (for example, Chouinard and Youngman, 2008; Volha, 2010) have argued that
historical cost disconnects from economic realities. Another acclaimed limitation of
historical cost accounting is that it provides an avenue for profit-smoothing through hidden
and excess reserves (Landsman, 2007; Enahoro and Jayeoba, 2013). These limitations of
historical cost accounting paved the way for fair value measurement, as it is expected that
this approach for measurement of items in financial reports would better-reflect their
economic values. IASB describes fair value as the price at which a knowledgeable buyer and
a willing seller agree to transact at arm’s length (Oyewo and Ajibolade, 2018). The Canadian
Institute of Chartered Accountants cited in Enahoro and Jayeoba (2013, p. 1174) defines fair
value as the “value of consideration agreed on in a fair transaction, based on both voluntary
sides familiar with the situation”. In referring to the Generally Accepted Accounting
Principles (GAAP) (Statement of Financial Accounting Standards No. 15), Ting and Soo
(2005) state that the fair value of an asset is the price at which an asset could be bought or
sold between marketplace participants in the reference market, other than in liquidation.
The fair value of a liability is the price at which the liability could be incurred or paid to
transfer the liability in a current transaction between marketplace participants in the
reference market, other than in liquidation.
IFRS 13, which became operational from 1 January 2013, aims at a more comprehensive
remedy for the problems of historical cost accounting. Prior to the issuance of IFRS 13,
erstwhile standards reflecting the principles of fair value measurement include IAS 39/IFRS
9 (recognition and measurement of financial instruments) and IAS 41 (accounting for
agricultural activity). As it has been over six years now that IFRS 13 became operational
(since 1 January 2013), implementation of the standard has not been without challenges,
including challenges bothering on the audit of fair value measurement and accounting
estimates (Johnstone and Bedard, 2003; Hoffman and Zimbelman, 2009; Pannese and
DelFavero, 2010; Kumarasin, 2011; Ahmed, 2012; Christensen, Steven and David, 2012;
Glover et al., 2017; Cenciarelli et al., 2018). In May 2017, the International Accounting
Standards Board (IASB) made a call for literature review on the effect of implementation of
IFRS 13, for the purpose of Post-Implementation Review (PIR) of the Standard (IFRS 13),
pointing to the Board’s awareness that some challenges may be posed by fair value
measurement (IASB, 2017).
 The challenges of applying fair value measurement in different jurisdictions is Auditing fair
heterogeneous (Ting and Soo, 2005; Lefebvre et al., 2009; Yichao, 2010). That the value
challenges of implementing fair value accounting are rather contextual but not general
provides ground for conducting country- or region-specific studies to unearth challenges
measurement
in auditing fair value measurement and accounting estimates. This study, therefore,
investigated the challenges confronting external auditors in the audit of fair value
measurement and accounting estimates in the Nigerian context. A study from Nigeria (as
one of the emerging economies in Africa) on the challenges of auditing fair value
53
measurement is crucial in providing a broader view on the diffusion and application of
fair value accounting in the post-IFRS-adoption regime. Nigeria joined the league of other
nations that have adopted IFRS standards (including IFRS 13), as it would be in the
interest of the Nigerian economy for reporting entities to apply globally accepted, high-
quality accounting standards. The full adoption of the International Financial Reporting
Standards (IFRSs) was planned in a phased transition (Federal Inland Revenue Service
(FIRS), 2013; Umoren and Enang, 2015). Quoted companies and companies with
significant public interest were mandated to adopt IFRS Standards effective from
January 2012; other public-interest entities from January 2013, while the adoption of the
IFRS-for-small- and medium-scale enterprises (SMEs) standard was effective January
2014; for not-for-profit entities (NGOs, religious bodies), effective date for adoption was
from January 2015 (Akhidime and Ekiomado, 2014; Jayeoba and Ajibade, 2016; Yahaya
et al., 2015). Although there is a plethora of studies on financial reporting standards since
the period that Nigeria adopted IFRS, literature on fair value measurement in Nigeria is
scanty. Research in the area of auditing fair value measurement and accounting
estimates is limited (Bratten et al., 2013; Cannon and Bedard, 2017; Glover et al., 2017).
Further, little is known on the post-implementation challenges on fair value measurement
in Nigeria, save for some few studies (Bessong and Charles, 2012; Okafor and Ogiedu,
2012; Jafaru and Shodipo, 2013; Ijeoma, 2014; Ladega, 2016). Worse still, the audit
challenges of fair value measurement and accounting estimates is yet to be rigorously
researched.
The motivation to undertake this study stems from the issues afore-stated. Hence, the
objectives of the study were to:

examine the audit challenges of fair value measurement and accounting estimates;

assess the extent of difference in the perception of auditors as to the audit challenges
of fair value measurement and accounting estimates; and

establish whether (or not) there is difference in the magnitude of audit challenges in
verifying fair value measurement and accounting estimates across industry sectors.

Empirical data obtained from 277 auditors were analysed using descriptive statistics,
factor analysis, one-way ANOVA, independent sample t-test and one-way multivariate
analysis of co-variance (MANCOVA). It was observed that the top-three ranking
challenges in auditing fair value (FV) measurements are: the tendency for managers to
manipulate earnings owing to the inability of auditor to effectively test fair value
estimates; difficulty in testing unobservable inputs due to the application of
assumptions and judgement in arriving at estimates by preparers of financial reports;
and increased audit risk due to estimation uncertainty and tendency of managers of
client firm to misstatement estimates. While there is no significant difference in the
perception of auditors on the audit challenges associated with FV measurement and
accounting estimates, there is a significant difference in the magnitude of audit
JFRA challenges faced in verifying FV measurements and accounting estimates across
18,1 industry sectors.
Considering that Nigeria has fully adopted IFRS, this study conducted in the Nigerian
setting contributes to knowledge by enriching the literature on challenges of FV
measurement, as well as exposing the practical challenges on the audit of fair value
measurement and accounting estimates typical of a country that has fully implemented
54 IFRS standards. Moreover, findings from the study of Nigeria as a country with one of the
largest economies in Africa could be compared with studies conducted in other jurisdictions
to gain a deeper insight into the challenges of fair value measurements – such knowledge
could inform financial reporting standards review, guide the reinvigoration of audit
standards and/or shape policy formulation in audit firms.
The remaining part of the paper is organised into five sections. In Section 2, FV
measurement as an innovation in the Nigerian context is discussed. Section 3 elaborates on
the audit challenges of fair value measurement and accounting estimates. Next, Section 4
discusses audit challenges in verifying fair value estimates across industry sectors. After
covering methodology issues in Section 5, the results of the analysis and discussion of
findings are covered in Section 6. Concluding remarks are passed in Section 7.

2. Fair value measurement as an innovation

Sequel to the adoption of IFRS by Nigerian entities in 2012, the requirement for the
application of IFRS 13 on an annual basis commenced from 1 January 2013 (Deloitte, 2012).
Thus, the application of FV measurement could arguably be conceived as an innovation and
Roger’s (2003) diffusion of innovation theory is invoked as the theoretical framework for this
study. Rogers (2003, p. 12) conceives innovation as “an idea, practice or project that is
perceived as new by an individual or other unit of adoption”. Before IFRS adoption by
Nigerian entities in 2012, the preparation of financial reports was guided by the Nigerian
Statement of Accounting Standards (SASs) issued by the Nigerian Accounting Standards
Board (NASB) since 1982 till July 20th, 2011 when the Financial Reporting Council Bill was
signed into law (Jafaru and Shodipo, 2013; Umoren and Enang, 2015). Although most of the
International Accounting Standards (IASs) issued by IASB have equivalent SASs issued by
NASB (Yahaya et al., 2015), certain standards issued by IASB had no equivalent SASs. One
of such standards that was fundamentally different is fair value measurement (Blanchette
and Desfleurs, 2011; Chua and Taylor, 2008).
Although fair value accounting has been in existence in developed countries (for
example, Europe, USA) before now (Cardao-Pito and Barros, 2016; Laux and Leuz, 2009), the
advent of IFRS adoption birthed the application of fair value measurement in Nigeria. It,
therefore, qualifies as an innovation going by Rogers’ (2003) position. According to Rogers
(2003), an innovation may have been invented a long time ago, but if individuals in a
location, place or organisation perceives it as new, then it may be construed as an innovation
for them. Today, reporting entities in Nigeria now render statement of profit or loss and
other comprehensive income, which recognises unrealized gains and losses from performing
a “mark-to-market”, underpinned by the application of fair value accounting.

3. Audit challenges associated with fair value measurement and accounting

estimates
Some of the documented challenges in auditing FV measurement and accounting estimates
bother on obtaining information relevant to the audit of fair value estimates,
appropriateness of valuation methods, evaluating management estimates and establishing
misstatement bias, risks to audit quality, expansion in scope of audit and the audit
expectation gap, auditors’ unawareness and lack of competence in fair value audit (Ahmed, Auditing fair
2012; Hux, 2017; Bucaro, 2019). These are discussed as follows. value
measurement
3.1 Obtaining information relevant to the audit of fair value estimates
Obtaining reliable information relevant to fair values has been one of the greatest challenges
faced by preparers, and auditors are also not removed from this (IAASB, 2008; Ryan, 2008;
Ahmed, 2012). Auditors will be burdened with verifying market values of assets and
liabilities; however, Level 1 inputs may not pose as much challenge as Levels 2 and 3 inputs
55
(Emett et al., 2018). When market information is either not available or sufficient information
is difficult to obtain, the non-availability of observable prices for some items may cause lack
of audit evidence. Auditors will need to work extra to obtain such audit evidence. The audit
evidence is the information used by the auditor in arriving at the conclusions on which the
auditor’s opinion is based (Morariu et al., 2008; American Institute Certified Public
Accountants [AICPA], 2015). Methods such as observation (looking at a process or
procedure being performed by others), external confirmation (audit evidence obtained by the
auditor as a direct written response to the auditor from a third party (the confirming party)
in paper form or by electronic or other medium) may have to be used in obtaining audit
evidence about fair-valued assets and inquiry (seeking information of knowledgeable
persons, both financial and nonfinancial, within the entity or outside the entity). The
reliability of audit evidence is influenced by its source and nature (IAASB, 2008). Although
the estimation of fair value may prove to be difficult owing to market uncertainty, it has not
proved impossible to obtain sufficient information (IAASB, 2008). Auditors must decide on
the extent of reliability placed on evidence or information available.

3.2 Appropriateness of valuation methods

IFRS 13 permits the use of quoted prices provided by third parties insofar as the prices are
developed in accordance with the standard. Although auditors can make use of pricing
services and valuation specialists (Griffith et al., 2015; Hux, 2017), they are expected to
understand valuation methods, significant assumptions and possible biases when auditing
fair value estimates (Martin et al., 2006; Joe et al., 2017; Emett et al., 2018). Ahmed’s (2012)
study provides empirical evidence from respondents in the Big 4 audit firms that
understanding the complexity of the mathematical methods and valuation methods used to
measure fair value is a challenge for auditors. IFRS 13 allows the use of quoted prices
provided by third parties that complies with the pricing mechanism specified by IFRS 13.
Ladega (2016) contend that valuations carried out in Nigeria in recent times by many
valuers (for financial reporting) are not in total compliance with the IFRS 13 fair value
measurement. This observation imposes peculiar challenges to auditors in Nigeria as per
auditing fair value measurements – they [auditors] must develop in-house mechanism of
pricing or verifying prices conferred on fair-valued assets and liabilities.

3.3 Evaluating management estimates and establishing misstatement bias

Scholars such as Chen et al. (2010) and Bell and Griffin (2012) stress the importance of
adducing and presenting evidence for the reasonableness of management estimates. When
there is estimation uncertainty, accounting estimates are needed to ascertain fair value of an
asset or liability. The ISAs cited in IAASB (2008, p. 1) defines accounting estimate as “an
approximation of a monetary amount in the absence of a precise means of measurement”.
There are audit challenges encountered in auditing accounting estimates (Backof et al., 2015;
Bucaro, 2019). The allowance in the standard (IFRS 13) for organisations to indulge in the
‘adjustment’ of entity’s own data to reflect market participants’ assumption, as in the case of
JFRA Level 3 inputs, provides avenue for financial information manipulation by unscrupulous
18,1 managers, which has implications for audit. Managers are responsible for systematic bias in
fair value estimates or intentional misstatement of asset and liability measurement
(Ramanna and Watts, 2012). Notwithstanding that external auditors do not have
responsibilities for detecting fraud, they [auditors] may have to be on the lookout for
earnings management. If markets become inactive, market price information becomes
56 unavailable and estimates need to be made based on other information [International
Auditing and Assurance Standards Board (IAASB), 2008]. The propensity of estimation
uncertainty increases and advertently heightens the risk of material misstatement (Ahmed,
2012). Christensen et al. (2012) state that management estimate is a controversial issue
adding to the challenges of fair value audit. Empirical studies (Martin et al., 2006; Benston,
2008; Akgü et al., 2011) have shown overwhelming evidence that management bias in
estimating fair value of items affects the quality of audit. Ahmed’s (2012) study of the Big 4
audit firms note that it may be difficult to know the intention of management when
submitting fair value estimates because of variation in price is due to the existence of
different market values for a single set of asset or liability, and because of lack of active price
in the market.

3.4 Risks to audit quality

Fair value measurement has implications for audit quality. Approaching audit quality from
the standpoint of the ability of an auditor to detect and report significant distortions in the
financial statements (De Angelo, 1981; Palmrose, 1988; Jafari, 2015), arguably, the extent to
which an auditor can detect distortion, frauds and irregularities in respect of recognition and
disclosure of financial statement items is dependent on the availability of information. In
relation to the fair value measurement discourse, uncovering misstatement of assets and
liabilities measured in fair value is dependent on the availability of information about the
assets and liabilities. To the extent that information is unavailable, misstatement may go
undetected – this is true, especially if the auditor has no internal mechanism for verifying
either fair value estimates incorporated in financial statements based on client
management’s estimates or estimates provided by external Valuers and relied upon by
clients’ management, communicated to auditors through management representation.
Auditors may have to look closely at fair value estimates and reasonableness of the
assumptions underlying management’s valuation before they (auditors) can repose
confidence in the financial statements, form an opinion on the likelihood that the financial
statements do not have significant distortions, and issue a clean audit report.

3.5 Expansion in scope of audit and the audit expectation gap

Organisations are at liberty to select assets, class of assets, liability and category of
liabilities to be fair-valued (Deloitte, 2012; IASB, 2012). Assets initially recorded at historical
costs may, nevertheless, require fair value consideration, for example, when supplementary
disclosure is required or when estimation of impairment losses for provisioning those items
is necessary. This places extra burdens on auditors to expand the scope of audit work. To
satisfy consistency as a qualitative characteristic of accounting information, auditors may
have to track the reporting history of items because some financial reporting frameworks
may require that changes in fair value measurement be reflected directly in equity (Kaplan,
2015), while others may require them to be reflected in income.
3.6 Auditors’ unawareness and lack of competence in fair value audit Auditing fair
The use of FV measurement, being an innovation in the Nigerian context (as statements value
were prepared using historical cost accounting prior to the adoption of IFRS in Nigeria),
requires proper understanding, mastery of the concepts, and a good grasp of the issues
measurement
surrounding its application. As auditors are seen as professionals providing guidance owing
to their experience and professional competence, they [auditors] are expected to have a
thorough knowledge of audit subject matter, including accounting principles and rules
relating to fair value measurement (IAASB, 2008; Ahmed, 2012). Hameed (1995) observes 57
that auditor’s knowledge in accounting and auditing standards, experience and honesty,
amongst other considerations, are the most important factors that affect audit quality. De
Angelo (1981) supported by Ahmed (2012) contends that auditor’s qualifications and
proficiency is very important to develop the auditor and to achieve a high level of quality.
Unfortunately, as Okafor and Ogiedu (2012) lament, auditors in Nigeria have a low level of
knowledge on fair value measurement. From the interview of 24 auditors, Griffith et al.
(2012) observe that most of the auditors lack the required competencies to audit fair values.
Further, their study note that Auditors are lacking in understanding management estimates,
unknowledgeable in major assumptions made by managers, and ignorantly relying on
assumptions made by specialists. The Chairman of Public Committee Oversight Accounting
Board (PCOAB) in the US admits that lack of knowledge on the part of auditors is a
challenge (Johnson, 2007). Experienced auditor may be unable to complete fair value audit
because of the peculiarities of fair value measurement and estimates (Griffith et al., 2012).
Fielding questions on auditor’s knowledge and familiarity with fair value accounting,
Ahmed (2012) reports that most respondents (auditors) from the Big 4 firms in Sweden
contend that although auditors operating at regional office may have no experience and
exposure of auditing fair values, auditors from bigger cities are always available on-demand
to regional cities to audit issues related to fair values. Further, respondents admitted that
there are training opportunities in the Big 4 Audit Firms but not specific to the audit of fair
value measurement.
Based on the discussions in the foregoing, it is hypothesized that:

H1. There is a significant difference in the perception of auditors as to the audit

challenges associated with fair value measurement and accounting estimates.

4. Magnitude of audit challenges in verifying fair value estimates across

industry sectors
FV applies to elements of financial statement such as financial assets and financial liabilities
(Cardao-Pito and Barros, 2016; Bell and Griffin, 2012; Deloitte, 2012; IASB, 2012). Following
the manner IFRS 13 was developed, fair value measurement can equally be applied to non-
financial items, which could be individual asset and liability or a group of assets and
liabilities, such as valuation of pension liabilities, goodwill and intangibles acquired in a
business combination, real estate, investment property, property plant and equipment
(PPE), biological assets, endowment funds, share-based payments, non-monetary exchanges
and other classes of assets and liabilities (Cardao-Pito and Barros, 2016; Yahaya et al., 2015;
Maruli and Farahmita, 2011; IAASB, 2008; Glover et al., 2017). Firms operating in an
industry may hold a concentration of certain type of assets/liabilities than others operating
in other industries. For instance, financial institutions may hold more financial instruments
than other organisations, and thus, may extensively apply fair value accounting in this area
than others. Meanwhile, IFRS 13 was contextually developed to measure financial
instruments (Hague, 2002; Yichao, 2010). As there were no local Statement of Accounting
JFRA Standards (SASs) covering fair value estimates in Nigeria, financial institutions may be
18,1 more familiar with erstwhile international standards on fair value measurement as to be
well advanced in its application. In comparison to other organisations that commenced the
application of fair value accounting, consequent on the adoption of IFRS by listed reporting
entities in Nigeria in 2012 and the subsequent launching of IFRS 13 January 2013, financial
institutions may apply fair value measurement more extensively. Cardao-Pito and Barros’s
58 (2016) study of listed Portuguese companies observes that the largest users of fair value
accounting are essentially the financial sector companies. On a general note, the level of
application of fair value measurement may expectedly be different from one sector to
another; by extension, the difficulties of auditing fair value measurement may conceivably
be dissimilar across industries/sectors of an economy.
Valuation methods for FV estimates such as market approach, expert estimation method,
cost approach and income approach have their peculiar difficulties (Watts, 2006; Landsman,
2007; Danbolt and Rees, 2008; Bessong and Charles, 2012). The valuation method to be
applied will depend on the nature of assets and liabilities to be fair-valued and the
availability of information/required inputs (Levels 1, 2 and 3, respectively). For instance,
ascertaining the fair value of an asset using the market approach is less cumbersome when
compared to the cost- or income- approach owing to the availability of information and the
procedure involved. While some assets (say tangible assets) may have “Level 1” direct
market price readily available (as to facilitate the application of market approach), some
other items (for example, intangible assets and liabilities) may have unobservable “Level 3”
input, thus necessitating the application of complex methods such as expert estimation or
income approach. Considering that the concentration of assets and liabilities (nature of
assets and liabilities determine largely the applicable valuation method) is dissimilar among
entities, the intensity of the (audit) challenges of fair value measurement may also
anticipatorily vary from sector-to-sector. Glover et al. (2017) observe that the challenges
auditors encounter when auditing fair value measurements differ between financial and
non-financial items, with greater challenges presented by non-financial fair value assets/
liabilities because of lack of observable market information.
Overall, owing to the nature of business/manners of operation of reporting entities and
heterogeneity in the concentration of assets and liabilities held by reporting entities, the
difficulties of applying fair value accounting – and by extension the audit challenges of fair
value measurement – may be disparate among reporting entities (Hague, 2002; Penttinen
et al., 2004; Herborhn and Herbohn, 2006; Pacter, 2007; Danbolt and Rees, 2008; Kohlbeck
et al., 2009; Maruli and Farahmita, 2011). Therefore, H2 is hypothesized as follows:

H2. There is significant difference in the magnitude of audit challenges faced in

verifying fair value measurements and accounting estimates across industry
sectors.

5. Methodology
5.1 Population, sample and data collection technique
The population of the study is comprised of all external auditors in Nigeria. Considering that
Nigeria has completely adopted IFRS, it is important to investigate the post-implementation
issues of IFRS 13 in the Nigerian setting from the perspective of external auditors with a
view to exposing the practical challenges on audit of fair value measurement and accounting
estimates typical of a country that has fully implemented IFRS standards. Moreover,
findings from the study of Nigeria as a country with one of the largest economies in Africa
could be compared with studies conducted in other jurisdictions to gain a deeper insight into
the challenges of fair value measurements. Such knowledge could inform financial reporting Auditing fair
standards review, guide the reinvigoration of audit standards and/or shape policy value
formulation in audit firms. These considerations informed the country selection. The study
was conducted in the period 2017/2018.
measurement
The list of audit firms registered with The Institute of Chartered Accountants of Nigeria
(ICAN) initially guided the enumeration of practicing auditors. The list of firms involved in
the audit of companies quoted on the mainboard of the Nigerian Stock Exchange was
thereafter compiled from the inspection of published annual reports. In total, 24 firms, 59
including the Big 4 (4 firms) and non-Big 4 (20 firms) were selected. Considering that the Big
4 have wider market share in providing attestation service (Khurana and Raman, 2004;
Okaro and Okafor, 2013), 50 copies of the questionnaire were distributed to each of the Big 4
and ten copies distributed to every of the twenty non-Big 4 firms for onward distribution to
auditors involved in fair value audit. A total of 400 copies were distributed through the audit
firms to individual auditors. Each auditor completed a copy of the questionnaire, with
respondents indicating the industry sector they specialise in auditing. Respondents were
requested to indicate their overall perception on the application of FV measurement at the
industry-sector level (and not for each of the audited companies), as it is expected the audit
of various companies within an industry of audit-specialisation over the period would have
exposed auditors to the fair value accounting practice of reporting entities within that
industry. The questionnaire administration lasted almost three months, with follow-up
visits and reminders at regular intervals during this period. This appreciably improved the
response rate.

5.2 Measurement of variables

The questionnaire had two parts, Sections A and B. Section A was subdivided into two
Subsections A1 and A2 with Subsection A1 measuring audit firm attributes including size,
affiliation to international audit firm and global presence and Subsection A2 measuring
personal characteristics of auditors.
The size of the audit firm was operationalised using the number of partners.
Categorisation of the number of partners was guided by the class of license issued by The
Institute of Chartered Accountants of Nigeria (ICAN) – the professional accountancy body
regulating audit practice in Nigeria. Firms were labelled as follows, based on the number of
partner (s): sole practitioner (1 Partner), small firm (2-4 Partners), medium-firm (5-9 Partners)
and large firm (10 Partners and above). Affiliation to international audit firm was measured
by requesting respondents to declare whether their firms were affiliated to an international
audit firm. The global presence was measured by segregating firms into Big 4 and non-Big
4. Big 4 audit firms enjoy more presence in the international scene than non-Big 4 (Okaro
and Okafor, 2013). The Big 4 audit firms (PwC, KPMG, Ernst &Young and Deloitte) offer the
highest attainable audit services due to their technical, as well as professional capabilities
(Bloom and Schirm, 2008). The Big 4 Audit Firms; KPMG, PwC, Deloitte and Ernest and
Young, are among the various international auditing and consulting firms that provide an
attestation for the genuine presentation of financial statements. Audit firms were stratified
into Big 4 and non-Big 4 for drawing a comparison among auditors based on the
characteristics of audit firms such as size based on the fact that the Big 4/non-Big 4
dichotomy is the most popular basis for segregating audit firms (Okaro and Okafor, 2013).
The two personal characteristics of auditors measured in subsection A2 were length of
work experience and industry sector of audit specialisation. Auditor’s experience was
measured in five categories – less than 3, 3-6, 7-10, 11-15 and over 15 years, respectively.
Auditors were requested to indicate the industry sector they specialise in auditing from the
JFRA following sector classification for audit purpose (this classification of industry sectors for
18,1 audit market purpose was gleaned from the websites of Big 4 and non-Big 4 audit firms):
manufacturing, financial service, technology, media and telecommunication, oil and gas,
healthcare, SMEs, energy, agriculture/agro-allied and other sectors (to capture any other
industry sectors not earlier enumerated).
Section B focussed on the challenges of auditing fair value measurement and accounting
60 estimates. This was measured by adapting seven items (items 1-7 in Appendix Table AII)
from Pannese and DelFavero’s (2010) study while four items (see items 8-11 in
Appendix Table AII) were added by the researchers following a review of extant literature,
making a total of 11-items. Respondents were requested to indicate their level of agreement/
disagreement as to whether each of the items represented a challenge on a scale of 1 (Strongly
Disagree) to 5 (Strongly Agree). Some studies [for example, Ahmed (2012)] have adopted
Pannese and DelFavero’s (2010) instrument to examine challenges in FV measurement.

5.3 Validity and reliability of research instrument

The research instrument was constructed after an extensive review of extant literature
relevant to the subject of the research. The initial draft of the questionnaire was submitted to
a senior academic with competence in fair value accounting and two senior auditors (one
from Big 4 and another from non-Big 4 audit firms) specialising in fair value audit for
critiquing. Feedbacks obtained from the three experts were incorporated in the final version
that was administered. Exploratory factor analysis with the principal component analysis
(PCA) extraction method was applied to assess the loading of items on components (full
results displayed in Appendix 1). All items loaded above 0.4 in component 1 explaining
31.041 per cent of the variance, thus confirming construct validity (Appendix Table AII).
The reliability of measurement scale was gauged using three techniques – Cronbach’s alpha,
Guttman Split-Half coefficient and Kaiser–Meyer–Olkin (KMO) measure of sampling
adequacy (Table I).
The Cronbach’s alpha and Guttman Split-Half coefficients are 0.770 and 0.699,
respectively. The Kaiser–Meyer–Olkin measure of sampling adequacy yielded a coefficient
of 0.760, significant at 1 per cent. These results establish internal consistency.

5.4 Respondents’ attrition and response rate

From the 400 copies of the questionnaire administered, 283 copies were retrieved,
representing a response rate of 70.75 per cent; 6 copies were found unsuitable for use
because of incomplete response to some questionnaire items resulting in 277 usable copies.
This diminished the effective response rate to 69.25 per cent. Non-response bias was
assessed by comparing the first 20 per cent of responses obtained with the last 20 per cent of
responses obtained using global presence (Big 4/non-Big 4 dichotomy) as a basis for

Reliability statistics
Number of Cronbach’s Guttman split- Kaiser–Meyer–Olkin measure
Variable item Alpha half coefficient of sampling adequacy

Challenges of auditing FV
Table I. measurement and
accounting estimates 11 0.770 0.699 0.760* [Appendix Table AI]
Reliability test
results Note: *Significant at 1%
comparison of early response with late response. The independent sample t-test result Auditing fair
shows no significant difference at 1 per cent (p = 0.837 > 0.01), thus confirming the absence value
of non-response bias.
measurement
5.5 Methods of data analysis
Descriptive and inferential statistics were applied in data analysis. Descriptive statistical
techniques used were frequency count, percentage analysis, range (minimum and maximum 61
values), mean (M) and standard deviation (SD). Inferential statistics applied were factor
analysis, independent sample t-test, one-way ANOVA, cluster analysis and one-way
MANCOVA.

6. Results and discussion

6.1 Audit firm attributes and respondents’ characteristics
The summary of statistics on audit firm attributes in Table II shows that audit firms of
varying sizes participated in the study
The summary of statistics on audit firm attributes in Table II shows that auditors from
audit firms of varying sizes participated in the study. A total of 15 (5.4 per cent) firms are
sole practitioners, 39 (14.1 per cent) are small firms, 80 (28.9 per cent) are medium firms and
143 (51.6 per cent) are large audit firms. A total of 244 (88.1 per cent) of the firms are
affiliated to international audit firms while 33 (11.9 per cent) have no affiliation to
international firms. A total of 143 (51.6 per cent) of the auditors are from the Big 4 and 134
(48.4 per cent) are from non-Big 4. An inspection of statistics in respect of the profile of
informers/respondents’ characteristics suggests that while 66 (23.8 per cent) have less than
3 years work experience, majority of the auditors have work experience of 3-6 years (109,
39.4 per cent). Furthermore, 56 (20.2 per cent), 34 (12.3 per cent) and 12 (4.3 per cent) auditors
have work experiences of 7-10 years, 11-15 years and over 15 years, respectively. Overall,
175 (63.2 per cent) have no more than 6 years work experiences, while 102 (36.8 per cent)

Variable Category Freq. (%) Total

Size (no. of partners) 1 15 5.4

2-4 39 14.1
5-9 80 28.9
10 and above 143 51.6 277
Affiliation to International audit firm Affiliated 244 88.1
Not Affiliated 33 11.9 277
Global presence Big-4 143 51.6
Non-Big-4 134 48.4 277
Less than 3 years 66 23.8
Length of work experience as external auditor 3-6 years 109 39.4
7-10 years 56 20.2
11-15 years 34 12.3
Over 15 years 12 4.3 277
Auditor sector specialisation Manufacturing 50 18.1
Financial service (bank and non-bank) 54 19.5
Technology, media and telecom 52 18.8
Oil and gas 45 16.2 Table II.
SMEs 35 12.6 Audit firm attributes
Energy 24 8.7 and profile of
Agriculture/agro-allied 17 6.1 277 informers
JFRA have over 6 years of experience. A total of 50 (18.1 per cent) auditors specialise in audit of
18,1 manufacturing firms, 54 (19.5 per cent) in the financial service sector and 52 (18.8 per cent) in
technology, media and telecommunications. A total of 45 (16.2 per cent), 35 (12.6 per cent), 24
(8.7 per cent) and 17 (6.1 per cent) specialise in the audit of oil and gas, SMEs, energy and
agriculture/agro-allied firms. Overall, result in Table II shows that the views of diverse
respondents were obtained. The distribution of audit firms across size, foreign affiliation
62 and global presence suggests that the responses obtained on the subject matter of the
research cut across audit firms upon their categorisation from different standpoints.

6.2 Audit challenges associated with fair value measurement and accounting estimates
Table III captures result on the audit challenges associated with fair value measurement and
accounting estimate (items ranked in descending order of mean score).
The top-three ranking audit challenges include: the tendency for managers to manipulate
earnings owing to the inability of auditor to effectively test fair value estimates (M = 3.67,
SD = 0.915), difficulty in testing unobservable inputs due to the application of assumptions
and judgement in arriving at estimates by preparers of financial reports (M = 3.55, SD =
0.918), and increased audit risk due to estimation uncertainty and tendency of managers of
client firm to misstatement estimates (M = 3.50, SD = 1.006) [research objective one]. The top
three challenges observed by this study are issues associated with the valuation of assets
and liabilities with no observable market price and the appropriateness of management’s
assumptions for such items. This is consistent with Cannon and Bedard’s (2017) and

S/N Items Range Mean SD p-value*

1 Opportunity for managers to manipulate earnings exist if auditors 1-5 3.67 0.915 0.734
cannot effectively test FV estimates
2 Unobservable inputs (Level 3 FV hierarchy) are difficult to test, as 1-5 3.55 0.918 0.028
those estimates are made based on assumptions and management
judgement
3 FVA increases audit risk because of estimation uncertainty and 1-5 3.50 1.006 0.003
tendency of managers of client firm to misstatement estimates
4 Information on FV estimates may be unavailable or difficult to obtain, 1-5 3.30 0.930 0.120
causing lack of audit evidence
5 Fraud, irregularities and misstatement in FV estimates may go 1-5 3.27 0.979 0.465
undetected due to non-availability of information about the asset/
liability
6 Auditors are being blamed for not detecting flawed fair value 1-5 3.21 0.911 0.020
estimates while conducting audits over internal controls for entities
7 The true FV of item can be within a range of þ/10% of projection 1-5 3.06 0.967 0.155
and auditor will be regarded as negligent if they fail to detect
manipulation
8 Auditors cannot easily verify that the price assigned to an asset/ 1-5 2.85 1.080 0.003
liability fairly reflects economic reality owing to lack of information
9 Auditors may not understand the valuation methods used by 1-5 2.83 0.957 0.219
managers due to its perceived complexity
Table III. 10 Auditors are being sued for being “overly” conservative when issuing 1-5 2.80 0.987 0.520
an adverse opinion when FV measurement approaches cannot be
Challenges of determined or disclosures are not sufficient
auditing fair value 11 Auditors are lacking in knowledge on FV measurement and FV audit 1-5 2.34 1.014 0.219
measurement and
accounting estimates Note: *p-value from one-way ANOVA based on length of work experience
Glover et al.’s (2017) findings that one of the three most frequently encountered problem Auditing fair
areas of auditing fair value measurement is the appropriateness of management’s value
assumptions (for valuation of items with no observable market price). The non-availability
of the determinable price will not only create a challenge in subjectively estimating the fair
measurement
value of items but also will pose a challenge for auditors in both verifying fair value
estimates and evaluating the reasonableness of the assumptions underlying management
estimation. Lack of verifiable price and unobservable inputs will, therefore, increase audit
risk (especially inherent and detection risks). 63
The next set of medium-ranking items (4-7) with mean score above 3.00 but below 3.50
includes: lack of audit evidence due to the inherent difficulty of obtaining such information
(M = 3.30), possibility of detecting fraud, irregularities and misstatement on fair value
estimates due to non-availability of information (M = 3.27), blaming auditors for failure to
detect flawed fair value estimates (M = 3.21) and charging auditors with negligence for
failure to detect manipulation of values and financial statements (M = 3.06). The lack of
audit evidence due to difficulty in obtaining information or complete unavailability of
information on fair value measurement will mean that auditors may be wanting in audit
evidence to detect or lay claim to misstatement, irregularity or fraud. Failure to detect
misstatement or irregularity would be tantamount to professional negligence or misfeasance
which simultaneously increases the audit risk and the auditor liability.
Other challenges such as inability to easily verify the economic reality of the price (M =
2.85), lack of understanding of valuation methods used by preparers due to their
complexities (M = 2.83), suing auditors for issuing adverse report due to limitation in scope
of audit (M = 2.80) are not strong audit challenges. Respondents do not agree auditors are
lacking in knowledge on FV measurement and FV audit (M = 2.34). An inspection of the
one-way ANOVA p-value shows no significant difference in perception (based on auditors’
work experience) on 7 out of the 11 items, meaning that these are some of the noteworthy
challenges affecting audit of fair value estimates.
The result in Table III gives a general view on the ranking of the challenges based on
their statistical properties as per mean distribution but does not evince the prevalence of
each challenge among reporting entities. To profile the challenges as per their commonness
among reporting entities, hierarchical cluster analysis (variable clustering) was applied,
triangulating the pervasiveness of the challenges with a 2- to 5-cluster grouping. The results
of the analysis are presented in Tables IV and V, Appendix 2.
The agglomeration schedule in Table IV displays how the hierarchical cluster analysis
progressively clustered the challenges of auditing FV measurement. The hierarchical clustering

Cluster combined Stage Cluster first appears

Stage Cluster 1 Cluster 2 Coefficients Cluster 1 Cluster 2 Next stage

1 8 9 129.000 0 0 7
2 4 11 276.500 0 0 4 Table IV.
3 1 2 457.000 0 0 9 Agglomeration
4 3 4 640.167 0 2 6 schedule for the
5 7 10 823.667 0 0 8
clustering of
6 3 5 1,033.500 4 0 7
7 3 8 1,246.667 6 1 10 challenges of
8 6 7 1,461.167 0 5 9 auditing fair value
9 1 6 1,775.467 3 8 10 measurement and
10 1 3 2,429.091 9 7 0 accounting estimates
JFRA 5 4 3 2
18,1 S/N Case Clusters Clusters Clusters Clusters

1 Auditors cannot easily verify that the price assigned to an 1 1 1 1

asset/liability fairly reflects economic reality owing to lack of
information
2 The true FV of item can be within a range of þ/10% of 1 1 1 1
64 projection and auditor will be regarded as negligent if they
fail to detect manipulation
3 Unobservable inputs (Level 3 FV hierarchy) are difficult to 2 2 2 2
test, as those estimates are made based on assumptions and
management judgement
4 Auditors are being blamed for not detecting flawed fair value 2 2 2 2
estimates while conducting audits over internal controls for
entities
5 Opportunity for managers to manipulate earnings exist if 2 2 2 2
auditors cannot effectively test FV estimates
6 Auditors are being sued for being “overly” conservative when 3 3 3 1
issuing an adverse opinion when FV measurement
approaches cannot be determined or disclosures are not
sufficient
7 Auditors are lacking in knowledge on FV measurement and 4 4 3 1
FV audit
Table V. 8 FVA increases audit risk because of estimation uncertainty 5 2 2 2
Clustering of the and tendency of managers of client firm to misstatement
prevalence of the estimates
challenges in 9 Fraud, irregularities and misstatement in FV estimates may 5 2 2 2
go undetected due to non-availability of information about the
auditing FV
asset/liability
measurements and 10 Auditors may not understand the valuation models used by 4 4 3 1
accounting estimates managers due to its perceived complexity
among reporting 11 Information on FV estimates may be unavailable or difficult 2 2 2 2
entities to obtain, causing lack of audit evidence

process is graphically presented through the vertical icicle plot (Figure A1). The graphical
representation of the hierarchical clustering of the prevalence of the challenges is also
displayed through a dendrogram (Figure A2). Table V shows the result of the cluster
analysis, as per the grouping of the challenges based on their prevalence among reporting
entities.
From the result in Table V, the tendency for managers to manipulate earnings owing to
the inability of auditor to effectively test fair value estimates (Item 5), and the difficulty in
testing unobservable inputs due to the application of assumptions and judgement in
arriving at estimates by preparers of financial reports (Item 3) both retained their
classification as “2” under the 2-cluster, 3-cluster, 4-cluster and 5-cluster grouping,
respectively (Table V). This is also true for lack of audit evidence due to unavailability
of/difficulty in obtaining FV information (Item 11) and blaming Auditors for not detecting
flawed fair value estimates while conducting audits over internal controls for entities (Item
4); these two items, though not high-ranking challenges, also retained their grouping as “2”
in the 2-cluster to 5-cluster categorisation. In sum, Items 3, 4, 5 and 11 (in Table V) are the
most prevalent challenges of auditing FV measurements among reporting entities.
The consistent appearance of Items 5 and 3 in the category of “2” in the 2-cluster to
5-cluster grouping on one hand (Table V), and the emergence of both items among the top-
three challenges on the other hand (Table III) lead to the conclusion that the two highest- Auditing fair
ranking and most-prevalent challenges of auditing fair value measurement and accounting value
estimates are the tendency for managers to manipulate earnings owing to the inability of
measurement
auditor to effectively test fair value estimates, and the difficulty in testing unobservable
inputs due to the application of assumptions and judgement in arriving at estimates by
preparers of financial reports (research objective one).
65
6.3 Perception on audit challenges associated with fair value measurement and accounting
estimates by big 4 and non-Big 4 audit firms
To further assess the perception of auditors on FV measurement, analysis of difference in
perception on audit challenges associated with FV measurement and accounting estimates
was conducted between Big 4 and non-Big 4 audit firms. The result is as reported in
Table VI.
The result in Table VI reveals that the mean across the challenges for the big and non-
Big 4 groups are very close to the extent that the difference in the score for each item is not
statistically significant at 1 per cent. The intensity of challenge is higher for the non-Big 4 in

Category of
Item audit firm N Mean SD p-value*

Auditors cannot easily verify that the price assigned to an Big 4 143 2.82 0.969 0.634
asset/liability fairly reflects economic reality owing to lack Non-Big 4 134 2.88 1.189
of information
The true FV of item can be within a range of þ/10% of Big 4 143 2.98 0.960 0.143
projection and auditor will be regarded as negligent if they Non-Big 4 134 3.15 0.970
fail to detect manipulation
Unobservable inputs (Level 3 FV hierarchy) are difficult to Big 4 143 3.48 0.948 0.192
test, as those estimates are made based on assumptions and Non-Big 4 134 3.62 0.883
management judgement
Auditors are being blamed for not detecting flawed fair Big 4 143 3.17 0.911 0.475
value estimates while conducting audits over internal Non-Big 4 134 3.25 0.913
controls for entities
Opportunity for managers to manipulate earnings exist if Big 4 143 3.75 0.876 0.151
auditors cannot effectively test FV estimates Non-Big 4 134 3.59 0.952
Auditors are being sued for being “overly” conservative Big 4 143 2.65 0.929 0.010
when issuing an adverse opinion when FV measurement Non-Big 4 134 2.96 1.025
approaches cannot be determined or disclosures are not
sufficient
Auditors are lacking in knowledge on FV measurement and Big 4 143 2.26 1.039 0.191
FV audit Non-Big 4 134 2.42 0.983
FVA increases audit risk because of estimation uncertainty Big 4 143 3.54 0.977 0.533
and tendency of managers of client firm to misstatement Non-Big 4 134 3.46 1.038
estimates Table VI.
Fraud, irregularities and misstatement in FV estimates may Big 4 143 3.32 0.885 0.375 Analysis of
go undetected due to non-availability of information about Non-Big 4 134 3.22 1.072 difference in
the asset/liability perception on audit
Auditors may not understand the valuation models used by Big 4 143 2.81 0.993 0.731 challenges of FV
managers due to its perceived complexity Non-Big 4 134 2.85 0.922
Information on FV estimates may be unavailable or difficult Big 4 143 3.23 0.886 0.182
measurement and
to obtain, causing lack of audit evidence Non-Big 4 134 3.38 0.972 accounting estimates
between big 4/non-
Note: *p-value from independent sample t-test Big 4
JFRA most cases, though, going by the higher Mean score for this group compared to the Big 4.
18,1 The standard deviation for each item is low and also close for both groups. This implies that
all auditors, whatever their size, face these challenges in the audit of fair value estimates.
Thus, H1 is rejected. In essence, the consensus among auditors is strong that the items
contained in Tables III-V are challenges of auditing fair value measurement and accounting
estimates (research objective two).
66
6.4 Magnitude of challenges in auditing fair value measurement and accounting estimates
across industry sectors
To examine the intensity of the challenges in auditing fair value estimates across industry
sectors, MANCOVA was applied. MANCOVA is a technique applied in assessing the impact
of a categorical independent variable (s) on a number of dependent variables after controlling
for covariates. The main purpose of running a one-way MANCOVA is to establish whether
the groups of the independent variable are significantly different on the dependent variables
collectively. MANCOVA helps to exert stricter experimental control by taking account of
confounding variables (covariates) to get a purer measure of effect of experimental
manipulation (Field, 2009). The main purpose of running a one-way MANCOVA is to
establish whether the groups of the independent variable are statistically significantly
different on the dependent variables collectively. It will tell whether the groups of the
independent variable statistically significantly differed based on the combined dependent
variables, after adjusting for the covariate. In applying the MANCOVA, the independent
variable is industry sector of auditor’s specialisation, the dependent variables are the 11 items
measuring the challenges of auditing fair value measurement, and the covariate is the
respondent’s length of experience because perception on audit challenges across industry
sector should depend, to some degree, on the experience of auditors. In essence, the influence
of respondent’s work experience is controlled for or taken out to see a purer effect that
industry sector exerts on audit challenges. MANCOVA result is reported in Table VII.
The different multivariate statistics (Pillai’s trace, Wilks’ Lambda, Hotelling’s trace and
Roy’s largest root) establish that the one-way MANCOVA is significant (Table VII).
Specifically, there is significant difference among industry sectors on the combined dependent
variables after controlling for auditor’s experience, F (66, 1391) = 1.434, p = 0.014 < 0.05, Wilks’

Effect Value F Hypothesis df Error df Sig. Observed power

Intercept
Pillai’s trace 0.880 172.582 11.000 259.000 0.000 1.000
Wilks’ Lambda 0.120 172.582 11.000 259.000 0.000 1.000
Hotelling’s trace 7.330 172.582 11.000 259.000 0.000 1.000
Roy’s largest root 7.330 172.582 11.000 259.000 0.000 1.000
Exprience
Pillai’s trace 0.062 1.563 11.000 259.000 0.110 0.793
Wilks’ Lambda 0.938 1.563 11.000 259.000 0.110 0.793
Table VII. Hotelling’s trace 0.066 1.563 11.000 259.000 0.110 0.793
Challenges of Roy’s largest root 0.066 1.563 11.000 259.000 0.110 0.793
auditing fair value
Sector
measurement and Pillai’s trace 0.337 1.430 66.000 1,584.000 0.015 1.000
accounting estimates Wilks’ Lambda 0.703 1.434 66.000 1,391.326 0.014 1.000
across industry Hotelling’s trace 0.368 1.434 66.000 1,544.000 0.014 1.000
sector (Panel 1) Roy’s largest root 0.124 2.972 11.000 264.000 0.001 0.986
l = 0.703, observed power = 1.000. From the result reported in Table VII, the omnibus p-values Auditing fair
generated from MANCOVA are all significant. Specifically, the Pillai’s trace, Wilks’ l , value
Hotelling’s trace and Roy’s largest root have p-values of 0.015, 0.014, 0.014 and 0.001,
respectively. The observed powers for these multivariate statistics are also strong.
measurement
Additional analysis in respect of intensity of challenge across industry sectors is reported
in Table VIII.
In Table VIII, there is significant difference in the magnitude of challenge in auditing fair
value measurement for three items – opportunity for managers to manipulate earnings
67
given that auditors cannot effectively test FV estimates (p = 0.084 # 0.10), lack of in
knowledge on FV measurement and FV audit (p = 0.014 # 0.05) and lack of audit evidence
owing to unavailability and difficulty in obtaining information on FV estimates (p = 0.041 #
0.05). Meanwhile, two of these three items are among the top-ranking challenges
(Tables III-V). The result in Table VIII supports the analysis in Table VII, leading to the
acceptance of H2 and the conclusion that the magnitude of audit challenges in verifying fair
value measurement and accounting estimates significantly differ across industry sectors
(research objective three). This result is consistent with Glover et al.’s (2017) observation that
audit partners in financial industries report more frequently encountering issues with
management’s assumptions than those in nonfinancial industries.

7. Conclusion
Following the issuance of IFRS 13 on FV measurement, this study investigated post-
implementation challenges in the audit of FV measurement and accounting estimates in the
Nigerian context. Top-ranking challenges encountered in auditing fair value measurement
and accounting estimates are; the tendency for managers to manipulate earnings owing to
the inability of auditor to effectively test fair value estimates, difficulty in testing
unobservable inputs due to the application of assumptions and judgement in arriving at
estimates by preparers of financial reports, and increased audit risk due to estimation
uncertainty and tendency of managers of client firm to misstatement estimates.
Furthermore, the two highest-ranking and most-prevalent challenges of auditing fair value
measurement and accounting estimates are the tendency for managers to manipulate
earnings owing to the inability of auditor to effectively test fair value estimates, and the
difficulty in testing unobservable inputs due to the application of assumptions and
judgement in arriving at estimates by preparers of financial reports (research objective one).
While there is no significant difference in the perception of auditors, based on their work
experience and audit firm size (Big 4/non-Big 4 dichotomy), as to the audit challenges
associated with fair value measurement and accounting estimates [supporting the rejection
of H1] (research objective two), the magnitude of the audit challenges in verifying fair value
measurement and accounting estimates significantly differ across industry sectors (research
objective three). As there may be differences in the intensity of applying fair value estimates
among reporting entities in Nigeria, it may have been expected that the intensity of the audit
challenges will also differ across industry sectors (acceptance of H2). Audit challenges may,
therefore, anticipatorily amplify as the propensity of application of FV estimates increase.
Concerned stakeholders (including but not limited to accounting regulators, auditing
standard setters, audit firms, researchers) are importuned to come up with robust and
pragmatic measures to curtain these challenges, as the inability of auditors to rigorously
verify fair value estimates may not only diminish the diffusion rate of fair value accounting
but also jeopardize the essence of fair value measurement, which is to elevate financial
reporting quality.
JFRA
Items Industry sector N Mean p-value*
18,1
Auditors cannot easily verify that the price Manufacturing 50 2.64 0.741
assigned to an asset/liability fairly reflects Financial service 54 2.93
economic reality owing to lack of Technology, media and 52 2.90
information telecoms
Oil and gas 45 2.76
68 SMEs 35 2.89
Energy 24 3.04
Agriculture/agro-allied 17 2.94
Total 277 2.85
The true FV of item can be within a range Manufacturing 50 2.88 0.364
of þ/10% of projection and auditor will be Financial service 54 3.22
regarded as negligent if they fail to detect Technology, media and 52 3.02
manipulation telecoms
Oil and gas 45 3.20
SMEs 35 3.00
Energy 24 3.21
Agriculture/agro-allied 17 2.76
Total 277 3.06
Unobservable inputs (Level 3 FV hierarchy) Manufacturing 50 3.40 0.384
are difficult to test, as those estimates are Financial service 54 3.72
made based on assumptions and Technology, media and 52 3.69
management judgement telecoms
Oil and gas 45 3.38
SMEs 35 3.51
Energy 24 3.46
Agriculture/agro-allied 17 3.59
Total 277 3.55
Auditors are being blamed for not detecting Manufacturing 50 3.06 0.227
flawed fair value estimates while Financial service 54 3.30
conducting audits over internal controls for Technology, media and 52 3.19
entities telecoms
Oil and gas 45 3.09
SMEs 35 3.09
Energy 24 3.58
Agriculture/agro-allied 17 3.41
Total 277 3.21
Opportunity for managers to manipulate Manufacturing 50 3.64 0.084
earnings exist if auditors cannot effectively Financial service 54 3.69
test FV estimates Technology, media and 52 3.83
telecoms
Oil and gas 45 3.71
SMEs 35 3.23
Energy 24 3.83
Agriculture/agro-allied 17 3.82
Total 277 3.67
Auditors are being sued for being “overly” Manufacturing 50 2.68 0.409
Table VIII. conservative when issuing an adverse Financial service 54 2.85
challenges of opinion when FV measurement approaches Technology, media and 52 2.69
auditing fair value cannot be determined or disclosures are not telecoms
measurement and sufficient Oil and gas 45 2.84
accounting estimates SMEs 35 2.77
across industry Energy 24 3.21
sector (Panel 2) (continued)
 Auditing fair
Items Industry sector N Mean p-value*
value
Agriculture/agro-allied 17 2.65 measurement
Total 277 2.80
Auditors are lacking in knowledge on FV Manufacturing 50 2.46 0.014
measurement and FV audit Financial service 54 1.87
Technology, media and 52 2.40
telecoms 69
Oil and gas 45 2.51
SMEs 35 2.37
Energy 24 2.63
Agriculture/agro-allied 17 2.29
Manufacturing 277 2.34
FVA increases audit risk because of Financial service 50 3.56 0.178
estimation uncertainty and tendency of Technology, media and 54 3.78
managers of client firm to misstatement telecoms
estimates Oil and gas 52 3.48
SMEs 45 3.38
Energy 35 3.51
Agriculture/agro-allied 24 3.33
Manufacturing 17 3.06
Total 277 3.50
Fraud, irregularities and misstatement in Manufacturing 50 3.46 0.732
FV estimates may go undetected due to Financial service 54 3.35
non-availability of information about the Technology, media and 52 3.23
asset/liability telecoms
Oil and gas 45 3.18
SMEs 35 3.14
Energy 24 3.17
Agriculture/agro-allied 17 3.24
Total 277 3.27
Auditors may not understand the valuation Manufacturing 50 2.86 0.678
models used by managers due to its Financial service 54 2.76
perceived complexity Technology, media and 52 2.85
telecoms
Oil and gas 45 2.98
SMEs 35 2.63
Energy 24 3.00
Agriculture/agro-allied 17 2.71
Total 277 2.83
Information on FV estimates may be Manufacturing 50 3.28 0.041
unavailable or difficult to obtain, causing Financial service 54 3.39
lack of audit evidence Technology, media and 52 3.27
telecoms
Oil and gas 45 3.42
SMEs 35 2.86
Energy 24 3.67
Agriculture/agro-allied 17 3.29
Total 277 3.30

Note: *p-value from one-way ANOVA based on industry sector of audit specialisation Table VIII.

Some limitations characterize this study such as the scope of issues investigated, the use of
questionnaire to gather data, the limited number of auditors surveyed, and the focus on
firms involved in the audit of companies quoted on the mainboard of the Nigerian stock
exchange. These limitations provide ground to conduct more research. Future studies may
JFRA examine other matters affecting the audit of fair value estimates while triangulating data
18,1 collection using questionnaire and interview with increased number of respondents.
Investigation may be conducted on how the interaction between external and internal auditors
can downplay the challenges of auditing fair value estimates. Another area for future studies is
the extent to which fair value accounting has caused a distortion in earnings, in comparison
with fluctuations in earnings under historical cost accounting. Studies may also consider
70 investigating the extent to which fair value measurement has presented opportunities for
creative accounting. As Ahmed’s (2012) study found that different audit models are used by
different audit firms in Sweden, and such audit models have not been covered by IFAC (2010),
it will also be worthwhile to devote research attention to audit models used in the audit of fair
value estimates. Bearing in mind that leadership affects adoption of accounting innovation,
future studies may consider providing empirical evidence on the role of leadership (managers
of the client firm) in the quality of fair value estimates.

References
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Further reading
AICPA (2015), “AU-C section 500: Audit evidence”, Source: SAS No. 122; SAS No. 128, pp. 385-397,
available at: www.aicpa.org
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Corresponding author
Babajide Oyewo can be contacted at: meetjidemichael@gmail.com
JFRA Appendix 1
18,1

74

Table AI.
Challenges of KMO measure of sampling adequacy 0.760
auditing FV
Bartlett’s test of sphericity Approx. chi-square 656.239
measurements and df 55
estimates: KMO and Sig. 0.000
Bartlett’s test

Component
S/N Items 1 2 3

1 Auditors cannot easily verify that the price assigned to an asset/ 0.501 0.257 0.504
liability fairly reflects economic reality owing to lack of information
2 The true FV of item can be within a range of þ/10% of projection 0.536 0.211 0.558
and auditor will be regarded as negligent if they fail to detect
manipulation
3 Unobservable inputs (Level 3 FV hierarchy) are difficult to test, as 0.505 0.306 0.470
those estimates are made based on assumptions and management
judgement
4 Auditors are being blamed for not detecting flawed fair value 0.665 0.099 0.119
estimates while conducting audits over internal controls for entities
5 Opportunity for managers to manipulate earnings exist if auditors 0.424 0.438 0.245
cannot effectively test FV Estimates
6 Auditors are being sued for being “overly” conservative when issuing 0.489 0.350 0.093
an adverse opinion when FV measurement approaches cannot be
determined or disclosures are not sufficient
7 Auditors are lacking in knowledge on FV measurement and FV audit 0.531 0.515 0.314
8 FVA increases audit risk because of estimation uncertainty and 0.551 0.524 0.190
tendency of managers of client firm to misstatement estimates
9 Fraud, irregularities and misstatement in FV estimates may go 0.709 0.270 0.195
Table AII. undetected due to non-availability of information about the asset/
liability
Component matrix
10 Auditors may not understand the valuation methods used by 0.478 0.513 0.336
for challenges of managers due to its perceived complexity
auditing fair value 11 Information on FV estimates may be unavailable or difficult to obtain, 0.666 0.068 0.223
measurements and causing lack of audit evidence
accounting estimates % of variance explained 31.041% 12.804% 10.953%
Appendix 2 Auditing fair
value
measurement

75

Figure A1.
Vertical icicle plot for
the clustering of
challenges in auditing
FV measurements
and accounting
estimates

Figure A2.
Dendrogram for the
clustering of
challenges in auditing
FV measurements
and accounting
estimates

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