An auditor is auditing the fair value measurements of Level 3 assets (unobservable inputs). Which of the following is the most appropriate audit procedure?

Answer options:

Verify the quoted market prices on a national exchange.

Develop an independent point estimate or range to corroborate management's estimate.

Agree the valuation to the prior year's audited financial statements.

Confirm the historical cost with the broker.

How to approach this question

Level 3 = No market data. Auditor must test the *model* or build their own.

Full Answer

B.Develop an independent point estimate or range to corroborate management's estimate.✓ Correct

Develop an independent point estimate or range to corroborate management's estimate.

Level 3 inputs are unobservable. The auditor must test management's significant assumptions, the valuation model, or develop an independent estimate to verify the fair value.

Common mistakes

Treating Level 3 like Level 1 (market prices).

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