(b) CA A has been appointed as an auditor of Datacom Ltd. to conduct statutory audit. The company has various derivative contracts - options,…

Testing the relevance and reasonableness of assumptions and methods used by the auditor's expert: As per SA 620, “Using the Work of an Auditor's Expert", when an auditor uses the work of an expert, they must evaluate whether the expert's work is adequate for the auditor's purposes. In the given case, CA A, statutory auditor of Datacom Ltd., is using the valuation report of Mr. S, a registered valuer, for auditing derivative instruments. CA A also observed that an expert's work involves the use of significant assumptions and methods. Accordingly, he must assess the relevance and reasonableness of the expert's assumptions, methods, and findings in the circumstances as per SA 620. SA 540, “Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related Disclosures", discusses the assumptions and methods used by management in making accounting estimates, including the use in some cases of highly specialised, entity-developed models. Although that discussion is written in the context of the auditor obtaining sufficient appropriate audit evidence regarding management's assumptions and methods, it may also assist the auditor when evaluating an auditor's expert's assumptions and methods. When an auditor's expert's work involves the use of significant assumptions and methods, factors relevant to the auditor's evaluation of those assumptions and methods include whether they are: Generally accepted within the auditor's expert's field;Consistent with the requirements of the applicable financial reporting framework;Dependent on the use of specialised models; andConsistent with those of management, and if not, the reason for, and effects of, the differences.