The auditor’s question: how do you challenge a valuation?

Auditing a fair value estimate means evaluating someone else’s judgement. The auditor rarely re-performs the valuation; the task is to test whether the process behind the number was rigorous, well evidenced and honestly reported. The International Valuation Standards (IVS) give that test structure. Because they set out how a valuation should be scoped, sourced, modelled and documented, they also give auditors a vocabulary for challenge — a way of asking precise questions rather than general ones.

Two standards, two jobs

Fair value measurement and the conduct of a valuation are governed by different standard-setters, and the boundary between them is formally drawn. Under the Statement of Protocols between the IFRS Foundation and the IVSC, IFRS 13 sets the principles for measuring fair value for financial reporting, while the IVSC maintains standards on how valuations are performed; each body retains sole responsibility for its own standards, and IFRS 13 does not adopt IVS. For the auditor, the distinction is practical. The accounting framework defines what the reported number must represent. The valuation standards describe what a disciplined process for reaching it looks like — and, by extension, what its absence looks like.

Start with the data

The IVS General Standards follow the arc of an engagement: scope of work, bases of value, valuation approaches, data and inputs, valuation models, and documentation and reporting. For audit purposes, IVS 104 Data and Inputs is often where challenge begins. A recent IVSC article on private credit valuation notes that proposed revisions to IVS 104 stress data provenance and scepticism toward management-supplied data — a concern every audit professional will recognise. In less liquid or harder-to-observe markets, where robust valuation governance matters most, asking where each significant input came from, and what was done to corroborate it, is the most efficient route into a valuation file.

Models inform; valuers conclude

The same article describes proposed revisions to IVS 105 making clear that judgement stays with the valuer, not the model, and revisions to IVS 106 pushing explicit disclosure of assumptions and of any specialists relied upon. A proposed new standard, IVS 107 Quality Controls, would make quality control an explicit, structured requirement — giving auditors a further line of enquiry into the controls operating around the valuer, not just around the valuation. The standard of explainability has been put memorably by 73 Strings’ Abhishek Pandey in an IVSC interview: “A valuation that cannot be explained or traced back to its assumptions isn’t a valuation — it’s an output.”

Uncertainty is not a deficiency

Challenge should distinguish between what a valuer could have controlled and what no valuer can. The IVSC’s Perspectives Paper Managing and Communicating Value Uncertainty draws the line clearly: valuation risk arises from errors or weaknesses in process and can be mitigated, while value uncertainty is inherent in the exercise and must instead be managed and disclosed. Even a fully IVS-compliant valuation may yield a range of credible outcomes. An estimate accompanied by a candid account of its uncertainty is, on this view, evidence of quality rather than weakness — transparency about uncertainty strengthens confidence in the conclusion.

Questions worth asking

A challenge framed in IVS terms is harder to deflect, because it asks about obligations the valuer has already accepted.