Responding to the meltdown in the mortgage and credit markets, the Public Company Accounting Oversight Board has issued a staff audit practice alert to remind auditors of their responsibilities for auditing fair value measurements of financial instruments, and how much reliance to place on the work of specialists.

"We were motivated to develop and issue this alert by the auditing challenges presented by the subprime credit situation and its effects on the markets and fair value measurements," said Marty Baumann, director of the PCAOB Office of Research and Analysis, in a statement.

The alert focuses on some of the matters that are likely to increase audit risk in a rapidly changing economic environment. Rising delinquency and default rates on subprime mortgages, along with a decline in home prices, have led to increases in credit losses for mortgage-backed securities, the PCAOB noted. The lower volumes of transactions in these securities make it more difficult to obtain relevant market information to estimate their fair value.

The practice alert draws attention to the new fair value accounting standard, Statement of Financial Accounting Standards No. 157. Auditing fair value measurements under the new accounting standard provides new challenges, the PCAOB acknowledged.

The practice alert discusses the auditor's responsibilities when using the work of specialists, including considerations for determining whether a specialist is needed and evaluating the specialist's assumptions. It also discusses the use of pricing services in fair value measurements.

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