When organizations report the fair value of financial instruments, audit-readiness is just as important as the valuation itself. Audit support plays a key role in ensuring that valuations are clear and reliable, especially under accounting frameworks such as ASC 820 (for U.S. GAAP), IFRS 13 (for IFRS) and GASB 72 (for governmental entities).
Why Audit Support for Valuations Is Important
A valuation report isn’t just an internal practice, it often forms part of the disclosures in financial statements and is subject to auditor review. Effective audit support ensures:
- The valuation methodologies and inputs are correctly documented and can be traced back to observable market data, model assumptions or both.
- The fair value measurement can be evaluated relative to the applicable fair-value hierarchy (Level 1, Level 2, Level 3).
- Management and audit committees can have confidence that the valuations pass independent review.
- The organization’s control environment around valuation has a strong foundation, which can reduce audit risk and increase stakeholder confidence.
Key Components of Audit-Ready Valuation Support
Here are several elements that help make a valuation audit-ready.
1. A clear, documented fair-value methodology
It’s important to specify how each class of instrument is valued: what inputs are used, how models handle unobservable variables, and how adjustments are made for illiquidity or credit risk, etc. This supports transparency and helps auditors evaluate the methods.
2. Alignment with the fair-value hierarchy
The fair value hierarchy provides a roadmap for how valuations are developed, depending on the availability and reliability of market data:
- Level 1 – Quoted Prices: Values derived directly from active market prices for identical assets or liabilities (for example, exchange-traded securities).
HedgeStar’s take: Use observable market prices for exchange-traded futures, options, and other standardized derivatives. These valuations rely on live data to provide an immediate, clear view of current market conditions.
- Level 2 – Observable Inputs: When market quotes aren’t available, valuations rely on observable inputs such as yield curves, credit spreads, or foreign-exchange rates (common for interest rate swaps or forward contracts).
HedgeStar’s take: When direct market quotes are unavailable, we utilize inputs supported by observable data. Our analysis for interest rate swaps, currency forwards, and commodity derivatives translates less direct data into reliable valuations.
- Level 3 – Unobservable Inputs: For more complex or illiquid instruments, such as customized derivatives or long-dated options, valuations depend on internally developed models and assumptions.
HedgeStar’s take: Complex derivatives require advanced modeling to account for unobservable inputs. Our quantitative techniques for structured products and long-dated options produce defensible valuations that accurately capture instrument details.
Understanding these levels helps users assess the reliability and subjectivity of valuation results.
3. Strong data and model inputs
Valuations rely on quality data (such as market prices, yield curves, volatilities) and, when market data is lacking, on robust models. Audit support should provide insight into sources of data, model assumptions, and any adjustments or overrides.
4. Reporting controls and turnaround time
Organizations should operate under internal control frameworks that support the valuation process — e.g., segregation of duties, independent reviews, and documented sign-offs. From an audit perspective, knowing that valuations follow consistent processes and reasonable turnaround times (for example, within a defined schedule) adds comfort.
5. Transparent disclosures and audit readiness
- Clear narratives explaining any significant judgments or estimates used in valuations.
- Evidence of independent review or benchmarking of valuation inputs/models.
- Documentation of changes in assumptions, model revisions, and how management assessed reasonableness of results.
- A trail of work-papers and data supporting the valuation figures presented in financial statements.
Practical Tips for Finance Teams
- Start early: Engage valuation reviewers well before year-end or reporting deadlines, so there’s time to address questions.
- Tag complex instruments: If you hold Level 3 instruments (e.g., structured products, long-dated options, illiquid assets), these deserve extra scrutiny and explanation.
- Maintain a valuation register: Keep track of all instruments, their classification in the fair-value hierarchy, methodology descriptions, and responsible personnel.
- Benchmark and test: Even if using internal models, consider independent benchmarks or third-party perspectives to enhance audit readiness.
- Monitor changes: Market dynamics (interest rates, credit spreads, volatility) change — so review assumptions and models periodically; not just at year-end.
Overall Importance of Financial Reporting with Audit Support
Valuation is not just a numbers practice, it’s a control, disclosure and governance practice. Audit support transforms fair-value measurement from a compliance check-box into a robust and defensible component of financial reporting. For financial leaders, embedding strong valuation/audit practices helps decrease risk, increase transparency, and strengthen stakeholder confidence.
How to Get Started with Audit Support – Valuation Services
Rely on HedgeStar to be your valuation specialist for Level 1, 2, and 3 instrument valuations.
The HedgeStar Advantage
- SOC 1 Type 2 certified
- Team of CPAs and quants
- Extensive network of market data providers
- Leveraged technology for quick turnaround
- 5-day turnaround
- Shorter turnaround upon request
- Experienced with ASC 820, GASB 72 and IFRS 13 fair value measurement standards
HedgeStar Instrument Coverage
- Alternative Investments
- Bonds & Loans
- Commodity Derivatives
- Credit Default Swaps
- Cryptocurrency
- Equity Derivatives
- Foreign Exchange Contracts
- Interest Rate Derivatives
- Mortgage-backed Securities
- Structured Investment Products
- Warrants and Stock Options
Book a meeting with HedgeStar expert today: https://outlook.office365.com/book/HedgeStar@derivactiv.com/?ismsaljsauthenabled=true
Are you ready to take control of your financial position?
Sound financial decisions start with precise, independent valuations. At HedgeStar, our seasoned team of CPAs and quantitative analysts cuts through complexity to deliver audit-ready assessments. Our approach gives you a true snapshot of your derivatives portfolio—helping you manage risk and seize opportunities.
At HedgeStar, we value a broad range of financial instruments, from plain vanilla to exotic. We support asset classes including municipal bonds, foreign debt, illiquid securities and derivatives. We have a proven, auditor-validated process for determining fair value as defined by ASC 820, IFRS 13, and GASB 72.
As a leading independent valuation specialist, HedgeStar is uniquely positioned to help clients meet fair valuation requirements related to financial assets and liabilities. Clients of all sizes and sectors rely on us to provide their valuation reports at any frequency – daily to annual. We can do the same for you. Learn more about fair value.
About HedgeStar:
Founded in 2004, HedgeStar is a leading independent provider of outsourced valuation and independent hedge accounting services for financial instruments including interest rate, currency, and commodity derivatives. HedgeStar provides derivative fair value calculations, cash flow hedge accounting, fair value hedge accounting, and risk management services.
The HedgeStar team is comprised of valuation experts, Certified Public Accountants (CPAs), and hedging program professionals. We deliver our services with a personal touch. We understand our clients and their portfolios and are an extension of their risk, finance and accounting departments. We strive to live by our core values every day.