THE

RELATIONSHIP
BETWEEN FAIR
VALUE SUPERVISOR

ACCOUNTING AND DR. RAGIA SHELIH

AUDIT FEES ON
THE LISTED
BANKS IN EGYPT
PRESENTED BY GROUP F
1. Ahmed Mostafa Ahmed
2. Mohamed Saber Ekab
3. Tarek Hamido Eid
4. Nervana Nassar Ebrahim
5. Mohamed Atef Mohamed
6. Mazen Yahya Zakria
7. Manar mohamed abdelhahamd
AGENDA
 Introduction

 Research Objective
 Research Problem
 Research Importance
 Literature Review
 Fair Value Definition
 Levels of Fair Value Measurements
 Audit Fees Determinates
 Fair Value Auditing

 The Relationship between Fair Value Accounting and Audit Fees in Egyptian Banks.
 Conclusion
INTRODUCTION
This research explores the challenges auditors face in determining audit fees amidst the

widespread adoption of fair value measurements in financial reporting. It proposes a

multifaceted solution, including developing a comprehensive evaluation framework,

conducting empirical analysis, supplementing with case studies and interviews,

establishing guidelines and best practices, and ensuring continuous monitoring and

adaptation.
By implementing these steps, stakeholders aim to enhance financial reporting

quality, ensure cost-effective audits, and bolster investor confidence in

financial markets
RESEARCH OBJECTIVES

The main objective of the research is to examine the association between fair

value accounting and audit fees based on listed banks in Egypt. Specifically,

we investigate whether the extent of assets and liabilities measured at fair

value is positively related to audit fees for banks listed on the Egyptian stock

exchange.
RESEARCH PROBLEM.
The research problem can be broken down into five questions:

1. What is fair value accounting, and how are fair value measurements conducted?

2. What factors determine audit fees in the context of listed banks in Egypt?

3. How are fair value accounting and fair value measurements relevant to listed banks in Egypt?

4. What factors influence audit fees within the banking sector of Egypt?

5. Is there a relationship between fair value accounting, fair value measurements, and audit fees in listed

banks in Egypt?
These questions aim to investigate the concepts of fair value accounting and

audit fees within the specific context of the banking sector in Egypt, with a

focus on understanding their interrelation and impact

RESEARCH IMPORTANCE

1. Enhancing Financial Reporting Transparency

2. Informing Regulatory Policy

3. Supporting Banking Sector Efficiency

4. Enhancing Investor Confidence

5. Promoting Audit Quality

6. Facilitating International Comparisons

LITERATURE REVIEW
• We summarize our Literature Review on Audit Fees Focus on 16
Resarch.
• We summarize our Literature Review on Fair Value Focus on 12 Resarch.
• We summarize our Literature Review on Relation BetweenAudit Fees
and Fair Value Accounting Focus on 7 Research.
Our research contributes to the literature in several ways. First, we focus on

banks because they have significant amounts of fair valued assets and

liabilities and their accounting practices have been the focus of considerable

criticism since the GFC. Second, our study is motivated to add to the body of

knowledge on fair value measurements in an international context.

The demand for the use of fair value accounting and the reliability of financial

statements in common-law countries can be different from the demand in code-

law countries. In particular, to implement fair value accounting requires very

specific conditions such as well-developed and liquid capital markets. For

example, some of the countries that have adopted IFRS do not have liquid and

well-developed capital markets, raising concern about the reliability of their

fair value estimates.

FAIR VALUE DEFINITION
Fair value is the estimated price at which an asset or liability would exchange

hands between knowledgeable and willing parties in an open market,

representing the current market value.

THE THREE LEVELS OF FAIR VALUE
MEASUREMENTS:

fair value measurements are categorized into three levels based on the

reliability of the inputs used in the valuation process. These levels are defined

by the Financial Accounting Standards Board (FASB) in the United States and

are widely recognized internationally.

LEVEL 1: QUOTED PRICES IN ACTIVE
MARKETS

- Level 1 inputs are the most reliable and are based on quoted prices for

identical assets or liabilities in active markets. These prices are readily

available and represent the most reliable evidence of fair value.

- Examples of Level 1 inputs include market prices for publicly traded stocks,

bonds, and commodities on major exchanges where trading occurs frequently

and with high volume.

LEVEL 2: OBSERVABLE INPUTS OTHER
THAN QUOTED PRICES

- Level 2 inputs are based on observable market data other than quoted prices

for identical assets or liabilities. These inputs are still considered reliable but

may require some degree of judgment or adjustment.

 - Examples of Level 2 inputs include quoted prices for similar assets or

liabilities in active markets, benchmark yields, interest rates, and observable

market data for similar instruments.

 LEVEL 3: UNOBSERVABLE INPUTS

- Level 3 inputs are the least reliable and are based on unobservable data that

reflects the reporting entity's own assumptions about the assumptions market

participants would use in pricing the asset or liability.

- These inputs are often used when there is limited or no market activity for

the asset or liability, requiring the reporting entity to rely on its own internal

models or valuation techniques.

- Examples of Level 3 inputs include discounted cash flow models, option

pricing models, and other valuation techniques that rely heavily on

management's judgments and estimates.

SUMMARY

In summary, the three levels of fair value provide a framework for categorizing

the reliability of inputs used in the valuation process, with Level 1 being the

most reliable and Level 3 being the least reliable. This classification helps

financial statement users understand the degree of subjectivity and uncertainty

associated with fair value measurements.

AUDIT FEES DEFINITION

Audit fees are the costs incurred by a company for hiring external auditors to

review and certify its financial statements and related documents.

AUDIT FEES DETERMINANTS

1.Size of the Audited Company 2.Audit Client Risk

3.Profitability 4.Second-Level Heading

5.Complexity 6.Audit Committee Independence

7.Year-end of Entity 8.Size of the Board of Directors

9.Industry Type 10.Auditor Change

11.Audit Report Lag 12.Auditor opinion

13.Status of the Audit Firm

FAIR VALUE AUDITING

Fair value auditing refers to the process of assessing the accuracy and
reliability of financial statements, particularly with regard to the valuation of
assets and liabilities at fair value.
THE RELATIONSHIP BETWEEN FAIR VALUE
ACCOUNTING AND AUDIT FEES IN EGYPTIAN
BANKS.
The relationship between audit fees and fair value accounting in Egyptian banks can be explained as follows:

• Audit fees tend to be positively associated with the extent of fair-valued assets held by banks.

• Fair value measurement relies on subjective judgments and estimations, especially in the absence of an

active market, which can lead to challenges in auditing fair values.

• Auditors face greater task difficulty when auditing fair values compared to other assets, particularly

during volatile market conditions.

• The complexity and uncertainty of fair value measurements increase audit risk,

requiring auditors to devote more resources and time to audits, resulting in higher

audit fees.

• Auditors commonly review and test managers' models and assumptions, but the

subjective nature of fair value measurements can lead to biased data.

• Fair values based on Level 3 inputs pose higher audit risk due to their subjective

nature, requiring increased use of judgment by preparers and auditors, leading to

higher audit fees.

Overall, fair-valued assets, especially those based on Level 3 inputs, contribute

more to audit fees due to the increased complexity, uncertainty, and

subjectivity involved in their valuation and auditing.

CONCLUSION

The research investigates the association between fair value measurements and audit fees in the

banking sector, hypothesizing a positive relationship due to the increased risk of financial

misreporting associated with fair value measurements. The results support this hypothesis, showing

a positive association between the extent of fair value assets and liabilities and a firm's audit fees.

This contributes to the fair value and audit pricing literature by providing theoretical and empirical

evidence of this association, shedding light on the economic consequences of fair value adoption.
Specifically, higher levels of Level 3 fair value estimates are linked to higher audit fees, increased cost of

debt and capital, and lower credit ratings, highlighting the importance of Level 3 transfer information

disclosure requirements for banks. As market liquidity declines, banks rely more on fair value estimates

based on their own assumptions and models, leading to increased controversy and debate surrounding fair

value accounting implementation, especially post the 2007-2009 financial crisis. This research bridges

the gap between fair value and audit fee literature by empirically linking fair value assets and liabilities

with audit fees, thereby contributing to a deeper understanding of the impact of fair value accounting on

audit fees in the banking sector.

THANK
YOU