In auditing fair value measurements for investment properties, how should hierarchy levels be tested?

• A. Test hierarchy levels using internal estimates alone.
• B. Ignore hierarchy levels if external appraisals exist.
• C. Compare hierarchy Level 1 inputs with Level 2 inputs only.
• D. Test all relevant hierarchy levels for reasonableness with observable data and model inputs, and ensure consistency with market data.

Answer: (D)

Hierarchy levels reflect how reliable the inputs are in fair value measurements. When auditing investment properties, you test all relevant levels to ensure the reported value makes sense given observable market data and the valuation model’s inputs. This means verifying that Level 1 uses actual quoted prices in active markets, Level 2 relies on observable data or market-derived methods, and Level 3 rests on management’s unobservable assumptions that are still supported by evidence. The goal is to confirm the inputs and the resulting value are reasonable, consistent with current market conditions, and appropriately categorized. External appraisals can be part of the evidence, but you don’t skip testing the hierarchy—you assess whether the inputs at each level are reasonable and corroborated by market data.