Accounting Estimates

Question 1

Objective:

Answer 1

1) Obtain appropriate audit evidence about accounting estimates are REASONABLE
2) Related disclosures are adequate in view of the applicable financial reporting

Question 2

Define accounting estimate:

Answer 2

Approximation of a monetary amount

Question 3

Define estimation uncertainty:

Answer 3

The susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its measurement

Question 4

What are the risk assessment procedures:

Answer 4

Obtain an understanding of:

• Requirements of applicable financial reporting framework
• How management makes the accounting estimates and the data on which they are based
• The method (or model) used & assumptions made
• Obtain an understanding if management used a specialist and how they assessed uncertainty

Question 5

In assessing RMM with respect to accounting estimates the auditor should:

Answer 5

• Evaluate the degree of estimation uncertainty

- Determine any of the estimates result in “significant risk”

Question 6

When you identify significant risks (in any area, not just estimates) what should the auditor do?

Answer 6

• Obtain an understanding of RELEVANT CONTROLS

- Do controls mitigate such risks?

Question 7

What should the auditor do to respond to assessed risks?

Answer 7

• Determine whether events up to the report date provides evidence about the estimate
• Test how management made the estimate and data used
• Test operating effectiveness of controls
• Develop a point estimate (or range) to evaluate managements point estimate (analytical procedure)
• Evaluate the disclosure
• Consider indicators of possible MANAGEMENT BIAS

Question 8

What should the auditor document?

Answer 8

• Basis for the auditors conclusions about the REASONABLENESS of any accounting estimates resulting in “significant risk”
• Any Indicators of management Bias