Management expert
An individual or organization possessing expertise in a field other than auditing or accounting which the entity used to assist them in preparing the financial statements
Can auditors use the work of a management expert as audit evidence for the valuation of Ppe ?
Yea
Before using the audit evidence prepared by a management’s expert what should be done ?
Evaluate the objectivity, skills and competence of the expert
Understand the work done by the expert
Evaluate the appropriateness of the work done as audit evidence
Auditors expert
When an auditor hires their own expert if they think they cannot rely on the management’s expert
Examples of accounting estimates
Warranty obligations
Useful life of an asset
Allowance for receivables
Accrued revenue
Deferred revenue
Inventory obsolescence
Provisions for litigation settlements
Intangible assets
Identifiable non monetary assets without physical substance eg. Patents, franchise, license, royalties, software
Audit evidence of intangible assets
Purchase invoices or specialist valuations
Research
Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding
Development
Application of research findings or other knowledge to a plan or design for the production of new and improved materials, systems and services before that start of production and use (cannot be capitalized)
Criteria for capitalizing development expenditure
P - probable future economical benefits
I - intention to complete and sell the asset
R - resource adequate and available to complete and use the asset
A - ability to use or sell the asset
T - technical feasibility of completing asset for sale
E - expenditure can be measured reliably
Audit risks for PPE
Assets may not be depreciated, may be depreciated over unrealistic useful lives and continue to depreciate even after asset is fully depreciated - Accuracy, valuation
Obsolete and idle assets may not be written down to a recoverable amount - Valuation
PPE may be purchased, misappropriated, used for non business purposes
PPE will be overstated if they do not exist - existence
PPE will be understated if capitalised as an expense - Completeness
Secured assets (those charged as security for bank loans) may not be disclosed in the FS
Disposals are not recorded - completeness
control without ownership may signify a liability
assets may be owned but not possessed (if they are leased to another party)
Audit risks for intangible assets
recorded assets ay not meet the definition of intangible asset under IAS 38
useful economic life may be overestimated
carrying amount may exceed expected discounted future benefits
Audit procedures for goodwill
- Agree the consideration to sales agreement by inspection
- Review the impairment review and discuss with management
- Consider whether asset valuation is reasonable
- Ensure valuation of goodwill is reasonable/ there has been no impairment not adjusted through discussion with management.
What must an auditor consider when using the work of others or experts ?
S - scope of work is sufficient and appropriate
O - organizational status (relevant to internal audit only) external auditor must evaluate the status of the internal audit department in the entity eg. are reports taken seriously etc
D - due skill and care. Auditor must determine to that the work of other is completed with due skill and care and it is planned, directed, supervised and adequately reviewed
I- independence auditor must determine that the expert is indecent to ensure no bias is reflected in their work
T- technical competence - the work of others must be of appropriate quality to be relied on by the auditor
Why are accounting estimates high risk ?
Subjective & judgmental
Susceptible to management bias or even manipulation
Often involve complex models or assumptions
Higher chance of material misstatement
What should the auditor do with regards to accounting for estimates
A. Understand the estimate
Understand how management made the estimate: method, data, assumptions.
Consider whether it’s routine or complex.
🔍 B. Assess risk
Identify which estimates are high risk.
Is the estimate highly subjective?
Is there a history of bias?
Is there a lot of uncertainty?
Key substantive procedures:
Review prior year estimates → compare with actual outcomes.
Inspect documentation of how the estimate was made.
Test assumptions → e.g. were the inputs reasonable? Realistic?
Develop your own (auditor’s) estimate to compare.
Get expert help if the estimate is technical (e.g., valuations).
Review post-year-end events that confirm estimate accuracy.
Consider whether:
The estimate is reasonable.
There are signs of management bias.
Ensure adequate disclosure in the financial statements.
Implications of a material misstatement in estimates
Financial statements may be misstated – the estimate affects key figures (e.g. receivables, provisions).
Indicates possible management bias – especially if estimates are consistently aggressive or optimistic.
Further audit work required – reassess risks, perform extra testing, possibly involve experts.
Must communicate with management/governance – discuss misstatement and request corrections.
Could affect the audit opinion:
Material but not pervasive → Qualified opinion
Material and pervasive → Adverse opinion
Lack of evidence → Disclaimer of opinion
Check disclosures – missing or poor disclosures about estimates can also cause material misstatement.
