SESSION 17 – ACCOUNTING ESTIMATES
1701
OVERVIEW
Objective
¾
To describe the audit approach to accounting estimates.DETERMINATION
AUDIT PROCEDURES
EVALUATION DEFINITION
¾ Subsequent events
¾ Uncertainties ¾ Examples ¾ Responsibilities
¾ Audit evidence ¾ Approaches
SESSION 17 – ACCOUNTING ESTIMATES
1702
1
DEFINITION
[ISA 540]
An approximation of the amount of an item in the absence of a precise means of measurement.
1.1
Examples
¾
Allowances: to reduce inventory to estimated net realisable value (NRV); to reduce accounts receivable to estimated recoverable amount;
to allocate costs of non-current assets over estimated useful lives (i.e. depreciation).
¾
Provisions: warranty claims;
losses on contract work in progress; loss from a lawsuit.
1.2
Responsibility
¾
Management is responsible for making accounting estimates included in financial statements.2
DETERMINATION
¾
May be simple (e.g. to accrue a charge for rent)
complex (e.g. requiring analysis of current data and sales forecasts to estimate slow-moving or surplus inventory).
¾
Any formulae used (e.g. standard depreciation rates) need to be reviewed regularly (e.g. every year) by management to assess their appropriateness and continued use.¾
May be routine (i.e. operating on a continuing basis) non-routine (i.e. operating only at the period end).
3
AUDIT PROCEDURES
3.1
Audit evidence
SESSION 17 – ACCOUNTING ESTIMATES
1703
3.2
Approaches
¾
The auditor should use one, or a combination, of the following:Review and test management’s process used to develop estimate
Use an independent estimate to compare with management’s
Review subsequent events to confirm
estimate made
¾
Evaluate data and assumptions¾
Test calculations¾
Compare prior period estimates with actual¾
Consider management’s review and approval procedures.¾
See “Using the work of an expert” (Session 18).¾
May reduce or remove need for alternative approaches.¾
Subsequent events may be more cost effective.¾
Make a final assessment of the reasonableness of the management’s approach to estimates based on understanding of the entity and its environment¾
Determine if estimates are consistent with other audit evidence.3.3
Data and assumptions
3.3.1
Considerations
¾
Consistency of accounting data with that processed in financial accounting system.¾
Sources outside entity (e.g. customer orders, industry data, lawyers)¾
Appropriateness of projections¾
Sensitivity of assumptions to variationsSESSION 17 – ACCOUNTING ESTIMATES
1704
4
EVALUATION
4.1
Subsequent events
¾
Consider whether there are any which affect the data and assumptions used.4.2
Uncertainties
¾
Evaluate differences between amount supported by best available alternative evidence and amount included in financial statements: within a range of acceptable results? biased in one direction?
FOCUS
You should now be able to:
