Accounting Estimates

Question 1

List some audit procedures that might be used to assess accounting estimates.

Answer 1

1. )Inquire of management to understand how the estimate was developed.
2. )Review and test management processes.
3. )Develop an independent expectation for comparison to the entity’s estimate.
4. )Review subsequent events for additional evidence.

Question 2

What is the auditor’s basic responsibility when auditing accounting estimates?

Answer 2

Evaluate the reasonableness (and the adequacy of related disclosures) of any significant accounting estimates relative to generally accepted accounting principles (GAAP) or other applicable financial reporting framework

Question 3

Define “view-only access.”

Answer 3

Permitting a user to view, but not change, a file.

Question 4

What is meant by the term “estimation uncertainty”?

Answer 4

The susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its measurement. (The risks of material misstatement increase when there is high estimation uncertainty.)

Question 5

What further substantive procedures should the auditor perform in responding to significant risks?

Answer 5

The auditor should evaluate:

1. )How management addressed estimation uncertainty in making the estimate.
2. )Whether management’s significant assumptions are reasonable.
3. )Whether management has the intent and ability to carry out specific actions, as relevant.

Question 6

What matters should the auditor document in connection with accounting estimates?

Answer 6

1. )The basis for the auditor’s conclusions about the reasonableness of accounting estimates resulting in significant risks and their disclosure
2. )Any indications of possible management bias

Question 7

Identify three factors affecting the nature of estimation uncertainty.

Answer 7

The nature of estimation uncertainty varies with

1. )The nature of the accounting estimate;
2. )The extent to which there is an accepted method (or model) to be used; and
3. )The subjectivity of any assumptions or the degree of judgment involved.