Accounting Estimates Flashcards
Objective:
1) Obtain appropriate audit evidence about accounting estimates are REASONABLE
2) Related disclosures are adequate in view of the applicable financial reporting
Define accounting estimate:
Approximation of a monetary amount
Define estimation uncertainty:
The susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its measurement
What are the risk assessment procedures:
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
In assessing RMM with respect to accounting estimates the auditor should:
- Evaluate the degree of estimation uncertainty
- Determine any of the estimates result in “significant risk”
When you identify significant risks (in any area, not just estimates) what should the auditor do?
- Obtain an understanding of RELEVANT CONTROLS
- Do controls mitigate such risks?
What should the auditor do to respond to assessed risks?
- 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
What should the auditor document?
- Basis for the auditors conclusions about the REASONABLENESS of any accounting estimates resulting in “significant risk”
- Any Indicators of management Bias