Accounting Estimates Flashcards
Which of the following statements is correct regarding accounting estimates?
The auditor’s objective is to evaluate whether accounting estimates are reasonable in the circumstances.
Accounting estimates should be used when data concerning past events can be accumulated in a timely, cost-effective manner.
An important accounting estimate is management’s listing of accounts receivable greater than 90 days past due.
Accounting estimates should not be used when the outcomes of future events related to the estimated items is unknown.
The auditor’s objective is to evaluate whether accounting estimates are reasonable in the circumstances.
This answer is correct because, when considering accounting estimates, an auditor is concerned with whether the estimates are reasonable, as well as with whether all estimates relating to material matters have been developed and the estimates are presented in conformity with GAAP.
In evaluating an entity’s accounting estimates, one of an auditor’s objectives is to determine whether the estimates are
Not subject to bias.
Consistent with industry guidelines.
Based on objective assumptions.
Reasonable in the circumstances.
Reasonable in the circumstances.
The requirement is to identify one of an auditor’s objectives when evaluating an entity’s accounting estimates. Answer (d) is correct because when evaluating accounting estimates an auditor’s objectives are to obtain sufficient appropriate audit evidence that (1) all material accounting estimates have been developed, (2) those accounting estimates are reasonable, and (3) those accounting estimates are in conformity with GAAP.
In evaluating the reasonableness of an entity’s accounting estimates, an auditor normally would be concerned about assumptions that are:
Susceptible to bias.
Consistent with prior periods.
Insensitive to variations.
Similar to industry guidelines
Susceptible to bias.
The requirement is to identify an area of concern to auditors when evaluating the reasonableness of an entity’s accounting estimates. Answer (a) is correct because AU-C 500 states that in evaluating the reasonableness of estimates auditors normally concentrate on assumptions that are subjective and susceptible to bias. Answer (b) is incorrect because all things being equal, an auditor would expect assumptions that are consistent with prior periods. Answer (c) is incorrect because assumptions that are insensitive to variations in underlying data have little predictive ability. Answer (d) is incorrect because, often, one would expect assumptions similar to industry guidelines.
Management prepares accounting estimates and the auditor is responsible for evaluating the reasonableness of the estimates. Which of the following would not be an auditor’s objective when evaluating estimates?
All accounting estimates which could be material to the financial statements have been developed.
The accounting estimates developed by management are accurate with 100% certainty.
The accounting estimates developed by management are reasonable.
The accounting estimates are presented in accordance with generally accepted accounting principles.
The accounting estimates developed by management are accurate with 100% certainty.
This answer is correct because no one accounting estimate can be considered accurate with certainty.
In evaluating an entity’s accounting estimates, one of the auditor’s objectives is to determine whether the estimates are
Prepared in a satisfactory control environment.
Consistent with industry guidelines.
Based on verifiable objective assumptions.
Reasonable in the circumstances.
Reasonable in the circumstances.
This answer is correct because an auditor is responsible for evaluating the reasonableness of accounting estimates made by management in the context of the financial statements taken as a whole.
Which of the following procedures would an auditor ordinarily perform first in evaluating management’s accounting estimates for reasonableness?
Develop independent expectations of management’s estimates.
Consider the appropriateness of the key factors or assumptions used in preparing the estimates.
Test the calculations used by management in developing the estimates.
Obtain an understanding of how management developed its estimates.
Obtain an understanding of how management developed its estimates.
The requirement is to identify the procedure an auditor would perform first in evaluating management’s accounting estimates for reasonableness. Answer (d) is correct because in evaluating reasonableness, the auditor should first obtain an understanding of how management developed the estimate. Answers (a), (b), and (c) are all incorrect because developing independent expectations, considering appropriateness of key factors or assumptions, and testing calculations occur after obtaining the understanding. See AU-C 500 for information on auditing accounting estimates.
It is the responsibility of the auditor to evaluate the reasonableness of the accounting estimates made by management. Which one of the following approaches would the auditor not use when evaluating the reasonableness of the estimate?
Review and test management’s process to develop the estimate.
Calculate an independent expectation of the estimate.
Confirm the estimate with independent parties.
Review subsequent events or transactions occurring prior to completion of fieldwork.
Confirm the estimate with independent parties.
This answer is correct because confirmation of most estimates (e.g., warranty liabilities) is not an appropriate approach for evaluating the reasonableness of the estimate.
Which of the following procedures would an auditor ordinarily perform first in evaluating the reasonableness of management’s accounting estimates?
Review transactions occurring prior to the completion of fieldwork that indicate variations from expectations.
Compare independent expectations with recorded estimates to assess management’s process.
Obtain an understanding of how management developed its estimates.
Analyze historical data used in developing assumptions to determine whether the process is consistent.
Obtain an understanding of how management developed its estimates.
This answer is correct because in evaluating reasonableness, the auditor should obtain an understanding of how management developed the estimate. Based on that understanding the auditor uses one or a combination of (1) reviewing subsequent events, (2) developing an independent expectation of the estimate, and (3) reviewing and testing management’s process.
In evaluating the reasonableness of an entity’s accounting estimates, an auditor most likely concentrates on key factors and assumptions that are
Stable and not sensitive to variation.
Objective and not susceptible to bias.
Deviations from historical patterns.
Similar to industry guidelines.
Deviations from historical patterns.
This answer is correct because deviations from historical patterns will ordinarily be investigated since the deviation may be the result of an error or fraud.
In evaluating the reasonableness of an accounting estimate, an auditor most likely would concentrate on key factors and assumptions that are
Consistent with prior periods.
Similar to industry guidelines.
Objective and not susceptible to bias.
Deviations from historical patterns.
Deviations from historical patterns.
The requirement is to identify a factor that an auditor would concentrate upon when evaluating the reasonableness of an accounting estimate. Answer (d) is correct because AU-C 500 states that the auditor normally concentrates on key factors and assumptions that are deviations from historical patterns, as well as those that are significant to the accounting estimate, sensitive to variations, and subjective and susceptible to misstatement and bias. Answer (a) is incorrect because deviations from historical patterns, not consistent patterns, are concentrated upon. Answer (b) is incorrect because factors and assumptions that are similar to industry guidelines are often reasonable. Answer (c) is incorrect because subjective factors and assumptions that are susceptible to bias are concentrated upon, not objective ones that are not susceptible to bias. See AU-C 500 for information on the manner in which auditors consider accounting estimates.
Which of the following procedures most likely would assist an auditor in determining whether management has identified all accounting estimates that could be material to the financial statements?
Inquire about the existence of related party transactions.
Determine whether accounting estimates deviate from historical patterns.
Confirm inventories at locations outside the entity.
Review the lawyer’s letter for information about litigation.
Review the lawyer’s letter for information about litigation.
If the auditor is concerned about identifying all material accounting estimates, the auditor is seeking to discover unrecorded estimates. The auditor is most likely to review the lawyer’s letter for information about litigation. Litigation losses is an area that commonly requires estimates and one in which estimates could be material to the financial statements.
It is also an area that falls outside of the normal financial reporting process and, thus, is more likely to be missed.
Which of the following audit procedures would be most appropriate to test the valuation of the collateral of a delinquent loan receivable?
Sending a positive confirmation letter to the debtor to confirm the loan balance.
Performing a site visit to physically inspect the collateral.
Reviewing the debtor’s purchase records to test the historical value of the collateral.
Obtaining a current value appraisal of the collateral.
Obtaining a current value appraisal of the collateral.
CORRECT! Obtaining a current appraisal of the collateral would be directly relevant to establishing the current value of that collateral.
