Concepts and Standards - Accounting Estimate

Question 1

In evaluating the reasonableness of an entity’s accounting estimates, an auditor most likely concentrates on key factors and assumptions that are

Answer 1

Deviations from historical patterns.

Why?

deviations from historical patterns will ordinarily be investigated since the deviation may be the result of an error or fraud.

Question 2

In evaluating an entity’s accounting estimates, one of an auditor’s objectives is to determine whether the estimates are

Answer 2

Reasonable in the circumstances.

Question 3

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 use when evaluating the reasonableness of the estimate?

Answer 3

Review and test management’s process to develop the estimate.

Calculate an independent expectation of the estimate.

Review subsequent events or transactions occurring prior to completion of fieldwork.

Question 4

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?

Answer 4

The accounting estimates developed by management are accurate with 100% certainty.

Why?

No one accounting estimate can be considered accurate with certainty.

Question 5

Which of the following procedures would an auditor ordinarily perform first in evaluating the reasonableness of management’s accounting estimates?

Answer 5

Obtain an understanding of how management developed its estimates.

Note:

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.

Question 6

In evaluating the reasonableness of an entity’s accounting estimates, an auditor normally would be concerned about assumptions that are

Answer 6

Susceptible to bias.

Why?

AU-C 500 states that in evaluating the reasonableness of estimates auditors normally concentrate on assumptions that are subjective and susceptible to bias.