ISA540- Auditing Accounting Estimates, including Fair Value Estimates and Related Disclosures

Question 1

Estimation questions in Risk Assessment (7)

Answer 1

1. What estimates are required?
2. How were the estimates prepared?
3. How significant are the estimates?
4. Is an auditors expert required?
5. How accurate were prior years’ estimates?
6. Any evidence of management bias?
7. Extent of estimation uncertainty involved

Question 2

Estimation questions in Risk Response (3)

Answer 2

1. Have estimates been prepared properly using consistent methodology
2. Is the supporting evidence reliable?
3. Any evidence of fraud?

Question 3

Estimation questions in Reporting (3)

Answer 3

1. Are financial statement disclosures of accounting estimates in accordance with the financial reporting framework
2. If a significant risk, has disclosure been made of the estimation uncertainty?
3. Obtain management representations

Question 4

Factors that increase the uncertainty or the significance of an accounting estimate (8)

Answer 4

1. Extent of managements judgement involved
2. Sensitivity to changes in assumptions
3. Existence of recognised measurement techniques that mitigate uncertainty
4. Length of the forecast period
5. Availability of reliable data from external sources
6. Extent to which estimate is based on observable or unobservable inputs
7. Susceptibility to bias
8. Actual or expected magnitude of the estimate

Question 5

The need for an expert may arise because of: (3)

Answer 5

• the specialised nature of the matter requiring estimation
• the technical nature of the models required to meet requirements of the applicable financial reporting framework
• the unusual or infrequent nature of the condition, transaction, or event requiring an accounting estimate