SA 540

Question 1

Maggi recipe

A/c estimates - relatively lower estimation uncertainty

Answer 1

1. business activities- not complex
2. Data - readily available
3. frequently made and updated-routine transactions
4. well known generally accepted - assumptions are observable
5. method of measurement - easy

Question 2

MODI

A/c estimated - high estimation uncertainty

Answer 2

1. Highly sepcialised entity developed model
2. Outcome of litigation
3. Derivative financial instruments not publicly traded
4. Inputs & assumptions that cannot be observed in the marketplace.

Question 3

How management makes the accounting estimate

Answer 3

1. Assumptions underlying
2. Methods used
3. Change in methods from prior period
4. Use of mgmt expert
5. how - assess the effect of Estimation uncertainty
6. Relevant controls

Question 4

Inquiries from management

Answer 4

1. New transactions - rise to new a/c estimates
2. Existing transaction terms - changed
3. Events & Conditions
4. A/c policies relating to a/c estimates - cahnged - in acc. with AFRF change
5. Regulatore & other changes - revise/new a/c estimates

Question 5

Estimation uncertainty: auditor - evaluate what?

.Auditor’s resaponsibilty/auditor’s procedures

Answer 5

1. mgmt-considered alt assumptions? ; why rejected
   2.significant assumptions used- reasonable?
   3.intent & ability of mgmt to carry out specific courses of action
   4.not adequately addressed the effects of estimation uncertainty- develop range to evaluate reasonableness

Question 6

Understanding of assumptions

Addl topic

Answer 6

1. Nature of assumtions
2. Relavance & completeness
3. internally consistent?
4. relate to withing mgm’t control/outside control
5. nature & extent of documentation

Question 7

Factors influencing degree of estimation uncertainty

Neha Kakkar- Indian Idol (GOT)

Answer 7

1.extent - depending on Judgement
2.Sensitivity to changes in assumptions
3.recognised measurement techniques
4.length of forecast period
5.reliable data from** external source**
6.extent to which based on observable / unobservable inputs

Question 8

Review of outcome of a/c estimates

Answer 8

1. Review outcome & re-estimation
2. Nature & if info fromr eview - relevant?
3. not to question mgmt’s judgement
4. understand - a/c estimates & outcome will vary
5. info - effectiveness of estimation process
6. audit evidence pertinent to re-estimation
7. audit evidence-estimation uncertainty
8. identify circumstances- susceptibility to possible mgmt bias
9. prof skepticism to identify such circumstances

Question 9

Written Representation

SA 580

Answer 9

• Possible mgmt bias
• basisi for auditor’s conclusion
• Disclosures:
  1. Mgmt measurement process-appropriateness
  2. mgmt’s intent & ability
  3. a/c estimate - complete & relevant
  4. subsequent events-no adjustment

1,2,3,4 - not available in book