Guide to Using International Standards on Auditing in - IFAC

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136 11. Accounting Estimates Chapter Content Audit procedures relating <strong>to</strong> the audit of accounting estimates, including fair value accounting estimates and related disclosures in an audit of financial statements. Relevant ISAs 540 Exhibit 11.0-1 What estimates are required? Risk Assessment How were the estimates prepared? How significant are the estimates? Is an audi<strong>to</strong>r’s expert required? How accurate were the prior year’s estimates? Any evidence of management bias? Extent of estimation uncertainty involved? Risk Response Have estimates been prepared properly using consistent methodology? Is the supporting evidence reliable? Any evidence of fraud? Reporting Are financial statement disclosures of accounting estimates in accordance with the financial reporting framework? If a significant risk, has disclosure been made of the estimation uncertainty? Obtain management representations. Paragraph # ISA Objective(s) 540.6 The objective of the audi<strong>to</strong>r is <strong>to</strong> obtain sufficient appropriate audit evidence about whether: (a) accounting estimates, including fair value accounting estimates, in the financial statements, whether recognized or disclosed, are reasonable; and (b) related disclosures in the financial statements are adequate, in the context of the applicable financial reporting framework.
137 <strong>Guide</strong> <strong>to</strong> <strong>Using</strong> <strong>International</strong> <strong>Standards</strong> on Auditing in the Audits of Small- and Medium-Sized Entities Volume 1—Core Concepts Paragraph # Relevant Extracts from ISAs 540.7 For purposes of the ISAs, the following terms have the meanings attributed below: (a) Accounting estimate—An approximation of a monetary amount in the absence of a precise means of measurement. This term is used for an amount measured at fair value where there is estimation uncertainty, as well as for other amounts that require estimation. Where this ISA addresses only accounting estimates involving measurement at fair value, the term “fair value accounting estimates” is used. (b) Audi<strong>to</strong>r’s point estimate or audi<strong>to</strong>r’s range—The amount, or range of amounts, respectively, derived from audit evidence for use in evaluating management’s point estimate. (c) Estimation uncertainty—The susceptibility of an accounting estimate and related disclosures <strong>to</strong> an inherent lack of precision in its measurement. (d) Management bias—A lack of neutrality by management in the preparation of information. (e) Management’s point estimate—The amount selected by management for recognition or disclosure in the financial statements as an accounting estimate. (f) Outcome of an accounting estimate—The actual monetary amount which results from the resolution of the underlying transaction(s), event(s) or condition(s) addressed by the accounting estimate. 11.1 Overview When auditing estimates, the objective is <strong>to</strong> obtain sufficient appropriate audit evidence about whether: • Accounting estimates, including fair value accounting estimates in the financial statements, whether recognized or disclosed, are reasonable; and • Related disclosures in the financial statements are adequate in the context of the applicable financial reporting framework. Some financial statement items cannot be measured precisely and therefore have <strong>to</strong> be estimated. Such accounting estimates range from the straightforward (such as net realizable values for inven<strong>to</strong>ry and accounts receivable) <strong>to</strong> the more complex (such as calculating revenues <strong>to</strong> be recorded from long-term contracts and future liabilities on product warranties and guarantees). Estimates can often involve considerable analyses of his<strong>to</strong>rical and current data, and the forecasting of future events such as sales transactions. The measurement of accounting estimates may vary based on the requirements of the applicable financial reporting framework and the financial item involved. For example, the measurement objective of an estimate may be <strong>to</strong>: • Forecast the outcome of one or more transactions, events, or conditions that gave rise <strong>to</strong> the accounting estimate; or • Determine the value of a current transaction or financial statement item based on conditions prevalent at the measurement date, such as estimated market price for a particular type of asset or liability. This would include fair value measurements. The risk of material misstatement arising from an estimate will often be based on the degree of estimation uncertainty involved. Some of the fac<strong>to</strong>rs <strong>to</strong> consider are outlined in the following exhibit.
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Guide to Using International Standards on Auditing in - IFAC

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