Guide to Using International Standards on Auditing in - IFAC

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<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
CONSIDER POINT
Where the use of a management expert would greatly assist the estimating process, discuss this need
with entity management as early as possible in the audit process so that appropriate action can be
taken.
The key areas for the audi<strong>to</strong>r <strong>to</strong> address are outlined in the exhibit below.
Exhibit 11.2-1
Address
How is the Need
for an Estimate
Identified?
Management’s
Process for
Making Estimates
Outcomes
of Estimates
Prepared in
Previous Periods
Description
This could result from the accounting framework being used or from transactions,
events, and conditions that may give rise <strong>to</strong> the need for accounting estimates <strong>to</strong> be
recognized or disclosed in the financial statements. In addition, the audi<strong>to</strong>r would
make inquiries of management about changes in circumstances that give rise <strong>to</strong> new,
or the need <strong>to</strong> revise existing, accounting estimates.
Review and evaluate management’s estimation processes including the development of
the underlying assumptions, reliability of data used, and any internal approval or review
process. Where applicable, this could also include the use of a management expert.
The need for a management expert may arise because of, for example:
• The specialized nature of the matter requiring estimation;
• The technical nature of models required <strong>to</strong> meet requirements of the applicable
financial reporting framework (such as certain measurements at fair value); and
• The unusual or infrequent nature of the condition, transaction, or event
requiring an accounting estimate.
Review the outcome of the previous period’s estimates and understand the reasons
for differences between prior-period estimates and the actual amounts. This will help
<strong>to</strong> understand:
• Effectiveness (or not) of management’s estimation process;
• Existence of any possible management bias (a review of estimates for possible
fraud is also required by ISA 240);
• Existence of pertinent audit evidence; and
• Extent of estimation uncertainty involved, which may be required <strong>to</strong> be
disclosed in the financial statements.