Guide to Using International Standards on Auditing in - IFAC

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140 <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.
141 <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 Address Extent of Estimation Uncertainty Involved Description Consider the following: • Extent of management’s judgment involved; • Sensitivity <strong>to</strong> changes in assumptions; • Existence of recognized measurement techniques that mitigate the uncertainty; • Length of the forecast period and relevance of data used; • Availability of reliable data from external sources; • Extent <strong>to</strong> which estimate is based on observable or unobservable inputs; and • Susceptibility <strong>to</strong> bias. Note: Determine whether the accounting estimates with a high estimation uncertainty are also “significant risks” <strong>to</strong> be addressed by the audi<strong>to</strong>r. Significance of the Estimates In assessing the risks of material misstatement, consider: • Matters addressed above in this table; • Actual or expected magnitude of the estimate; and • Whether the estimate is a significant risk. See “extent of estimation uncertainty” above. 11.3 Responses <strong>to</strong> Assessed Risks Paragraph # Relevant Extracts from ISAs 540.12 Based on the assessed risks of material misstatement, the audi<strong>to</strong>r shall determine: (Ref: Para. A52) (a) Whether management has appropriately applied the requirements of the applicable financial reporting framework relevant <strong>to</strong> the accounting estimate; and (Ref: Para. A53-A56) (b) Whether the methods for making the accounting estimates are appropriate and have been applied consistently, and whether changes, if any, in accounting estimates or in the method for making them from the prior period are appropriate in the circumstances. (Ref: Para. A57-A58)
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