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
In smaller entities, there is likely <strong>to</strong> be active management involvement in the financial reporting process which
includes accounting-estimate preparation. As a result, controls over the estimating process may not exist, or, if
they do exist, may operate informally. For this reason, the audi<strong>to</strong>r’s response <strong>to</strong> the assessed risks is likely <strong>to</strong> be
substantive in nature, with the audi<strong>to</strong>r performing one or more of the other responses outlined below.
Exhibit 11.3-1
Address
Have Estimates
Been Prepared
Appropriately?
How Reliable Is
the Supporting
Evidence?
Description
• Test how management made the accounting estimate and the data on which it
is based. Evaluate whether:
– The method of measurement used is appropriate in the circumstances,
and
– The assumptions used by management are reasonable in light of the
measurement objectives of the applicable financial reporting framework.
• Test the operating effectiveness of the controls, if any, over how management
made the accounting estimate, <strong>to</strong>gether with appropriate substantive
procedures.
• Develop a point estimate or a range <strong>to</strong> evaluate management’s point estimate.
If the assumptions or methods used by the audi<strong>to</strong>r differ from management’s,
obtain an understanding of management’s assumptions or methods sufficient
<strong>to</strong> establish that the audi<strong>to</strong>r’s point estimate or range takes in<strong>to</strong> account relevant
variables. Also evaluate any significant differences from management’s point
estimate. If it is appropriate <strong>to</strong> use a range, narrow the range, based on audit
evidence available, until all outcomes within the range are considered reasonable.
Undertake one or more of the following procedures, taking in<strong>to</strong> account the nature
of the accounting estimate, the nature of the evidence that will be obtained, and
the assessed risk of material misstatement, including whether the assessed risk is a
significant risk:
Review events subsequent <strong>to</strong> the period end <strong>to</strong> ensure they support management’s
estimates. This may be particularly relevant in some smaller owner-managed entities, where
management does not have formalized control procedures over accounting estimates.
• Test the information, controls (if any), methods, and assumptions used.
• Based on available evidence and discussions with management, develop an
independent point estimate or range of reasonableness for comparison with
the entity’s estimate. The amount by which management’s estimate differs
from the point estimate or falls outside the range of reasonableness would be
considered as a misstatement.
• When there is a longer period between the balance-sheet date and the date of the
audi<strong>to</strong>r’s report, the audi<strong>to</strong>r’s review of events in this period may be an effective
response for accounting estimates other than fair value accounting estimates.