Accounting Estimates

Examples

• inventory valuations (net realisable value; need for impairments)
• depreciation method and useful life
• all provisions and contingent liabilities
• irrecoverable debts and allowances for receivables
• tangible asset valuations where revaluations have occurred

The problem with estimates

Procedures for auditing estimates

In accordance with ISA 540 Auditing Accounting Estimates auditors need to obtain an understanding of:

• How management identifies those transactions, events and conditions that give rise to the need for estimates; and
• How management actually makes the estimates, including the control procedures in place to minimise the risk of misstatement.

ISA 540 also requires the auditor to:

• Evaluate the degree of uncertainty associated with an accounting estimate; and
• Consider if estimates with a high degree of uncertainty give rise to significant risks.

In response to this assessment auditors should perform the following further procedures:

• Review of the outcome of the estimates made in the prior period (or their subsequent re-estimation);
• Consider events after the reporting date that provide additional evidence about estimates made at the year-end;
• Test the basis and data upon which management made the estimate (e.g. review mathematical methods);
• Test the operating effectiveness of controls over how estimates are made;
• Develop an independent estimate to use as a point of comparison; and
• Consider whether specialist skills/knowledge are required (e.g. lawyer).

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Tags:	estimates