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XII

Auditing Accountin
timates and Fair V
Measurements an
Disclosures
S I L I O

M A N T E S

R A M

AUDITING
ACCOUNTI
NG

ACCOUNTING
ESTIMATE
an approximation of the amount of a financial
statement element, item or account in the
absence of a precise means of measurement
(Auditing Standards, PSA 540 definition).
Examples:
allowances to reduce inventory and accounts
receivable to their estimated realizable value
provisions to allocate the cost of fixed assets over
their estimated useful lives
Accrued revenue
Deferred tax
Provision for a loss from a lawsuit
Losses on construction contracts in progress
Provision to meet warranty claims

It is included in historical financial

statements because
1. The measurement of some amounts
or the valuation of some accounts is
uncertain, pending the outcome of
future events.
2. Relevant data concerning
events that have already occurred
cannot be accumulated on a
timely, cost-effective basis.

AU D I T
PROCEDURES
I N E VA LUAT I N G
ACCOUNTING
E S T I M AT E S

AUDITORS OBJECTIVE
to obtain sufficient appropriate audit
evidence to provide reasonable assurance that
accounting estimates that could be material to
the financial statements have been developed,
reasonable in the circumstances and, when
required, is appropriately disclosed.

AUDITORS CONSIDERATION
circumstances of the industry or
industries in which the entity operates
its methods of conducting business
new pronouncements
and other external factors

AUDIT PROCEDURES
1.
Consider
assertions
embodied
in the
financial
statement
s to
determine
the need
for
estimates.

2. Evaluate information
obtained in performing other
procedures, such as:
Information
about
changes
made or
planned in
the entitys
business

Changes in
the methods
of
accumulating
information.

Information from
reading available
minutes of meetings
of stockholders,
directors and
appropriate
committees.

Information
concerning
identified
litigation, claims,
and assessments
and other
contingencies.

Information contained
in regulatory or
examination reports,
supervisory
correspondence and
similar materials from
applicable regulatory
agencies.

3. Inquire
of
management
about the
existence
of circumstances that
may
indicate
the need
to make an
accounting
estimate.

UNDERSTANDING ON HOW MANAGEMENT

DEVELOPED THE ESTIMATE APPROACHES

APPROACH #
1
Review and test the
process used by
management to
develop the
estimate.

PROCEDURES:
Identify whether there are controls over the preparation
of accounting estimates and supporting data that may be
useful in the evaluation.
Identify the sources of data and factors that management
used in forming the assumptions, and consider whether
such data and factors are relevant, reliable and sufficient
for the purpose based on information gathered in other
audit tests.
Consider whether there are additional key factors or
alternative assumptions about the factors.
Evaluate whether the assumptions are consistent with
each other, the supporting data, relevant historical data
and industry data.

APPROACH # 1

PROCEDURES: (continuation
Analyze historical data used in developing the
assumptions to assess whether the data is comparable
and consistent with data of the period under audit and
consider whether such data is sufficiently reliable for
the purpose.
Consider whether changes in the business or industry
may cause other factors to become significant to the
assumptions.
Review available documentation of the assumptions
used in developing the accounting estimates and inquire
about any other plans, goals, and objectives of the
entity, as well as consider their relationship to the
assumptions.

APPROACH # 1

PROCEDURES: (continuation
Consider using the work of a specialist regarding certain
assumptions.
Test the calculations used by management to translate
the assumptions and key factors into the accounting
estimate.
Consider whether review and approval is performed by
the appropriate level of management and that it is
evidenced in the documentation supporting the
determination of the accounting estimate.

APPROACH # 1