Audit Midterm Auditing Estimates

Accounting Estimates

Measurement of recognition of amounts involving subjective assumptions and measurement uncertainty

Management responsible for preparing

Estimates are pervasive in financial statements - consider ROMM
Consider use of specialists in evaluation

Difficult to estimate if no historic data

Issues with management responsibility

Assume management has biases

In most cases, will overstate assets and understate liabilities, but not always the case

assume management may skew results to benefit them

ROMM in estimations

Has to deal with how complex the estimation is

period of time looking

depreciation

Identifying and assessing ROMM

Identify accounting estimates in significant accounts and disclosures

Understand the process by which accounting estimates are developed

Identify and assess ROMM related to accounting estimates

Testing Accounting Estimates

Use one or a combination of following:

Test company’s process for developing the accounting estimate

Develop an independent expectation to compare the company’s estimate

Evaluate audit evidence from subsequent events related to the accounting estimate for comparison to company’s estimate

Testing company’s process

Evaluate company’s methods: appropriate for nature of estimate and consistent with prior periods

Test data used: relevant, consistent, accurate, complete, precise

Identify and evaluate significant assumptions

Evaluate work of company specialists

Develop an independent expectation

Ensure reasonable basis for assumptions and methods

Test data used to develop the estimate

Compare auditor’s independence expectation to company’s estimate

it is client’s responsiblity to adjust entry

Evaluating evidence from subsequent events

Consider whether the evidence is sufficient, reliable, and relevant to the company’s estimate

Subsequent events and transactions are relevant to extent they reflect conditions at measurement date

Consider changes in circumstances or conditions

Example for estimates in patent purchase

If a company purchases another company that holds a patent, management will be biased to underreport the worth of the patent to lower amortization expense. This would offset goodwill, which does not get amortized

Evaluate Audit Results

Evaluate identified misstatements

Evaluate qualitative aspects of company’s accounting practices

Consider potential for management bias

Evaluate presentation and disclosure of the accounting estimate in financial statements