Review professional auditing standards to describe the auditor’s responsibilities for examining management-generated estimates. Also, describe the techniques commonly used by auditors to evaluate the reasonableness of management’s estimates.
What will be an ideal response?
Both the ASB's Auditing Standards (AU-C) Section 540 and the PCAOB's AS 2501 note that the auditor
is responsible for evaluating the reasonableness of accounting estimates made by management in the
context of the financial statements taken as a whole. The auditor’s objective when evaluating accounting
estimates is to obtain sufficient appropriate evidential matter to provide reasonable assurance that:
a. All accounting estimates that could be material to the financial statements have been developed.
b. Those accounting estimates are reasonable in the circumstances.
c. The accounting estimates are presented in conformity with applicable accounting principles and
are properly disclosed.
AU-C Section 540 and PCAOB AS 2501 note that in evaluating the reasonableness of management’s
estimates, the auditor should use one or a combination of the following approaches:
a. Review and test the process used by management to develop the estimate.
b. Develop an independent expectation of the estimate to corroborate the reasonableness of
management’s estimate.
c. Review subsequent events or transactions occurring up through the audit report date.
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