What is Auditing accounting estimates?
In short
When auditing an accounting estimate, the auditor evaluates whether management's estimate and related disclosures are reasonable, considering estimation uncertainty, complexity, subjectivity and the risk of management bias.
Key takeaways
- There are three approaches: use events up to the report date, test how management made the estimate, or develop the auditor's own point estimate or range.
- If management's amount falls outside the auditor's reasonable range, the misstatement is at least the difference to the nearest end of the range.
- A retrospective review of last year's estimates helps detect management bias.
Where it's tested
AUD: Auditing Accounting Estimates — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
During the audit, the auditor notes that each of management's significant estimates falls within a reasonable range, but every one lands at the end of the range that maximizes reported income. How should the auditor evaluate this?