Auditing Accounting Estimates

Statement on Auditing Standards (SAS) No. 143

• Understand methods, significant assumptions, data, and controls.
• Inherent risk factors: estimation uncertainty, complexity, subjectivity.
• Retrospective review of prior estimates → identify bias, not second-guess.

Three approaches (one or more)

1. Events up to the report date (subsequent sales or settlements).
2. Test how management made the estimate (method, assumptions, data).
3. Develop an auditor's point estimate or range.

Measuring misstatement

• Outside the range → difference to the nearest end.
• Auditor point estimate → full difference.
• Range: only reasonable, supported amounts.

Bias indicators

Unjustified changes in method · assumptions favoring targets · all estimates at the favorable end · inconsistent assumptions.

Other

Level 3 fair values = highest uncertainty. Evaluate specialists and pricing services. Written representations on assumptions.

Exam traps

• Management's estimate inside the auditor's range isn't a misstatement — but a pattern of estimates always at the favorable end suggests bias.
• Management using a specialist doesn't remove the auditor's duty to evaluate the specialist's assumptions and data.
• A difference in judgment about an estimate is still a misstatement — accumulate it with factual and projected misstatements.