Psa 540 Audit of Accounting Estimates

Evaluation of
AUDIT
Results of Audit
PREOCEDURE
10 V Procedures
The auditor should adopt one or a The auditor should obtain sufficient The auditor should make a final assessment of the
combination of the following appropriate audit evidence as to reasonableness of the estimate based on the auditor?s
PSA 540 AUDIT OF approaches in the audit of an whether an accounting estimate is knowledge of the business and whether the estimate is
ACCOUNTINGESTIMATES accounting estimate: reasonable in the circumstances consistent with other audit evidence obtained during the audit.
and, when required, is
appropriately disclosed.
When there is a difference between the auditor?s estimate of the
amount best supported by the available audit evidence and the
estimated amount included in the financial statements, the auditor
Use an independent estimate would determine whether such a difference requires adjustment.
INTRODUCTION The auditor may make or obtain an
for comparison with that independent estimate and compare it
prepared by with the accounting estimate prepared The auditor would also consider whether individual differences which
Management by management. have been accepted as reasonable are biased in one direction, so
The auditor should obtain that, on the accumulative basis, they may have a material effect on
sufficient appropriate audit the financial statements. In such circumstances, the auditor would
evidence regarding evaluate the accounting estimates taken as a whole.
accounting estimates.
Review subsequent events Transactions and events which occur
Accounting estimate which confirm the estimate after period end, but prior to completion
means an approximation of the
amount of an item in the
made. of the audit, may provide audit evidence
absence of a precise means of regarding an accounting estimate made
measurement by management.
Management is responsible for Review and test the process

making accounting estimates
included in financial statements
used by management to
develop the
Estimate CONSIDER:
auditor would evaluate
auditor would evaluate whether the entity has an
whether the data on which - Reasonable in light of actual results in prior periods.
Evaluation of the data and appropriate base for the
NATURE OF the estimate is based is principal assumptions
ACCOUNTING consideration of accurate, complete and - Consistent with those used for other accounting estimates.
assumptions on which the used in the accounting
ESTIMATES relevant estimate
estimate is based - Consistent with management?s plans which appear appropriate
The auditor would test the calculation procedures used by

Testing of the calculations management. The nature, timing and extent of the
The determination of an involved in the estimate auditor?s testing will depend on such factors as the
accounting estimate may be
complexity involved in calculating the accounting estimate
simple or complex
depending upon the nature of Comparison, when possible, (a) obtaining evidence about the general
the item. of estimates made for prior reliability of the entity?s estimating procedures
When possible, the auditor would compare accounting
periods with actual results
estimates made for prior periods with actual results of
Accounting estimates may be of those periods (b) considering whether adjustments to
those periods to assist in:
determined as part of the estimating formulae may be required
routine accounting system
operating on a continuing Consideration of Material accounting estimates are ordinarily reviewed and approved by (c) evaluating whether differences between
basis or may be nonroutine, management?s approval management. The auditor would consider whether such review and actual results and previous
operating only at period end. procedures approval is performed by the appropriate level of management and that it estimates have been quantified and that,
is evidenced in the documentation supporting the determination of the where necessary, appropriate
accounting estimate. adjustments or disclosures have been made.
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Psa 540 Audit of Accounting Estimates

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Evaluation of

Management is responsible for Review and test the process

The auditor would test the calculation procedures used by

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