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Audit committee self-evaluation questions Audit committee chair considerations Discussion points and interesting observations
The selection and application of accounting policies robustly challenge management on such conclusions and As accounting estimates are approximations, they will
is crucial to the preparation of financial statements. expect that the auditor and regulators will do likewise. need to be revisited and potentially updated as additional
Accounting policies should be selected and applied information becomes known, the circumstances on which
consistently for similar transactions, other events and Finally, audit committees should ensure that they are based change, new developments arise, or
conditions, unless an accounting standard specifically appropriate disclosures are provided on material more experience is gained. By its nature, a change in an
requires or permits categorization of items for which accounting policies. accounting estimate does not relate to prior periods and
different policies may be appropriate. Entities need to is not a correction of an error.
7.1.1.2 Estimates
disclose material accounting policy information, including
the choices and judgments applied. For material estimates, the audit committee will need
An accounting policy may require items to be measured
to understand the judgments made by management
at monetary amounts that cannot be observed directly
Audit committees need to assess the overall in arriving at the proposed measurement and related
and must instead be estimated in a way that involves
appropriateness of accounting policies, especially where internal controls. In doing so, the audit committee should,
measurement uncertainty. Developing such accounting
management has applied judgment, challenging any among other considerations, remain cognizant of fraud
estimates involves a number of judgments:
departures from GAAP and industry norms. Any voluntary factors and bias, ensure that judgments or assumptions
change to accounting policies needs to be scrutinized. In its • S
► electing and applying a method or model for are based on the latest available, reliable information,
oversight role, the audit committee should focus on those computing the monetary amount use objective and credible external data points where
policies that are most material to the financial statements available, and probe management that appropriate
• I► dentifying and/or developing assumptions and inputs
and those that relate to judgments and estimates. specialist input was sought, if relevant. The audit
for use in the method or model, based on the latest
committee should also understand how management
The audit committee should also ensure that available, reliable information
reviewed the outcome of previous accounting estimates
management assesses the impact of any future, required • S
► electing and interpreting data to develop the and responded to the results of that review.
changes to GAAP sufficiently in advance to ensure a assumptions and inputs, which can be of a specialized,
smooth implementation of any resulting changes. often nonfinancial nature Finally, audit committees should ensure that appropriate
disclosures are provided on the assumptions made
Under IFRS, an entity achieves a fair presentation by Depending on the extent of judgment involved, about the future and other major sources of estimation
compliance with applicable standards in virtually all accounting estimates will have varying degrees of uncertainty that have a significant risk of resulting in a
circumstances. It may be permissible to depart from the uncertainty, complexity and subjectivity. By their material adjustment to the carrying amounts of assets
requirements of a standard only in extremely rare cases, very nature, they will be prone to management bias. and liabilities within the next financial year.
when management concludes that compliance would be Intentional bias may be driven by pressures or incentives
so misleading that the reported result would not faithfully to achieve certain results and may lead to fraud;
represent the transactions, other events and conditions unintentional biases may be the result of management
it purports to. Some regulatory frameworks may prohibit optimism or overconfidence.
such departures altogether. Audit committees should
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Audit committee self-evaluation questions Audit committee chair considerations Discussion points and interesting observations

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