IntroductionIntroduction

Introduction

4 The purpose of this Auditing Standard is to establish mandatory requirements and to provide explanatory guidance on the audit of accounting estimates contained in a financial report. This Auditing Standard is not intended to be applicable to the examination of prospective financial information, though many of the audit procedures outlined herein may be suitable for that purpose.

5 The auditor shall obtain sufficient appropriate audit evidence regarding accounting estimates.

6 “Accounting estimate” means an approximation of the amount of an item in the absence of a precise means of measurement. Examples where estimates may be required include:

• Provision for inventory obsolescence.
• Determining the fair value of financial assets and financial liabilities.
• Provisions to allocate the cost of non-current assets over their estimated useful lives or expected pattern of consumption of the future economic benefits.
• Accrued revenue.
• Deferred tax.
• Provision for a loss from a lawsuit.
• Losses on construction contracts in progress.
• Provision to meet warranty claims.

7 Those charged with governance and management are responsible for making accounting estimates included in the financial report. These estimates are often made in conditions of uncertainty regarding the outcome of events that have occurred or are likely to occur and involve the use of judgement. As a result, the risk of material misstatement is greater when accounting estimates are involved and in some cases the auditor may determine that the risk of material misstatement related to an accounting estimate is a significant risk that requires special audit consideration. See ASA 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement.