Reviewing and Testing the Process Used bReviewing and Testing the Process Used by Management

Reviewing and Testing the Process Used by Management

15 The steps ordinarily involved in reviewing and testing of the process used by management are:

(a) evaluation of the data and consideration of assumptions on which the estimate is based;

(b) testing of the calculations involved in the estimate;

(c) comparison, when possible, of estimates made for prior periods with actual results of those periods; and

(d) consideration of management’s approval procedures.

Evaluation of Data and Consideration of Assumptions

16 Ordinarily, the auditor would evaluate whether the data on which the estimate is based is accurate, complete and relevant. When information produced by the entity is used, it will need to be consistent with the data processed through the information system relevant to financial reporting. For example, in substantiating a warranty provision, the auditor obtains audit evidence that the data relating to products still within the warranty period at period end agree with the sales information within the information system relevant to financial reporting. ASA 500 Audit Evidence provides additional discussion on the need to obtain audit evidence about the accuracy and completeness of information produced by the entity when it is used in performing audit procedures.

17 The auditor may also seek audit evidence from sources outside the entity. For example, when examining a provision for inventory obsolescence calculated by reference to anticipated future sales, the auditor may, in addition to examining internal data such as past levels of sales, orders on hand and marketing trends, seek audit evidence from industry-produced sales projections and market analyses.

18 The auditor ordinarily evaluates whether the data collected is appropriately analysed and projected to form a reasonable basis for determining the accounting estimate. Examples are the analysis of the age of accounts receivable and the projection of the number of months of supply on hand of an item of inventory based on past and forecast usage.

19 The auditor ordinarily evaluates whether the entity has an appropriate base for the principal assumptions used in the accounting estimate. In some cases, the assumptions will be based on industry or government statistics, such as future inflation rates, interest rates, employment rates and anticipated market growth. In other cases, the assumptions will be specific to the entity and will be based on internally generated data.

20 In evaluating the assumptions on which the estimate is based, the auditor ordinarily considers, among other things, whether they are:

(a) reasonable in light of actual results in prior periods;

(b) consistent with those used for other accounting estimates; and