Considerations Specific to Smaller EntitConsiderations Specific to Smaller Entities

Considerations Specific to Smaller Entities

1. Obtaining this understanding for smaller entities is often less complex as their business activities are often limited and transactions are less complex. Further, often a single person, for example the owner‑manager, identifies the need to make an accounting estimate and the auditor may focus enquiries accordingly.

Obtaining an Understanding of How Management Makes the Accounting Estimates (Ref: Para. 8(c))

1. The preparation of the financial report also requires management to establish financial reporting processes for making accounting estimates, including adequate internal control. Such processes include the following:

• Selecting appropriate accounting policies and prescribing estimation processes, including appropriate estimation or valuation methods, including, where applicable, models.
• Developing or identifying relevant data and assumptions that affect accounting estimates.
• Periodically reviewing the circumstances that give rise to the accounting estimates and re‑estimating the accounting estimates as necessary.

1. Matters that the auditor may consider in obtaining an understanding of how management makes the accounting estimates include, for example:

• The types of accounts or transactions to which the accounting estimates relate (for example, whether the accounting estimates arise from the recording of routine and recurring transactions or whether they arise from non‑recurring or unusual transactions).
• Whether and, if so, how management has used recognised measurement techniques for making particular accounting estimates.
• Whether the accounting estimates were made based on data available at an interim date and, if so, whether and how management has taken into account the effect of events, transactions and changes in circumstances occurring between that date and the period end.