Estimation Uncertainty (Ref: Para. 8(c)(Estimation Uncertainty (Ref: Para. 8(c)(vi))

Estimation Uncertainty (Ref: Para. 8(c)(vi))

1. Matters that the auditor may consider in obtaining an understanding of whether and, if so, how management has assessed the effect of estimation uncertainty include, for example:

• Whether and, if so, how management has considered alternative assumptions or outcomes by, for example, performing a sensitivity analysis to determine the effect of changes in the assumptions on an accounting estimate.
• How management determines the accounting estimate when analysis indicates a number of outcome scenarios.
• Whether management monitors the outcome of accounting estimates made in the prior period, and whether management has appropriately responded to the outcome of that monitoring procedure.

Reviewing Prior Period Accounting Estimates (Ref: Para. 9)

1. The outcome of an accounting estimate will often differ from the accounting estimate recognised in the prior period financial report. By performing risk assessment procedures to identify and understand the reasons for such differences, the auditor may obtain:

• Information regarding the effectiveness of management’s prior period estimation process, from which the auditor can judge the likely effectiveness of management’s current process.
• Audit evidence that is pertinent to the re‑estimation, in the current period, of prior period accounting estimates.
• Audit evidence of matters, such as estimation uncertainty, that may be required to be disclosed in the financial report.

1. The review of prior period accounting estimates may also assist the auditor, in the current period, in identifying circumstances or conditions that increase the susceptibility of accounting estimates to, or indicate the presence of, possible management bias. The auditor’s professional scepticism assists in identifying such circumstances or conditions and in determining the nature, timing and extent of further audit procedures.
2. A retrospective review of management judgements and assumptions related to significant accounting estimates is also required by ASA 240.[12] That review is conducted as part of the requirement for the auditor to design and perform procedures to review accounting estimates for biases that could represent a risk of material misstatement due to fraud, in response to the risks of management override of controls. As a practical matter, the auditor’s review of prior period accounting estimates as a risk assessment procedure in accordance with this Auditing Standard may be carried out in conjunction with the review required by ASA 240.
3. The auditor may judge that a more detailed review is required for those accounting estimates that were identified during the prior period audit as having high estimation uncertainty, or for those accounting estimates that have changed significantly from the prior period. On the other hand, for example, for accounting estimates that arise from the recording of routine and recurring transactions, the auditor may judge that the application of analytical procedures as risk assessment procedures is sufficient for purposes of the review.