Indicators of Possible Management Bias (Indicators of Possible Management Bias (Ref: Para. 32)

Indicators of Possible Management Bias (Ref: Para. 32)

1. Management bias may be difficult to detect at an account level and may only be identified by the auditor when considering groups of accounting estimates, all accounting estimates in aggregate, or when observed over a number of accounting periods. For example, if accounting estimates included in the financial report are considered to be individually reasonable but management’s point estimates consistently trend toward one end of the auditor’s range of reasonable outcomes that provide a more favourable financial reporting outcome for management, such circumstances may indicate possible bias by management.
2. Examples of indicators of possible management bias with respect to accounting estimates include:

• Changes in an accounting estimate, or the method for making it, when management has made a subjective assessment that there has been a change in circumstances.
• Selection or development of significant assumptions or the data that yield a point estimate favourable for management objectives.
• Selection of a point estimate that may indicate a pattern of optimism or pessimism.

When such indicators are identified, there may be a risk of material misstatement either at the assertion or financial statement level. Indicators of possible management bias themselves do not constitute misstatements for purposes of drawing conclusions on the reasonableness of individual accounting estimates. However, in some cases the audit evidence may point to a misstatement rather than simply an indicator of management bias.

1. Indicators of possible management bias may affect the auditor’s conclusion as to whether the auditor’s risk assessment and related responses remain appropriate. The auditor may also need to consider the implications for other aspects of the audit, including the need to further question the appropriateness of management’s judgements in making accounting estimates. Further, indicators of possible management bias may affect the auditor’s conclusion as to whether the financial report as a whole is free from material misstatement, as discussed in ASA 700.[61]
2. In addition, in applying ASA 240, the auditor is required to evaluate whether management’s judgements and decisions in making the accounting estimates included in the financial report indicate a possible bias that may represent a material misstatement due to fraud.[62] Fraudulent financial reporting is often accomplished through intentional misstatement of accounting estimates, which may include intentionally understating or overstating accounting estimates. Indicators of possible management bias that may also be a fraud risk factor, may cause the auditor to reassess whether the auditor’s risk assessments, in particular the assessment of fraud risks, and related responses remain appropriate.