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Sri Lanka Auditing Standard 540 Audit of Accounting Estimates
Sri Lanka Auditing Standard 540 Audit of Accounting Estimates
Sri Lanka Auditing Standard 540 Audit of Accounting Estimates
SriLankaAuditingStandard540
AuditofAccountingEstimates
Sanath Fernando PartnerErnst&Young
3October2012
Introduction
Whatareaccountingestimates
EstimationUncertainty
Auditresponses
Overview
2
2
NewAuditingStandards
Previously:
theauditorwas
permittedtorely
upontheassumption
ofmanagements
goodfaithand
integrity
Now
Toincreasetherigorandskepticismtobeappliedin
auditingaccountingestimates
Toprovideenhancedguidanceonestimationuncertainty
andmanagementbias
SLAuS 315andSLAuS 330discussedriskbasedaudit
approach
ObjectivesinRevisingSLAuS 540
3
3
Auditorshouldobtainsufficientappropriateauditevidence
regardingaccountingestimates
accountingestimates,arereasonable;and
relateddisclosuresareadequate
AuditorsObjective
4
Accountingestimatereferstoapproximationofamount
ofiteminabsenceofprecisemeansofmeasurement
Allowanceforbaddebts,inventory
Deferredtax
Provisionforlossfromalawsuit
Lossesinconstructioncontractsinprogress
Provisionsforwarrantyclaims
Actuarialvaluations
Impairmenttestingetcetc
FVarealsoestimatesthatarespecificallyaddressedin
SLAuS 545
WhatareAccountingestimates?
5
4
Managementisresponsibleformakingsuchestimates
Estimatesareoftenmadeinconditionsofuncertainly
andusesjudgment
Riskofmisstatementgreaterbecauseofelementof
uncertainty
Whoisresponsible?
6
Thesusceptibilityofanaccountingestimatetoan
inherentlackofprecisioninitsmeasurement
Thedegreeofestimationuncertaintyaffectstherisk
thatthefinancialstatementsaremateriallymisstated
andwhetheranestimateisparticularlysusceptibleto
managementbias
NatureofEstimationUncertainty
5
Natureofaccountingestimates
Determinationofestimatemaybe:
Simple(e.g.rentaccrual)orComplex(e.g.slowmoving
inventory)
Estimatesmaybe:
Doneaspartofroutineaccountingsystem,operating
continuouslyorNonroutine,beingdoneonlyatperiod
end
Oftendonebyapplyingformulabasedonexperience
Formulashouldthenbereviewedregularlyby
management
Itemmaybeincapableofreasonableestimation
Auditormustthenconsidereffectonhisreport
7
AuditProceduresandevaluation
6
Auditorshouldobtainsufficientappropriateauditevidence
astowhetherestimateisreasonableandappropriately
disclosed
Understandingoftheentityandenvironment
Internalcontrols
Understandingoftheproceduresandmethodsincluding
relevantcontrolactivities,usedbythemanagementhelps
theauditortodesigntheN,T&E
Auditprocedures
8
Threeauditapproaches (canbecombined):
1. Reviewandtestprocessusedbymanagementto
developestimate
2. Compareindependentestimatewithmanagements
3. Reviewsubsequenteventsconfirmingestimate
Auditapproaches
9
7
1. Reviewingandtestingprocessusedbymanagement
Evaluationofdataandconsiderationofassumptionson
whichestimateisbased
Testingofcalculationsinvolved
Comparisonofestimatesforpriorperiodswithactual
results
Why?
Considerationofmanagementsapprovalprocedures
Auditapproaches
10
2. Useofindependentestimate
Auditorwouldordinarily:
Evaluatedata
Considerassumptions
Testcalculationprocedures
3. Reviewofsubsequentevents
Eventsafteryearendbutbeforecompletionofaudit
mayprovideauditevidenceregardingestimate
E.g.provisionforbaddebtsorobsoletestock
Auditapproaches(continued)
11
8
Auditorshouldmakefinalassessmentofreasonablenessof
estimate,basedon:
Hisknowledgeofbusiness
Whetherestimateisconsistentwithotheraudit
evidenceobtainedduringaudit
Evaluationofdifferencescanbedifficultduetoelementof
uncertainty
Ifthereisdifference,auditorshouldconsiderif
adjustmentisrequired
Ifyes,andmanagementrefusestorevisetheir
estimate:differenceshouldberegardedas
misstatement
Evaluationofresultsofprocedures
12
Auditingactuarialvaluationofgratuity
Discussion:Practicalscenario
9
Estimatesareinherentlyimpreciseandmostofthe
numbersinFSarenotfacts,butestimates
EvaluateAssumptions
DetermineAppropriatenessofModel
Testthedataandcalculations
Useindependentestimates,
Reviewsubsequentevents
Conclusion
12
Thepresentationiswrittenintheauthor'spersonalcapacity
anddoesnotreflecttheviewofErnst&Young.