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SAS 420 Audit of Accounting Estimates
SAS 420 Audit of Accounting Estimates
Contents
Paragraphs
Introduction 1–4
Effective date 21
185
Audit of accounting estimates
Statements of Auditing Standards (‘SASs’) are to be read in the light of ‘The scope and
authority of APB pronouncements’. In particular, they contain basic principles and
essential procedures (‘Auditing Standards’), indicated by paragraphs in bold type,
with which auditors are required to comply in the conduct of any audit. SASs also
include explanatory and other material which is designed to assist auditors in
interpreting and applying Auditing Standards. The definitions in the Glossary of terms
are to be applied in the interpretation of SASs.
Introduction
The purpose of this SAS is to establish standards and provide guidance on the audit 1
of accounting estimates contained in financial statements. This SAS is not intended
to be applicable to the examination of prospective financial information, though
many of the procedures outlined herein may be suitable for that purpose.
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APB Statements of Auditing Standards
end. In many cases, accounting estimates are made by using a formula based on
experience, such as the use of standard rates for depreciating each category of fixed
assets or a standard percentage of sales revenue for computing a warranty provision.
In such cases, the formula is reviewed regularly by management or the directors, for
example by reassessing the remaining useful lives of assets or by comparing actual
results with the estimate and adjusting the formula when necessary.
7 If the uncertainty associated with an item, or the lack of objective data, makes it
incapable of reasonable estimation, auditors consider the implications for their
report.
Audit procedures
8 Auditors should obtain sufficient appropriate audit evidence as to whether an
accounting estimate is reasonable in the circumstances and, when required, is
appropriately disclosed. (SAS 420.2)
11 Auditors should adopt one or a combination of the following approaches in the audit
of an accounting estimate:
(a) review and test the process used by management or the directors to develop the
estimate;
(b) use an independent estimate for comparison with that prepared by
management or the directors; or
(c) review subsequent events. (SAS 420.3)
12 The steps normally involved in the review and testing of the process used by
management or the directors are:
(a) evaluation of the data and consideration of the 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 or the directors’ review and approval proce-
dures.
13 Auditors may make or obtain an independent estimate and compare it with the
accounting estimate prepared by management or the directors. When using an
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Audit of accounting estimates SAS 420
independent estimate auditors generally evaluate the data, consider the assumptions
and test the calculation procedures used in its development. It may also be appro-
priate to compare independent estimates made for prior periods with actual results
of those periods.
Effective date
Auditors are required to comply with the Auditing Standards contained in this SAS 21
in respect of audits of financial statements for periods ending on or after 23
December 1995.
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