International Standard Audit 540 "Audit of accounting estimates, including accounting estimates for fair value, and related disclosures"
International Standard 540 considers the auditor's responsibility for accounting estimates, including accounting estimates at fair value, and related disclosures in the audit of financial statements, and should be read in the context of the MCA 200. The general objectives of the independent auditor and the conduct of an audit in accordance with international audit standards & quot;
Some indicators of financial reporting nc can be accurately measured, but can only be estimated - these are accounting estimates. The nature and reliability of the information available to management to justify the accounting valuation can vary greatly, which affects the degree of possible uncertainty associated with accounting estimates.
The purpose of measurements of accounting estimates may vary depending on the nature of the principles applied for the preparation of financial statements and the financial object that should be reported. For example, the applicable financial reporting principles may require measurement at fair value.
The difference between the actual result for an accounting estimate and the amount initially recognized or disclosed in the financial statements is not necessarily a misstatement of the financial statements. This is especially true for accounting estimates at fair value, since the observed result is affected by events and conditions that follow the date on which the measurement was performed for financial reporting purposes.
The objectives of the auditor are to obtain sufficient appropriate audit evidence in the context of the applicable principles for the preparation of financial statements in respect of the following:
• the reasonableness of accounting estimates that are recognized or disclosed in the financial statements, including accounting estimates at fair value;
• the adequacy of the disclosures associated with them in the financial statements.
For the purposes of MCA 540, the following terms are used.
Accounting Estimated Value is an approximate value of the article in the absence of precise methods for measuring it. This term is used for items measured at fair value in cases where there is uncertainty, as well as for other items requiring estimates. When this MCA only talks about accounting estimates that require measurement at fair value, the term "accounting fair value estimate" is used.
Auditor's point or interval valuation is a single value or range of values, respectively, derived from the audit evidence for use in reviewing the management's point estimate.
Uncertainty , associated with the valuation - exposure to the accounting estimate and related disclosures in the financial statements the lack of accuracy in its measurement.
Distortion related to management is a distortion caused by the lack of neutrality on the part of management when preparing and presenting information.
Management's point estimate - the amount that management has selected as the accounting estimate for recognition or disclosure.
The result of the accounting valuation is the current actual value of the item that is the result of the transaction, the event or condition for which the accounting valuation was determined.
In the course of implementing procedures for identifying and assessing risks and related actions in order to gain an understanding of the organization and its environment, including internal control, the auditor is obliged to understand the following:
• the requirements of the applicable principles for the preparation of financial statements in respect of accounting estimates, including related disclosures;
• how management identifies those transactions, events and conditions that may cause the recognition of, or disclosure in, financial statements of accounting estimates;
• How management receives accounting estimates and achieves an understanding of the information on which they are based; and if so, how, the effect of uncertainty associated with the assessment.
The auditor is required to verify the actual performance of the accounting estimates included in the previous period's financial statements, or, if applicable, their subsequent revision for the purposes of the current reporting period. The nature and extent of the audit shall take into account the nature of the accounting estimates and whether the information obtained during the audit will be applicable to identify and assess the risks of material misstatement of accounting estimates made for the financial statements for the current period. However, the audit has no purpose to question the judgments made in the past period, which were based on the information available at that time (see A39-A44).
In identifying and assessing the risks of material misstatement, the auditor is required to assess the degree of uncertainty associated with the valuation in respect of accounting estimates.
The auditor is required to determine whether there are any accounting estimates in accordance with his professional judgment for which there is a high degree of uncertainty associated with the valuation leading to significant risks.
Based on the assessed risks of material misstatement, the auditor is obliged to determine:
• have management applied the applicable requirements of accounting principles relevant to accounting estimates in an appropriate manner;
• are the methods for obtaining accounting estimates estimated to be appropriate.
In response to the risks of material misstatement, the auditor is required to:
• determine whether the events that occurred before the date of issuing the audit report provide audit evidence in relation to accounting estimates;
• check how the management received the accounting estimates. In performing this audit, the auditor is required to assess whether the method of obtaining estimates was appropriate in the circumstances; whether the assumptions made by the management were reasonable in the light of measurement objectives in the framework of the applicable principles for the preparation of financial statements; check the operational effectiveness of controls as to how management received accounting estimates, along with appropriate procedures for validation, but
• Develop a point or interval accounting estimate value for estimating the point value received by management.
For accounting estimates that are associated with significant risks, the auditor is required to assess:
• How did management consider alternative assumptions or outcomes or why they did not consider them; as management in some other way approached the uncertainty associated with the evaluation when obtaining accounting estimates (see A103-A106);
• Are the significant assumptions made by management reasonable?
• If it is applicable to the reasonableness of significant management assumptions or the proper application of the applicable principles for the preparation of financial statements, are the management's intentions to perform special actions and its ability to perform these actions.
If, in accordance with the auditor's judgment, management has inadequately relate to the uncertainty associated with the estimates and its impact on accounting estimates, leading to significant risks, the auditor is obliged, if it deems it necessary, to develop an interval estimate in order to assess the reasonableness of the accounting estimate value.
For accounting estimates that lead to significant risks, the auditor is required to obtain sufficient appropriate audit evidence about whether the following is consistent with the requirements of the applicable financial reporting framework:
• Management decisions on recognition or non-recognition of accounting estimates in the financial statements;
• The selected basis for measuring accounting estimates.
The auditor is obliged to evaluate on the basis of audit evidence whether the accounting estimates in the financial statements are reasonable in the context of the applicable principles of financial reporting or are distorted.
The auditor is required to obtain sufficient appropriate audit evidence that the disclosure of accounting estimates presented in the accounts is in accordance with the applicable principles for preparing financial statements.
The auditor is required to receive management's written statements about whether it considers accounting estimates to be reasonable.
The audit documentation should include:
• the basis for the audit findings on the reasonableness of accounting estimates that led to significant risks and their disclosures;
• if available, indicators of possible intentional misstatement by management.
Documenting the indicators of potential management misstatements identified during the audit will help the auditor in formulating the conclusion whether the risk assessments and further procedures in place regarding them remain appropriate, and in assessing whether the financial statements contain material misstatements .
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