Page 145 - Internal Auditing Standards

Guide to Using International Standards on Auditing in the Audits of Small- and Medium-Sized Entities Volume 1—Core Concepts

In smaller entities, there is likely to be active management involvement in the financial reporting process which
includes accounting-estimate preparation. As a result, controls over the estimating process may not exist, or, if
they do exist, may operate informally. For this reason, the auditor’s response to the assessed risks is likely to be
substantive in nature, with the auditor performing one or more of the other responses outlined below.
Exhibit 11.3-1

Address Description
Have Estimates • Test how management made the accounting estimate and the data on which it
Been Prepared is based. Evaluate whether:
Appropriately?
– The method of measurement used is appropriate in the circumstances,
and
– The assumptions used by management are reasonable in light of the

measurement objectives of the applicable financial reporting framework.

• Test the operating effectiveness of the controls, if any, over how management
made the accounting estimate, together with appropriate substantive
procedures.
• Develop a point estimate or a range to evaluate management’s point estimate.
If the assumptions or methods used by the auditor differ from management’s,

obtain an understanding of management’s assumptions or methods suffi cient
to establish that the auditor’s point estimate or range takes into account relevant
variables. Also evaluate any signifi cant differences from management’s point

estimate. If it is appropriate to use a range, narrow the range, based on audit
evidence available, until all outcomes within the range are considered reasonable.

How Reliable Is Undertake one or more of the following procedures, taking into account the nature
the Supporting of the accounting estimate, the nature of the evidence that will be obtained, and
Evidence? the assessed risk of material misstatement, including whether the assessed risk is a
signifi cant risk:

Review events subsequent to the period end to ensure they support management’s
estimates. This may be particularly relevant in some smaller owner-managed entities, where
management does not have formalized control procedures over accounting estimates.
• Test the information, controls (if any), methods, and assumptions used.
• Based on available evidence and discussions with management, develop an
independent point estimate or range of reasonableness for comparison with
the entity’s estimate. The amount by which management’s estimate diff ers
from the point estimate or falls outside the range of reasonableness would be
considered as a misstatement.
• When there is a longer period between the balance-sheet date and the date of the
auditor’s report, the auditor’s review of events in this period may be an eff ective
response for accounting estimates other than fair value accounting estimates.

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