Page 146 - Internal Auditing Standards

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

Address Description
Possible • Identify whether there are indicators of possible management bias. This could
Management Bias include changes in the way estimates are calculated, or the selection of a
point estimate that indicates a pattern of optimism or pessimism. This could
occur where estimates consistently lie at one boundary of the auditor’s range
of reasonableness, or where the bias moves from one boundary of the range
to the other in successive periods. For example, where management puts the
business up for sale and the earnings goal changes from tax minimization to
maximization of earnings.
• Consider the cumulative effect of bias in the preparation of management’s

accounting estimates.

Where the estimate is complex or involves specialized techniques, the auditor may determine it is necessary
to use the work of an auditor’s expert (see Volume 1, Chapter 15.7 (ISA 620) for guidance on using the work of
an auditor’s expert).

11.4 Reporting

Paragraph # Relevant Extracts from ISAs
540.19 The auditor shall obtain sufficient appropriate audit evidence about whether the disclosures

in the financial statements related to accounting estimates are in accordance with the
requirements of the applicable financial reporting framework. (Ref: Para. A120-A121)

540.20 For accounting estimates that give rise to significant risks, the auditor shall also evaluate the
adequacy of the disclosure of their estimation uncertainty in the financial statements in the

context of the applicable financial reporting framework. (Ref: Para. A122-A123)
The final step is to determine whether:

• Sufficient appropriate evidence has been obtained. Where sufficient appropriate evidence is not available

or the evidence refutes management’s estimates, the auditor would discuss the findings with management

and consider the need to change the risk assessment and perform further audit procedures;
• The accounting estimates are either reasonable in the context of the applicable fi nancial reporting
framework, or are misstated; and
• Disclosures in the financial statements about the estimates:

– Are in accordance with the requirements of the applicable financial reporting framework, and

– Adequately disclose their estimation uncertainty, if they give rise to signifi cant risks.

Written Representations
The auditor would obtain written representations from management regarding the reasonableness of
signifi cant assumptions.
Also consider obtaining a written representation as to whether the assumptions appropriately refl ect

management’s intent and ability to carry out specific courses of action relevant to any fair value
measurements or disclosures.

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