Page 76 - CA Final PARAM Digital Book.

Part 5 - SA 540

QNO Estimates (Estimates High Uncertainty) Old Course – (N16E)
80.000 TITANIUM CNO—SA540.040

With reference to the Standards on Auditing state the examples of accounting estimates that may have a
high estimation uncertainty

Answer Part I -- Relevant Standards & Laws
▪ SA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related

Disclosures
Part II -- Requirements of Relevant Standards & Laws
➢ High Estimation Uncertainty: -
If there is high estimation uncertainty in any estimate, then there is significant risk
As per SA 540, the auditor shall determine whether, in the auditor’s judgment, any of those
accounting estimates that have been identified as having high estimation uncertainty give rise to
significant risks.

High uncertainty in JR HR department
➢ Examples
Judgement Dependent / Review of Prior Period Estimates / Not Calculated using
Recognised Measurement Techniques / Highly Specialised Entity Developed Model
Examples of accounting estimates that may have high estimation uncertainty include the
following:
• Accounting estimates that are highly dependent upon judgment, for example,
judgments about the outcome of pending litigation or the amount and timing of
future cash flows dependent on uncertain events many years in the future.
• Accounting estimates where the results of the auditor’s review of similar
accounting estimates made in the prior period financial statements indicate a
substantial difference between the original accounting estimate and the actual
outcome.
• Accounting estimates that are not calculated using recognised measurement
techniques.
• Fair value accounting estimates for which a highly specialised entity-developed
model is used or for which there are no observable inputs.

QNO Estimates (Estimates low Uncertainty) Old Course – (N19E)
80.050 TITANIUM CNO—SA540.040
During the audit of Data Solutions Ltd., a listed company, your audit manager observed that several
estimates are made by the Company. He seeks your guidance to know areas of accounting estimates that
may give rise to lower level of risk of material misstatement. Guide him with examples.
Answer Part I -- Relevant Standards & Laws
▪ SA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related
Disclosures
Part II -- Requirements of Relevant Standards & Laws
➢ Examples of Low Estimation Uncertainty

FMCG ki Report mine bahut kam uncertainty hai
Accounting estimates that are Frequently made and • (Inventory Valuation)
updated because they relate to routine Transactions
Fair value accounting estimates where the Method of • (E.g., Ind AS 113 gives method of
measurement prescribed by the applicable financial computing fair value, if this is used
reporting framework is simple and applied easily to the then it is reliable)
asset or liability requiring measurement at fair value.
Accounting estimates arising in entities that engage in • (E.g., Depreciation of furniture in
business activities that are not Complex trading entity) (Fixed Asset)
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