Page 77 - CA Final PARAM Digital Book.

Fair value accounting estimates where the model used • (E.g., Equity share valuation through
to measure the accounting estimate is well known or net asset method is very simple and
Generally accepted, provided that the assumptions or well-known method)
inputs to the model are observable.

Accounting estimates derived from data that is Readily • (E.g., Average PE ratio was

available, such as published interest rate data or computed for retail industry from
exchange-traded prices of securities. Such data may be share prices and earnings of listed
referred to as “observable” in the context of a fair value companies and same was used to
accounting estimate. value a private company shares in
retail industry) (Investment)

Authors Note

• Shortcut to remember - FMCG ki Report mine bahut kam uncertainty hai
• Examples are provided for better understanding of the points.

Estimates (Risk Assessment) Old Course – (M11E, M12M, N12R, M16M, SM17, PM17, M18M,
QNO TITANIUM CNO—SA540.120
81.000 SM21, M21M, M22E)
New Course – (SM23)
While auditing Z Ltd., you observe certain material financial statement assertions have been based on
estimates made by the management. As the auditor how do you minimize the risk of material
misstatements?
OR
CA Harry is appointed as a Statutory Auditor of Delist Limited for the financial year 2021-22. M/s Delist
Limited is a listed entity at National Stock Exchange and the financial statements are to be drawn up in

compliance with Ind AS. M/s Delist Limited made certain fair value accounting estimates on complex
financial instruments which are not traded in an active and open market. CA Harry is concerned with
identification and assessment of the risks of material misstatement for accounting estimates. Guide him
with regard to the estimation making process adopted by management with reference to the relevant
Standard on Auditing.

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
➢ Risk Assessment Procedures: - In risk assessment procedure we obtain understanding which
will become basis of identifying and assessing risk
As per SA 540, the auditor shall obtain an understanding of the following in order to provide a basis
for the identification and assessment of the risks of material misstatements for accounting
estimates:

➢ Important Overall Understandings: -
How Mgt Identifies TEC which need accounting estimates to be recognised, disclosed
or need to revise existing estimates / Requirements of applicable FRF
• The requirements of the applicable financial reporting framework relevant to the
accounting estimates, including related disclosures.
• How Management identifies those transactions, events and conditions that may
give rise to the need for accounting estimates to be recognised or disclosed, in
the financial statements. In obtaining this understanding, the auditor shall make
inquiries of management about changes in circumstances that may give rise to
new, or the need to revise existing, accounting estimates.

➢ Estimation Process Including: -
Relevant Controls / Expert / Methods Including Model / Assumptions
➢ Additional Information: -
Changes from Prior Period / Management’s Assessment of Estimation Uncertainty

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