Page 78 - CA Final PARAM Digital Book.

The estimation making process adopted by the management including-
Relevant controls.
• Whether management has used an expert?
• The method, including where applicable the model, used in making the
accounting estimates.
• The assumption underlying the accounting estimates.
• Whether there has been or ought to have been a change from the prior period in
the methods for making the accounting estimates, and if so, why; and
• Whether and, if so, how the management has assessed the effect of estimation
uncertainty.

QNO Obtaining Understanding of Assumptions Used for Determining Estimates Old Course – (M21E)
81.020 TITANIUM CNO—Unique
Assumptions are integral components of accounting estimates. State the matters that the auditor may
consider in obtaining an understanding of the assumptions underlying the accounting estimates with
reference to relevant SA’s.
Answer As per SA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and
Related Disclosures, how management makes the accounting estimates, and an understanding of the
data on which they are based, including assumptions underlying the accounting estimates.

Assumptions are integral components of accounting estimates. Matters that the auditor may consider
in obtaining an understanding of the assumptions underlying the accounting estimates include, for
example:
• The nature of the assumptions, including which of the assumptions are likely to be
significant assumptions.
• How management assesses whether the assumptions are relevant and complete (that
is, that all relevant variables have been taken into account).
• Where applicable, how management determines that the assumptions used are
internally consistent.
• Whether the assumptions relate to matters within the control of management (for
example, assumptions about the maintenance programs that may affect the estimation of an
asset’s useful life), and how they conform to the entity’s business plans and the external
environment, or to matters that are outside its control (for example, assumptions about
interest rates, mortality rates, potential judicial or regulatory actions, or the variability and the
timing of future cash flows).
• The nature and extent of documentation, if any, supporting the assumptions.

Assumptions may be made or identified by an expert to assist management in making the
accounting estimates. Such assumptions, when used by management, become
management’s assumptions.

QNO Further Audit Procedures Where Significant Risk is Identified. Old Course – (N20E, M22M, M23M)
81.050 TITANIUM CNO—SA540.120
M/s. HK & Co. was appointed as an auditor of GSB Limited, a company operating its business in telecom
sector. As per spectrum allocation agreement with Government, GSB Limited is required to pay certain
percentage of its annual revenue as license fee. GSB Limited paid the license fee on its core business for
last two years. At the end of third year, the communication was received from Government that it needs
to pay agreed percentage on its total revenues and not only on core business revenues. Matter was
disputed and went to court of law. On prudence basis, GSB Limited made a provision on estimated
business in its books of accounts of agreed percentage on non-core business receipts also. The amount of
provision was of such huge amount that the GSB Limited's profit and loss account for that quarter reflected
loss due to that provision. How you as an auditor can evaluate this accounting estimate which involves
significant risk and what if Management has not addressed the effects of estimation uncertainty on
provision made?

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