Page 79 - CA Final PARAM Digital Book.

Answer In the given case, HK & Co. was appointed as an auditor of GSB Ltd., operating in Telecom sector. GSB
Ltd paid the license fee on its core business revenue whereas Govt required it to pay on non-core
business receipts as well. Consequently, the amount of provision was of such a huge amount that GSB
Ltd.’s profit and loss account reflected a lo ss due to that provision. As an auditor evaluation would be
done as under:

For accounting estimates that give rise to significant risks, in addition to other substantive procedures
performed to meet the requirements of SA 330, the auditor shall evaluate the following:

(i) How management has considered alternative assumptions or outcomes, and why it has rejected
them, or how management has otherwise addressed estimation uncertainty in making the
accounting estimate.

(ii) Whether the significant assumptions used by management are reasonable.

(iii) Where relevant to the reasonableness of the significant assumptions used by management or
the appropriate application of the applicable financial reporting framework, management’s
intent to carry out specific courses of action and its ability to do so.

(iv) (iv) If, in the auditor’s judgment, management has not adequately addressed the effects of
estimation uncertainty on the accounting estimates that give rise to significant risks, the auditor
shall, if considered necessary, develop a range with which to evaluate the reasonableness of the
accounting estimate.

QNO Inquiries of management about changes in circumstances Old Course – (M23E)
81.050 TITANIUM CNO-- SA 540.120

M/s ABC Limited is engaged in the business of construction of infrastructure and housing projects. While
preparing the financial statements for the year ended 31.03.2023, management has made various
accounting estimates and confirmed to the auditor that all necessary accounting estimates have been
recognised, measured and disclosed in the financial statements are in accordance with the applicable
financial reporting framework. The auditor during the course of audit observed some changed
circumstances giving rise to the need for an accounting estimate. Inquiries of same were sought from the
management. Can you list down some circumstances, change of which will result in inquiries from the
management?
Answer As per SA 540, “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related
Disclosures”, inquiries of management about changes in circumstances may include, for example, inquiries
about whether:

• The entity has engaged in new types of transactions that may give rise to accounting estimates.
• Terms of transactions that gave rise to accounting estimates have changed.
• Accounting policies relating to accounting estimates have changed, as a result of changes to the
requirements of the applicable financial reporting framework or otherwise.
• Regulatory or other changes outside the control of management have occurred that may require
management to revise, or make new, accounting estimates.
• New conditions or events have occurred that may give rise to the need for new or revised accounting
estimates.

During the audit, the auditor may identify transactions, events and conditions that give rise to the need for
accounting estimates that management failed to identify. SA 315 deals with circumstances where the auditor
identifies risks of material misstatement that management failed to identify, including determining whether
there is a significant deficiency in internal control with regard to the entity’s risk assessment processes.

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