Page 81 - CA Final PARAM Digital Book.

QNO Review of Prior period estimates Old Course – (M19R, SM21, N21M, M23E)
81.200 TITANIUM CNO—SA540.120 New Course--(SM23)
BETA Ltd is engaged in the Construction business since year 2001. The auditor understands that a thorough
construction estimate is vital to the viability of any construction business and requested the information
related to financing and operating estimated costs from the management to review the outcome of
accounting estimates included in the prior period financial statements and their subsequent re-estimation
for the purpose of current period.

The management refused to provide the information to the auditor as it believed that the judgments and
estimates made in the prior periods were based on the information available at that time, and the review
of the prior period information should not be done by the auditor in the current financial year. With
reference to the relevant SA, comment on whether the contention of management is correct or not.
OR
A Pvt Ltd is engaged in the business of real estate. The auditor of the company requested the information
from the management to review the outcome of accounting estimates (like estimated costs considered
for percentage completion etc) included in the prior period financial statements and their subsequent re-
estimation for the purpose of the current period.
The management has refused the information to the auditor saying that the review of prior period
information should not be done by the auditor. Please advise.
Answer ➢ Mandatory to review outcome of prior period estimates
As per SA 540, “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and

Related Disclosures”, the auditor shall review the outcome of accounting estimates included in the
prior period financial statements, or, where applicable, their subsequent re-estimation for the
purpose of the current period. The nature and extent of the auditor’s review takes account of the
nature of the accounting estimates, and whether the information obtained from the review would
be relevant to identifying and assessing risks of material misstatement of accounting estimates
made in the current period financial statements.

➢ Benefits of Reviewing outcome of Prior Period Estimates
The outcome of an accounting estimate will often differ from the accounting estimate recognised in
the prior period financial statements. By performing risk assessment procedures to identify and
understand the reasons for such differences, the auditor may obtain:

Information regarding the effectiveness of management’s prior period estimation process,
from which the auditor can judge the likely effectiveness of management’s current process.
Audit evidence that is pertinent to the re-estimation, in the current period, of prior period
accounting estimates.
Audit evidence of matters, such as estimation uncertainty, that may be required to be
disclosed in the financial statements.
The review of prior period accounting estimates may also assist the auditor, in the current
period, in identifying circumstances or conditions that increase the susceptibility of
accounting estimates to, or indicate the presence of, possible management bias. The
auditor’s professional scepticism assists in identifying such circumstances or conditions and
in determining the nature, timing and extent of further audit procedures.

➢ Not Intended to question or doubt prior period estimates
However, the review is not intended to call into question the judgments made in the prior periods
that were based on information available at that time.

➢ Conclusion
In the given case, the management is not correct in refusing the relevant information to the auditor.

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