Page 64 - CA Final Audit Titanium Full Book. (With Cover Pages)

CA Ravi Taori
individual accounting estimates.
2B. Bias Indicators: The SA provides indicators of potential management bias.

(CNO-SA540.040) Nature of Accounting Estimates (Shortcut ABC of Estimates with Info ER)
Definition
1A. Accounting Estimates: Certain items in financial statements cannot be precisely measured and must be
estimated. These are referred to as accounting estimates.
Reasons
1B. Business Uncertainties: Inherent uncertainties in business activities necessitate the estimation of some
financial statement items.
1C. Characteristics and Measurement: The specific attributes of an asset, liability, or equity component, as
well as the measurement method prescribed by the financial reporting framework, may necessitate the
estimation of certain financial statement items.
Risk Related
2A. Information Variance: The accuracy of these estimates can vary widely based on the information available
to management when making them.
2B. Estimation Uncertainty: This variability in information leads to a degree of uncertainty in the estimates.
2C. Risk of Misstatement: The level of estimation uncertainty directly impacts the risk of material
misstatement in the financial statements.
Estimates with Low Estimation Uncertainty & Low RMM (Examples)
(Shortcut: Routine SONG)
Routine Transactions: Accounting estimates that are frequently updated due to their relation to routine
transactions.
Simple Measurement Method: Fair value accounting estimates where the prescribed measurement method
by the financial reporting framework is simple and easily applied to the asset or liability requiring fair value
measurement.
Observable Data: Accounting estimates derived from readily available data (Active market), such as published
interest rates or exchange-traded security prices. This data is often referred to as "observable" in the context of
fair value accounting estimates.
Non-Complex Business Activities: Accounting estimates in entities engaged in non-complex business
activities.
Generally Accepted Models: Fair value accounting estimates where the model used for measurement is well-
known or generally accepted, assuming that the model's inputs or assumptions are observable.
Estimates with High Estimation Uncertainty & High RMM (Examples)
(Shortcut: Lazy SON)

Litigation Outcomes: Accounting estimates may have high estimation uncertainty when they relate to the
outcomes of litigation.
Specialized Models: Fair value accounting estimates that use highly specialized, entity-developed models or
have assumptions or inputs that cannot be observed in the marketplace can lead to high estimation
uncertainty.
Ongoing Negotiations on Revision of Wage Agreement: Accounting estimates in cases of Wage Revision
Agreements, where negotiations with Trade Unions are ongoing or government approval is awaited, can lead to
high estimation uncertainty.
Non-Public Derivatives: Fair value accounting estimates for derivative financial instruments that are not
publicly traded can also have high estimation uncertainty.

The Degree of Estimation Uncertainty
(Shortcut: MNS)
Methodology: The uncertainty can also depend on the extent to which a generally accepted method is used to
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