Page 66 - CA Final Audit Titanium Full Book. (With Cover Pages)

CA Ravi Taori
that might have significantly affected management's actions or the assumptions used by management.

(CNO-SA540.060) Management Bias
Background
1A. Neutrality is Important: Financial reporting frameworks stress the importance of neutrality, meaning the
absence of bias. This ensures that financial statements provide accurate and unbiased information to users.
1B. Influence of Management: Accounting estimates, due to their inherent imprecision, can be influenced by
management judgment. This judgment can introduce unintentional or intentional bias, often driven by
motivations to achieve desired outcomes.
1C. Degree of Subjectivity: The degree of subjectivity involved in making an accounting estimate determines
its susceptibility to management bias. Subjective decisions required in accounting estimates inherently carry
the risk of both unintentional and intentional management bias.

How to Deal
2A. Prior Period Indicators of possible management bias: Indicators of possible management bias identified
during prior audits influence the planning and risk identification of auditors in the current period. These prior
audit findings related to management bias assist auditors in assessing potential risks and planning their
activities accordingly.
2B. Addressing Bias: Recognizing and addressing management bias is crucial for ensuring the integrity and
reliability of financial statements. Auditors play a pivotal role in detecting and mitigating management bias to
maintain the credibility of financial reporting.
2C. Challenging to identify: Management bias in accounting estimates is challenging to identify when
examining individual accounts. It becomes apparent when considering groups of accounting estimates or all
accounting estimates, and detection may also occur over multiple accounting periods.

Types
3A. Unintentional Bias: Subjective judgments in accounting involve some degree of management bias.
However, this bias does not necessarily imply an intention to mislead financial statement users.
3B. Intentional Bias: When there is an intention to mislead, management bias becomes fraudulent.
Fraudulent management bias involves deliberate manipulation of financial statements.

(CNO-SA540.080) The Measurement Objective of Accounting Estimates
1A. Measurement Objective Differs: The measurement objective of accounting estimates depends on the
financial reporting framework and the financial item.
1B. Forecast: Some accounting estimates aim to forecast the outcome of future transactions or events.
1C. Fair Value: Other estimates, especially fair value accounting estimates, are based on the current value of a
transaction or item given current conditions, like the estimated market price for an asset or liability.
1D. Fair Value Definition: The financial reporting framework might necessitate fair value measurement using
a hypothetical current transaction between informed, willing participants in an arm’s length transaction.
2A. Difference in Outcome: A difference between the actual outcome of an estimate and the amount
originally recognized doesn't imply a financial statement misstatement.
2B. Events After Balance Sheet Date: For fair value accounting estimates, observed outcomes can be
influenced by events after the measurement date for the financial statements.

(CNO-SA540.100) Objective of SA 540
Estimates are Reasonable: The auditor aims to gather enough relevant audit evidence to determine if the
accounting estimates, including those related to fair value, whether recognised or disclosed in the financial
statements, are reasonable.
Disclosures are Adequate: The auditor's objective is to assess if the related disclosures in the financial
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