Page 67 - CA Final Audit Titanium Full Book. (With Cover Pages)

CA Ravi Taori
statements are adequate.
Important Definition:
Accounting Estimate: An accounting estimate is an approximation of a monetary amount when precise
measurement is not possible. This includes amounts measured at fair value with estimation uncertainty and
other amounts that require estimation. However, this SA addresses only accounting estimates involving
measurement at fair value, as the term ‘fair value accounting estimate’ is used.
Auditor's-Estimate: The auditor's point estimate or range is the amount or range of amounts derived from
audit evidence used to evaluate management's point estimate.
Bias: Management bias refers to a lack of neutrality by management in preparing and presenting information.
Management Point Estimate: Management's point estimate is the amount chosen by management for
recognition or disclosure in the financial statements as an accounting estimate.
Estimation Uncertainty: Estimation uncertainty is the inherent lack of precision in the measurement of an
accounting estimate and related disclosures. The outcome of an accounting estimate is the actual monetary
amount resulting from the resolution of the underlying transactions, events, or conditions addressed by the
accounting estimate.
Outcome of an accounting estimate: The actual monetary amount resulting from the resolution of the
underlying transactions, events, or conditions addressed by the accounting estimate.

Auditor’s Responsibility /Audit Procedures
(CNO-SA540.120) Step 1: - Risk assessment procedures and related activities for accounting estimates:
1A. Understanding as per SA 315: The auditor conducts risk assessment procedures and related activities to
understand the entity and its environment, including its internal control, as per SA 315. This understanding
forms the basis for identifying and assessing the risks of material misstatement for accounting estimates.
1B. Understand FRF: The auditor needs to understand the requirements of the applicable financial reporting
framework relevant to accounting estimates, including related disclosures.
1C. Understand Management’s Identification Process: The auditor must understand how management
identifies transactions, events, and conditions that may necessitate the recognition or disclosure of accounting
estimates in the financial statements.
2. Inquiries about Changes: The auditor should inquire about any changes in circumstances that may require
new accounting estimates or revisions to existing ones.
3. Importance of Assessing Estimates: The assessment of accounting estimates is crucial as it directly affects
the auditor's final decision in forming an opinion. The auditor's conclusion heavily depends on the
understanding and assessment of the above points.
Obtaining an Understanding of How Management Identifies the Need for Accounting Estimates:
Management Responsibility
1A. Identifying TEC: Management is responsible for determining whether a transaction, event, or condition
necessitates an accounting estimate while preparing the financial statements.
1B. Recognition, Measurement, and Disclosure: Management must ensure that all necessary accounting
estimates have been recognized, measured, and disclosed in the financial statements.
1C. Compliance with FRF: All these processes should be in accordance with the applicable financial
reporting framework.
Auditor Responsibility
2A. Understanding as per RAP: The auditor's understanding of the entity and its environment, obtained
through risk assessment procedures and other audit evidence, assists in identifying circumstances or changes
that may necessitate an accounting estimate.
2B. Changes in circumstances:
The auditor may inquire about changes in circumstances, such as
• New types of transactions,
• Changes in terms of previous transactions

www.auditguru.in 3.23