Audit of Accounting Estimates

An accounting estimate is described in ISA 540 Audit of Accounting Estimates as 'an estimation of the amount of an item in the absent of a precise means of measurement'. Estimates involved amounts for accumulated depreciation, deferred tax; write downs to losses on long term contracts, total realizable value, and legal claims against the company, another contingent liabilities and other areas that a important element of judgment is necessary.

That items are inherently more risky than non-judgmental items and control risk is generally higher as these are non-routine transactions. So Management is responsible for creating approximation.

The audit of accounting guesses under ISA 540 includes the following three steps as:

1. Testing and Review of the process used through management to increase the estimate

This will include evaluation of the data and considerations of assumptions on such calculate is based. Management's calculates as to warranty costs, as an example should be based on past experience as to be in based and the level of claims. Management's calculates as to warranty costs, as an example should be based on past experience like to the level of claims and be in line along with the auditor's information of the business. It will include checking also of the mechanical calculations, comparison along with estimates made in prior times and consideration of management's approval process.

1. Use an independent calculation generated through the auditor to compare along with management's calculation
2. Review subsequent events that confirm the estimate

Wherever in the case of contingent liabilities, subsequent events 'crystallize' the liability there will be no requirement to review management's processes or requirement independent calculation. The auditor will usually test the estimation of the calculations, asses the assumptions created as the court is 90% probable to find in our favour compare estimates along with those made in previous duration and ensure about the estimate is in accordance along with the auditor's information of the business and the other audit evidence obtained.