CPA Exam — AUDPerforming Further Procedures and Obtaining EvidenceHard
An auditor is reviewing a client's significant accounting estimates, such as the allowance for doubtful accounts and inventory obsolescence. Which of the following approaches to auditing accounting estimates would generally be considered the most effective and provide the highest level of assurance?
- AObtaining management's written representations regarding the reasonableness of the estimate.
- BDeveloping an independent expectation or point estimate for comparison.
- CReviewing subsequent events or transactions related to the estimate.
- DReviewing and testing the client's process for developing the estimate.
Show answer & explanationAnswer & explanation
Correct answer: B. Developing an independent expectation or point estimate for comparison.
Developing an independent expectation or point estimate provides the auditor with their own objective benchmark to compare against management's estimate. This approach, when properly executed, offers the highest level of assurance because it involves the auditor's direct knowledge and judgment, rather than solely relying on or testing management's work.
Why the other options are wrong
- A. Written representations are required but are the least persuasive form of evidence, as they are management's assertions and not independent corroboration.
- C. Reviewing subsequent events can provide highly persuasive evidence for *some* estimates (e.g., subsequent cash receipts for A/R), but it's not applicable to all estimates and might not cover the full period or all factors.
- D. Testing management's process is a valid approach, but it still relies on the effectiveness of management's process. Developing an independent estimate is generally more robust.
Auditing Accounting Estimates Approaches
Methods auditors use to obtain sufficient appropriate evidence regarding the reasonableness of management's accounting estimates.
- Three main approaches: test management's process, develop independent estimate, review subsequent events.
- Independent estimate generally provides highest assurance.
- All approaches may be used in combination.
Memory trick: Independent estimate gives the best audit fate.