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 warranty liabilities. Which of the following audit procedures would provide the most persuasive evidence regarding the reasonableness of these estimates?
- AObtaining written representations from management confirming the reasonableness of the estimates.
- BDeveloping an independent estimate and comparing it to the client's estimate.
- CInquiring of management about the methods and assumptions used in developing the estimates.
- DComparing the client's estimates to industry benchmarks and prior period actual results.
Show answer & explanationAnswer & explanation
Correct answer: B. Developing an independent estimate and comparing it to the client's estimate.
Developing an independent estimate provides the auditor with the most objective and persuasive evidence because it involves the auditor using their own judgment, data, and assumptions to arrive at a comparable figure, which can then be directly contrasted with management's estimate.
Why the other options are wrong
- A. Written representations confirm management's responsibility and assertions but are not considered sufficient persuasive audit evidence on their own; they corroborate other procedures.
- C. Inquiry is a starting point but is generally not sufficient persuasive evidence on its own, as it relies on management's explanations.
- D. Comparing to benchmarks and prior results is a useful analytical procedure, but it may not fully capture the client's specific circumstances or be as robust as an independently developed estimate.
Auditing Accounting Estimates
Auditing accounting estimates involves evaluating the reasonableness of management's judgments and assumptions, with developing an independent estimate being a highly persuasive procedure.
- Estimates involve significant judgment and uncertainty.
- Auditor must gather evidence on methods, data, and assumptions.
- Independent estimates provide strong corroboration or challenge.
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