Aas Accounting Estimates

In: Business and Management

Submitted By nikfatin
Words 648
Pages 3
General Ideas
An accounting estimate is an approximation of a financial statement element, item, or account in the absence of exact measurement. In other words, it refers to items/account balances that are subject to management judgments, appraisals and management assumptions. Accounting estimates are made based on management’s knowledge and experience of past and current events. Meaning to say, management is responsible for establishing the process and controls for preparing accounting estimates. Accounting estimates should be made properly in reasonable manner since it may have a significant affect on a company’s financial statements. Examples of accounting estimates include periodic depreciation, the provision for bad debts, net realizable value of inventory, revenues from contracts accounted for by the percentage-of-completion method, and pension and warranty expenses.
Specific Issue: Estimates
The specific issue regarding estimates is that auditors have responsibility to review and assess the appropriateness of the client’s significant accounting estimates. As the auditor completes the audit, review activities are conducted to ensure that the client’s financial statements are materially correct and to ensure high audit quality. The auditor is responsible for evaluating the reasonableness of accounting estimates made by management in the context of the financial statements taken as a whole.
Since estimates are based on subjective as well as objective factors, it may be difficult for management to establish controls over them. Even when management’s estimation process involves competent personnel using relevant and reliable data, there is potential for bias in the subjective factors. Hence, during planning and performing procedures to evaluate accounting estimates, the auditor should consider the issue with an attitude of professional skepticism for both the…...

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