ACCOUNTING ESTIMATE
Accounting Estimate
• Accounting estimate – An approximation of a monetary amount in the absence of a precise means of measurement. This term is used for an amount measured at fair value where there is estimation uncertainty, as well as for other amounts that require estimation.
PSA 540
9 The auditor shall review the outcome of accounting estimates included the prior period financial statements, or, where applicable, their subsequent re-estimation for the purpose of the current period. The nature and extent of the auditor’s review takes account of the nature of the accounting estimates, and whether the information obtained from the review would be relevant to identifying and assessing risks of material misstatement of accounting estimates made in the current period financial statements. However, the review is not intended to call into question the judgments made in the prior periods that were based on information available at the time.
A42
The auditor may judge that a more detailed review is required for those accounting estimates that were identified during the prior period audit as having high estimation uncertainty, or for those accounting estimates that have changed significantly from the prior period.
PSA 540
Par A6
Additional examples of situations where accounting estimates, other than fair value accounting estimates, may be required include:
• Allowance for doubtful accounts.
• Inventory obsolescence.
• Warranty obligations.
• Depreciation method or asset useful life.
• Provision against the carrying amount of an investment where there is uncertainty regarding its recoverability.
• Outcome of long term contracts.
• Costs arising from litigation settlements and judgments.
• Warranty expense is the cost that a business expects to or has already incurred for the repair or replacement of goods that it has sold. The total amount of warranty expense is limited by the warranty period that a business typically allows. After the warranty period for
a
• Accounting estimate – An approximation of a monetary amount in the absence of a precise means of measurement. This term is used for an amount measured at fair value where there is estimation uncertainty, as well as for other amounts that require estimation.
PSA 540
9 The auditor shall review the outcome of accounting estimates included the prior period financial statements, or, where applicable, their subsequent re-estimation for the purpose of the current period. The nature and extent of the auditor’s review takes account of the nature of the accounting estimates, and whether the information obtained from the review would be relevant to identifying and assessing risks of material misstatement of accounting estimates made in the current period financial statements. However, the review is not intended to call into question the judgments made in the prior periods that were based on information available at the time.
A42
The auditor may judge that a more detailed review is required for those accounting estimates that were identified during the prior period audit as having high estimation uncertainty, or for those accounting estimates that have changed significantly from the prior period.
PSA 540
Par A6
Additional examples of situations where accounting estimates, other than fair value accounting estimates, may be required include:
• Allowance for doubtful accounts.
• Inventory obsolescence.
• Warranty obligations.
• Depreciation method or asset useful life.
• Provision against the carrying amount of an investment where there is uncertainty regarding its recoverability.
• Outcome of long term contracts.
• Costs arising from litigation settlements and judgments.
• Warranty expense is the cost that a business expects to or has already incurred for the repair or replacement of goods that it has sold. The total amount of warranty expense is limited by the warranty period that a business typically allows. After the warranty period for
a