<img height="1" width="1" style="display:none;" alt="" src="https://px.ads.linkedin.com/collect/?pid=938154&amp;fmt=gif">

How Accounting Estimates Are Audited



Measuring accounting estimates involves some level of uncertainty. As a result, accounting estimates — such as allowances for doubtful accounts, impairments of long-lived assets, and valuations of financial and nonfinancial assets — require extra attention from auditors.

Here’s a closer look at the current standards for auditing estimates and examples of specialists who may be hired to provide independent estimates.

Applying the Auditing Standards

Some estimates may be easily determinable, but many are inherently subjective or complex. Auditing standards generally provide three approaches for substantively testing fair value measurements and other accounting estimates:

  1. Testing Management’s Process. Auditors evaluate the reasonableness and consistency of management’s assumptions, as well as test whether the underlying data is complete, accurate and relevant.
  2. Developing an Independent Estimate. Using management’s assumptions (or alternative assumptions), auditors come up with an estimate to compare to what’s reported on the internally prepared financial statements.
  3. Reviewing Subsequent Events or Transactions. The reasonableness of estimates can be gauged by looking at events or transactions that happen after the balance sheet date but before the date of the auditor’s report.

Independence guidelines generally prohibit auditors from providing certain services for their public audit clients. To obtain independent accounting estimates, companies often turn to outside specialists.

(Download Video Transcript)

Relying on Specialists

Examples of specialists used to prepare accounting estimates include:

  • Actuaries to determine employee benefit obligations,
  • Engineers to determine obligations regarding environmental remediation,
  • Appraisers to determine the value of intangible assets or real estate,
  • Geologists to estimate mineral deposits or oil reserves for mining and energy companies, and
  • Lawyers to forecast the potential losses from a legal proceeding.

Auditors often help direct these specialists to minimize the risk of misstatement, especially when specialists aren’t subject to the audit firm’s training, resources and quality control systems.

Finding Help

Business transactions have grown more complicated in recent years, leading companies to make a significant number of subjective estimates and rely more heavily on outside parties to bring in specialized knowledge.

We understand how to apply the auditing standards to accounting estimates made in-house and/or using outside specialists. Contact us for additional information.

Request More Information

© 2016

Share this post:


Biz Tip Topic Expert: Rebecca Muehl, CPA

Rebecca Muehl, CPA

Rebecca is a Senior Manager with SVA Certified Public Accountants specializing in assurance services including audits, reviews, compilations, and agreed-upon procedures engagements for closely-held businesses of varying sizes.

Awards and Affiliations

milwaukee-business-journal-largest-milwaukee-area-accounting-firms-2022-logo2
sva-certified-public-accountant-affiliation-wicpa
SVA_2023_Certification_Badge-white
accountingtoday-white
sva-award-logo-inside-public-accounting-top-200-firms-2023
sva-certified-public-accountant-affiliation-m-power-business-champion-program
sva-certified-public-accountant-affiliation-aicap-ebpaqc-member
2023ECA_Finalist-white
sva-certified-public-accountant-affiliation-aicpa

Locations

Madison, WI
1221 John Q Hammons Dr, Suite 100
Madison, WI 53717
(608) 831-8181

Milwaukee, WI
18650 W. Corporate Drive, Suite 200
Brookfield, WI 53045
(262) 641-6888

Colorado Springs, CO
1880 Office Club Pointe, Suite 128
Colorado Springs, CO 80920
(719) 413-5551

SVA BBB Business Review Man Standing

Contact

(888) 574-4782
info@SVAaccountants.com
BizTips

Are you in the know on the latest business trends, tips, strategies, and tax implications? SVA’s Biz Tips are quick reads on timely information sent to you as soon as they are published.

Connect With Us

Copyright © 2024 SVA Certified Public Accountants | Privacy Policy | Cookie Policy | CCPA