Explain why the audit of accounting estimate is a difficult area for the auditor?

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Riaz Ahammed
11-April-2015

Auditing

Question added by Frank Mwansa , ACCOUNTING LECTURER , FREELANCER
Date Posted: 2016/03/11

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by Abdul Khalique , Finance Manager , Value Real Estate & Construction

Because of the uncertainties inherent in accounting estimates, evaluating differences can be more difficult than in other areas of the audit. When there is a difference between the auditors' estimate of the amount best supported by the available audit evidence and the estimated amount included in the financial statements, auditors would determine whether such a difference requires adjustment. If the difference is reasonable, for example, because the amount in the financial statements falls within a range of acceptable results, it may not require adjustment. However, if the auditors believe the difference is unreasonable, management would be requested to revise the estimate. Auditors also consider whether individual differences which initially were accepted as reasonable are biased in one direction, so that, taken in aggregate, they may have a material effect on the financial statements. In such circumstances, auditors evaluate the accounting estimates on an overall basis in determining whether the differences are reasonable and whether to request management to adjust the estimates.

If the auditors consider that the estimates need to be adjusted and management refuses to revise them, the differences would be considered misstatements and would be considered with all other misstatements identified in the course of the audit in assessing whether the effect on the financial statements is material. Where the auditors consider that the effect on the financial statements is material, they would consider whether the auditors' report would be qualified for disagreement, or whether they would express an adverse opinion, in accordance with Auditors' reports on financial statements.

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