How should auditors evaluate management's estimates?

How should auditors evaluate management's estimates?

• A. Review assumptions, corroborate with evidence, test reasonableness, and consider bias and subsequent events
• B. Accept management's estimates without testing
• C. Only check arithmetic accuracy
• D. Rely on internal audit reports

Answer: (A)

Auditors must critically evaluate management's estimates by examining the underlying assumptions, corroborating data, and the methods used, then test whether those estimates are reasonable and free from bias, also taking into account events after the reporting date. This involves reviewing how the estimates were developed, the significant judgment involved, and whether the inputs reflect current conditions and risks. The auditor corroborates management's data with independent evidence, recalculates or tests the calculations, and performs sensitivity analyses to see how changes in key assumptions would affect the outcomes. Additionally, the auditor considers whether there could be bias in management's judgments and whether any subsequent events could require adjustments or disclosures. This comprehensive approach provides a sound basis for assessing whether the estimates are fair and properly supported, rather than simply accepting them, checking only arithmetic, or relying solely on internal audit reports.

Auditors must critically evaluate management's estimates by examining the underlying assumptions, corroborating data, and the methods used, then test whether those estimates are reasonable and free from bias, also taking into account events after the reporting date. This involves reviewing how the estimates were developed, the significant judgment involved, and whether the inputs reflect current conditions and risks. The auditor corroborates management's data with independent evidence, recalculates or tests the calculations, and performs sensitivity analyses to see how changes in key assumptions would affect the outcomes. Additionally, the auditor considers whether there could be bias in management's judgments and whether any subsequent events could require adjustments or disclosures. This comprehensive approach provides a sound basis for assessing whether the estimates are fair and properly supported, rather than simply accepting them, checking only arithmetic, or relying solely on internal audit reports.