PCAOB Issues Audit Focus on Auditing Accounting Estimates

Brought to you by SA Accounting Academy: The Public Company Accounting Oversight Board (PCAOB) has published a new edition of its Audit Focus series, providing guidance on auditing accounting estimates to assist smaller audit firms in addressing complex measurement uncertainties.

In accordance with PCAOB auditing standards, accounting estimates are identified as areas of significant risk due to their subjective nature and susceptibility to management bias. The Audit Focus: Auditing Accounting Estimates publication highlights key regulatory reminders and staff perspectives on common deficiencies observed during inspections.

The PCAOB inspection staff continues to identify recurring deficiencies in the testing of accounting estimates, which often substantially affect a company’s financial position and results of operations. These deficiencies include:

• Failure to identify significant assumptions used by the company to determine an accounting estimate;
• Inadequate testing of the data and underlying inputs used in the development of estimates; and
• Insufficient evaluation of measurement uncertainty and potential management bias.

The resource provides auditors with reminders of the requirements under AS 2501: Auditing Accounting Estimates, Including Fair Value Measurements. It emphasizes that because estimates often involve subjective assumptions, auditors must exercise professional skepticism and perform substantive procedures that are responsive to the risks of material misstatement.

Click here to download the PCAOB Audit Focus: Auditing Accounting Estimates.

What this means for you, your business, or your clients

• For yourself: You must enhance your technical knowledge of AS 2501 and related standards to ensure you can effectively identify and challenge significant assumptions made by management during the audit process.
• For your business: Smaller audit practices should review their internal audit programs and workpaper templates to ensure they explicitly require the documentation and testing of significant assumptions used in accounting estimates to avoid inspection findings.
• For your clients: Clients must be prepared to provide more robust evidence and documented rationales for the assumptions underlying their accounting estimates, as auditors face increased regulatory pressure to scrutinize these areas for management bias.

Originally published at https://accountingacademy.co.za/news/read/pcaob-audit-focus-auditing-accounting-estimates