ACCA Strategic Professional · Advanced Audit and Assurance (International) · Evidence and testing considerations
Auditor Naledi Co audits Tarn Industries, which values a Level 3 unquoted equity holding using a discounted cash flow model with an unobservable growth rate. The auditor develops a range of reasonable values of 8.0 million to 9.0 million. Management's point estimate is 9.6 million, and the auditor concludes the range is supported by sufficient appropriate evidence. How should the auditor treat the difference under ISA 540 (Revised)?
The misstatement is 0.6 million, being the excess of management's 9.6 million over the nearest point of the auditor's range, 9.0 million. The auditor measures against the closest end of the range, not the far end, and Level 3 classification does not remove the requirement to evaluate it.
- ATreat 0.6 million, the amount by which management's estimate exceeds the top of the range, as a misstatementCorrect
- BTreat 1.6 million, the difference from the bottom of the range, as a misstatement
- CTreat no amount as a misstatement because the item is Level 3
- DTreat 0.6 million as a misstatement only if management agrees
Explanation
If management's point estimate lies outside the auditor's range, the misstatement is at least the difference between management's estimate and the nearest point of the auditor's range: 9.6 - 9.0 = 0.6 million. Using the bottom of the range (1.6 million) uses the wrong end. Level 3 status increases risk but does not excuse misstatement, and management's agreement is not required for the auditor to conclude.
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