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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Audit procedures and obtaining evidence

Kestrel Group's draft financial statements include a provision estimate of $4.0m. The auditor's range of reasonable outcomes, supported by sufficient appropriate evidence, is $3.2m to $3.8m. Management has not changed its estimate. Which conclusion is most appropriate under ISA 540 (Revised)?

The misstatement is at least $0.2m, the gap between management's $4.0m and the nearest end of the auditor's supported range, $3.8m. The midpoint is irrelevant because any point in the range is acceptable, and the amount is then evaluated with other misstatements against materiality.

  1. AThe estimate is reasonable because it is within a tolerable difference of the auditor's range midpoint of $3.5m
  2. BThe estimate is a misstatement of at least $0.2m, being the difference between management's point estimate and the nearest end of the auditor's range, to be evaluated with other misstatementsCorrect
  3. CThe estimate is a misstatement of $0.5m, being the difference from the midpoint of the range
  4. DNo misstatement exists because estimates are inherently uncertain

Explanation

Where the auditor's range is supported by sufficient appropriate evidence and management's point estimate lies outside it, the misstatement is at least the difference between the point estimate and the nearest point of the range: $4.0m - $3.8m = $0.2m. Using the midpoint ($0.5m) is incorrect because any point within the range is acceptable. Uncertainty does not eliminate the misstatement.

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