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CS Professional · Compliance Management, Audit and Due Diligence · Forming an Opinion and Reporting

The auditor of Sahyadri Foods Ltd is evaluating whether the financial statements are prepared in accordance with the framework. Management has repeatedly chosen estimates that each fall at the favourable end of a reasonable range, increasing profit. Under SA 700 (Revised), what should the auditor's evaluation include?

The evaluation must include consideration of the qualitative aspects of the entity's accounting practices, including indicators of possible bias in management's judgments. A consistent pattern of favourable estimates is such an indicator and cannot be ignored merely because each estimate seems individually reasonable.

  1. AConsideration of the qualitative aspects of the entity's accounting practices, including indicators of possible bias in management's judgmentsCorrect
  2. BOnly a check of arithmetical accuracy, since estimates are management's responsibility
  3. COnly a check of whether the estimates are within the materiality threshold individually
  4. DIgnoring the pattern because each estimate is individually reasonable

Explanation

SA 700 (Revised) says the evaluation shall include consideration of the qualitative aspects of the entity's accounting practices, including indicators of possible bias in management's judgments. A consistent one-directional pattern of estimates is such an indicator, so ignoring it because each estimate looks reasonable is wrong.

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