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

When auditing management's accounting estimates, the auditor performs a retrospective review of prior-year estimates. What is the primary purpose of this procedure under ISA 540 (Revised)?

The retrospective review compares prior estimates with actual outcomes to judge how well management's estimation process worked and whether bias or high estimation uncertainty exists. It informs risk assessment but does not replace testing current-year assumptions or data.

  1. ATo obtain information about the effectiveness of management's prior estimation process, assisting in assessing estimation uncertainty and possible management biasCorrect
  2. BTo confirm that last year's financial statements should be reissued
  3. CTo replace the need for testing current-year assumptions
  4. DTo determine the auditor's fee for the current year

Explanation

ISA 540 (Revised) requires the auditor to review the outcome of prior-period estimates, or their subsequent re-estimation, to inform risk assessment on the effectiveness of management's process and to indicate possible bias. It does not replace testing current assumptions, and it has nothing to do with reissuing statements or fees.

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