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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Evidence and testing considerations

When responding to assessed risks for a significant accounting estimate at Barrow Foods, the audit senior lists possible approaches. Under ISA 540 (Revised), which is one of the approaches the auditor may take when the auditor's response involves developing a point estimate or range?

The auditor may develop its own point estimate or range and compare it with management's point estimate. This is a recognised response under ISA 540 (Revised), alongside testing how management made the estimate and considering events up to the report date. Representations alone are never sufficient evidence.

  1. ADevelop an auditor's point estimate or range to evaluate management's point estimateCorrect
  2. BUse management's point estimate as the auditor's range without testing
  3. CTreat any difference from management's estimate as a misstatement automatically
  4. DRely solely on management's representation letter

Explanation

ISA 540 (Revised) permits the auditor to develop a point estimate or range to evaluate management's point estimate. Simply adopting management's figure lacks independence, and a representation letter alone is not sufficient appropriate evidence. Where a range is used, only the amount outside the range is treated as misstatement, not any difference.

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