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

Zephyr Ltd, an audit client, reports an inventory provision that is an accounting estimate. During risk assessment under ISA 540 (Revised), the audit team of Kestrel & Co is deciding what to consider about the estimate. Which matter is the auditor specifically required to consider when identifying and assessing the risks of material misstatement for the estimate?

The auditor must consider estimation uncertainty, subjectivity and complexity when assessing the risks of material misstatement for an accounting estimate. These inherent risk factors determine how much susceptibility to misstatement the estimate carries, so they drive the nature and extent of the further audit procedures required.

  1. AEstimation uncertainty, subjectivity and complexity inherent in the estimateCorrect
  2. BOnly the arithmetical accuracy of the provision calculation
  3. CWhether the estimate was approved by the audit committee chair
  4. DWhether the estimate was the same amount as in the prior year

Explanation

ISA 540 (Revised) requires the auditor to assess inherent risk by considering estimation uncertainty, complexity and subjectivity, along with other inherent risk factors. Arithmetic accuracy alone is too narrow, and prior-year equality or committee approval does not determine risk of misstatement.

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