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

Zeta Ltd's finance director has estimated an expected credit loss allowance for trade receivables using a model. Under ISA 540 (Revised), which approach is the auditor required to consider when responding to the assessed risks of material misstatement for this accounting estimate?

The auditor must assess whether management applied the framework's requirements properly, covering the method, significant assumptions and data used for the estimate. Representations alone or checking arithmetic only are inadequate, and an independent estimate is just one possible response, not a mandatory one.

  1. ARely solely on management's representation that the model is appropriate
  2. BDetermine whether management has applied the applicable financial reporting framework's requirements appropriately, including method, data and assumptionsCorrect
  3. CReplace management's estimate with the auditor's own estimate in every case
  4. DTest only the arithmetical accuracy of the final allowance figure

Explanation

ISA 540 (Revised) requires the auditor to evaluate whether management's methods, significant assumptions and data are appropriate under the framework. Representations alone are never sufficient evidence, and developing a point estimate is only one of several permitted approaches. Checking arithmetic alone ignores the assumptions and data.

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