Auditing accounting estimates is the topic of the Public Company Accounting Oversight Board’s latest edition of “Audit Focus,” a series of PCAOB publications that aims to provide easy-to-digest information to auditors, especially those who audit smaller public companies.
“Audit Focus: Auditing Accounting Estimates” provides auditors with reminders and good practices about accounting estimates, an especially challenging aspect of financial statements.
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Accounting estimates—such as impairments of long-lived assets or allowances for credit losses—are pervasive in financial statements, often substantially affecting a company’s financial position and results of operations, the PCAOB said.
By their nature, accounting estimates generally involve subjective assumptions and measurement uncertainty, making them susceptible to management bias. Some estimates involve complex processes and methods. As a result, accounting estimates are often some of the areas of greatest risk in an audit, the regulator said.
The PCAOB’s inspection staff continues to identify deficiencies related to auditors’ testing of accounting estimates. The deficiencies include, among others, not identifying the significant assumptions used by the company to determine an accounting estimate.
This edition of “Audit Focus” shares:
- Key reminders for auditors from the PCAOB standards related to auditing accounting estimates;
- Staff’s perspectives on common deficiencies in auditors’ work; and
- Good practices that audit firms that audit smaller companies have implemented in the area of accounting estimates.
Previous editions of “Audit Focus”—which have covered topics such as journal entries, audit committee communications, and critical audit matters—can be found at the PCAOB’s Staff Publications and Information for Smaller Firms pages.
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