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What is an accounting estimate? Considerations for auditors

When performing audits of financial statements, it is important that you identify all relevant accounting estimates to which the requirements in ISA 540 (Revised) Auditing accounting estimates and related disclosures apply. This Audit and Assurance guide provides information and guidance on how to spot accounting estimates and not overlook the more obvious ones in your audit.

A set of historical financial statements includes many amounts that cannot be calculated with certainty. This may be because the measurement or valuation of these amounts is dependent on the outcome of future events. It could also be that the information needed to determine the amount cannot be accumulated in a timely or cost effective manner.

ISA 540 (Revised) defines an accounting estimate as: “A monetary amount for which the measurement, in accordance with the requirements of the applicable financial reporting framework, is subject to estimation uncertainty”, where estimation uncertainty is defined as  “susceptibility to an inherent lack of precision in measurement”.