What is an accounting estimate?
When performing audits of financial statements, it is important that you identify all relevant accounting estimates to which the requirements in ISA 540 apply. You can find out more below 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, Auditing accounting estimates including fair value accounting estimates, and related disclosures (ISA 540), currently defines an accounting estimate as: “An approximation of a monetary amount in the absence of a precise means of measurement. This term is used for an amount measured at fair value where there is estimation uncertainty, as well as for other amounts that require estimation.”