Auditing Practices" Issued by The Institute.: Audit of Accounting Estimates
Auditing Practices" Issued by The Institute.: Audit of Accounting Estimates
Auditing Practices" Issued by The Institute.: Audit of Accounting Estimates
The following is the text of Statement on Standard Auditing Practices (SAP) 18, "Audit of
Accounting Estimates", issued by the Council of the Institute of Chartered Accountants of India.
The Statement should be read in conjunction with the "Preface to the Statements on Standard
Auditing Practices" issued by the Institute.
INTRODUCTION
1. The purpose of this Statement on Standard Auditing Practice (SAP) is to establish standards
on the audit of accounting estimates contained in financial statements. This SAP is not intended
to be applicable to the examination of prospective financial information2.
2. The auditor should obtain sufficient appropriate audit evidence regarding accounting
estimates.
1
With the formation of the Auditing Practices Committee in 1982, the Council of the Institute has
been issuing a series of Statements on Standard Auditing Practices (SAPs). Statements on
Standard Auditing Practices lay down the principles governing an audit. These principles apply
whenever an independent audit is carried out. Statements on Standard Auditing Practices
become mandatory on the dates specified in the respective SAPs. Their mandatory status implies
that, while discharging their attest function, it will be the duty of the members of the Institute to
ensure that the SAPs are followed in the audit of financial information covered by their audit
reports. If, for any reason, a member
2
In this regard, it may be noted that the Institute of Chartered Accountants of India has issued a
Guidance Note on Accountant's Report on Profit Forecasts and/or Financial Forecasts.
a. review and test the process used by management to develop the estimate;
b. use an independent estimate for comparison with that prepared by management; or
c. review subsequent events which confirm the estimate made.
a. evaluation of the data and consideration of assumptions on which the estimate is based;
b. testing of the calculations involved in the estimate;
c. comparison, when possible, of estimates made for prior periods with actual results of
those periods; and
d. consideration of management's approval procedures.
The auditor would need to pay particular attention to assumptions which are sensitive to variation,
subjective or susceptible to material misstatement.
17. In the case of complex estimating processes involving specialised techniques, it may be
necessary for the auditor to use the work of an expert, for example, engineers for estimating
quantities in stock piles of mineral ores. Requirements as to how to use the work of an expert are
prescribed in SAP 9, "Using the Work of an Expert."
18. The auditor would review the continuing appropriateness of formulae used by management in
the preparation of accounting estimates. For this purpose, the auditor's knowledge of the financial
results of the entity in prior periods, practices used by other entities in the industry and the future
plans of management as disclosed to the auditor would be useful.
Testing of Calculations
19. The auditor would test the calculation procedures used by management. The nature, timing
and extent of the auditor's testing will depend on such factors as the complexity involved in
calculating the accounting estimate, the auditor's evaluation of the procedures and methods used
by the entity in producing the estimate and the materiality of the estimate in the context of the
financial statements.
Comparison of Previous Estimates with Actual Results
20. When possible, the auditor would compare accounting estimates made for prior periods with
actual results of those periods to assist in:
a. obtaining evidence about the general reliability of the entity's estimating procedures;
b. considering whether adjustments to estimating formulae may be required; and
c. evaluating whether differences between actual results and previous estimates have been
quantified and that, where necessary, appropriate adjustments or disclosures have been
made.