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The American Institute of Certified Public Accountants’ (AICPA) Auditing Standards Board (ASB) on Aug. 22, 2019, issued a proposal intended to improve audits of accounting estimates and encourage auditors to exercise professional skepticism.

Comments are due by Nov. 22 on Exposure Draft (ED): Proposed Statement on Auditing Standards (SAS), Auditing Accounting Estimates and Related Disclosures.

If finalized, the standard will supersede SAS No. 122, AU-C Section 540, “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures.”

“This proposed standard breaks down the various aspects of management estimates, thus addressing one of the biggest challenges auditors face and allowing auditors to focus their efforts on unique aspects like subjectivity and estimation uncertainty,” AICPA Chief Auditor Robert Dohrer said in a statement. “The focus on unique aspects are intended to enhance the effectiveness of the auditor’s procedures as they relate to management estimates in general.”

The AICPA wants auditors to focus on factors driving estimate uncertainty and potential management bias. Company management has an incentive to record estimates that make their books better. Moreover, inspection findings have shown that this is an area in need of improvement.

The ASB’s proposed standard would enhance the auditor’s risk assessment by providing requirements that are more specific to estimates. “The proposed SAS focuses on how complexity, subjectivity and estimation uncertainty are taken into account when identifying and assessing risks of material misstatement.”

The proposed standard also requires a separate assessment of inherent risk and control risk at the assertion level for accounting estimates.

“Depending on the nature of a particular accounting estimate, the susceptibility of an assertion to a misstatement that could be material may be subject to or affected by estimation uncertainty, complexity, subjectivity, or other inherent risk factors, and the interrelationship among them,” the exposure draft says.

The ASB said that inherent risk is higher for some assertions and related classes of transactions, account balances and disclosures than for others. Thus, assessing inherent risk depends on the degree to which the inherent risk factors affect the likelihood of misstatement.

“In assessing control risk, the auditor takes into account whether the auditor’s further audit procedures contemplate planned reliance on the operating effectiveness of controls,” the proposal said. “If the auditor does not perform tests of controls, the auditor’s assessment of the risks of material misstatement at the assertion level cannot be reduced for the effective operation of controls with respect to the particular assertion.”

The proposed standard would also be scalable, from difficult to relatively simple estimates.

For more information on this topic, or to learn how Baker Tilly accounting and assurance specialists can help, contact our team.

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