excessive in the circumstances of the If the external auditor uses the work of the
engagement. This communication not internal audit function, the external auditor shall
only dispels any perception that the
external auditor's independence might be
compromised by the use of direct
assistance but also facilitates
appropriate dialogue with those charged
with governance.
 Evaluate whether the external auditor is
sufficiently involved in the audit.
(2) Prior to the use of internal auditors to provide
direct assistance, the external auditor has to
obtain written agreement from two parties:
 From an authorized representative of the
entity stating that:
- the internal auditors will be
allowed to follow the external
auditor's instructions
- the entity will not intervene in the
work the internal auditor performs
for the external auditors
 From internal auditors stating that they
will:
- keep confidential specific matters
as instructed by the external
auditor
- inform the external auditor of any
threat to their objectivity
(3) During the audit, the external auditor has to:
 Direct, supervise and review the work
performed by internal auditors on the
engagement, bearing in mind that the
internal auditors are not independent of
the entity. It is therefore expected that
such supervision and review will be of a
different nature and more extensive than
if members of the audit engagement
team perform the work.
 Remind the internal auditors to bring
accounting and auditing issues
identified during the audit to the
attention of the external auditors.
 Check back to the underlying audit
evidence for some of the work performed
by the internal auditors.
 Make sure the internal auditors have
obtained sufficient appropriate audit
evidence to support the conclusions
based on that work.
Documentation
include the following items in the audit
documentation:
(1) The evaluation of the objectivity and
competence level of the internal audit
function and whether it applies a
systematic and disciplined approach.
(2) The nature and extent of the work used
and the basis for that decision.
(3) The audit procedures performed by
external auditors to evaluate the
adequacy of the work used.
If the external auditor uses internal auditors to
provide direct assistance on the audit, the
external auditor shall include the following items
in the audit documentation:
(1) Evaluation of the existence and
significance of the threats to the
objectivity and the level of competence of
the internal auditors used to provide
direct assistance.
(2) The basis for the decision regarding the
nature and extent of the work performed
by the internal auditors.
(3) The date and extent as well as the party
that reviewed the work performed.
(4) The written agreements from an
authorized representative of the entity
and the internal auditors.
(5) The working papers prepared by the
internal auditors providing direct
assistance on the audit engagement.
CHAPTER 13
OTHER AUDIT CONSIDERATIONS
AUDITING ACCOUNTING ESTIMATES AND RELATED
DISCLOSURES
Some financial statement items cannot be
precisely measured. These are referred to as
accounting estimates. Auditing standards (i.e.,
PSA 540) defined accounting estimate as an
approximation of a monetary amount in the
absence of a precise means of measurement.
This term is used for amounts measured at fair
value when estimation uncertainty exists and
other amounts that require estimation. The
nature and reliability of information available to
management to support the making of an
accounting estimate may vary widely. This create
a degree of estimation Uncertainty, which in turn
affects the risks of material misstatement of RISK ASSESSMENT PROCEDURES AND RELATED
accounting estimates, including their ACTIVITIES
susceptibility to unintentional or intentional
In performing risk assessment procedures and
management bias.
related activities to gain an understanding of the
Measurement objectives of accounting entity and its environment, including its internal
estimates can vary, depending on the applicable control, the auditor should obtain an
financial reporting framework, or "basis of understanding of the following in order to
accounting," and the financial item being provide a basis for identifying and assessing the
reported. They may, for example, have as their risks of material misstatement for accounting
objective: estimates:

(1) Forecasting the outcome of transactions, (1) The requirements of the applicable financial
events, or conditions. reporting framework relevant to accounting
estimates, including the related disclosures.
(2) Estimating the value of a current transaction
or financial statement item based on Conditions (2) How management identifies those
prevalent at the measurement date, such as a transactions, events and conditions that may
fair value measurement based on an assumed give rise to the need for accounting estimates to
hypothetical current arm's-length transaction. be recognized or disclosed in the financial
statements.
Accounting estimates are inherently uncertain.
This is particularly true for fair value estimates. In obtaining this understanding, the auditor
Thus, differences between the outcome of an should inquire of management concerning
accounting estimate and the amount originally changes in circumstances that may give rise to
recognized or disclosed in the financial new, or the need to revise existing, accounting
statements do not necessarily represent a estimates.
misstatement.
(3) How management makes the accounting
Table 13.1 Definition of Terms estimates.
Auditor’s pointThe amount or range of
estimate or
amounts, respectively, (4) Data on which they are based, including:
auditor’s rangederived from audit  The method or model used in making the
evidence for use in
accounting estimate
evaluating management’s
point estimate.  Relevant controls
Estimation The susceptibility of an  Management's used of an expert
uncertainty accounting estimate and  The assumptions underlying the
related disclosures to an accounting estimates
inherent lack of precision  Whether there has been or ought to have
in its measurement. been a change from the prior period in the
Management A lack of neutrality by methods or assumptions for making the
bias management in the accounting estimates
preparation and
 How management has assessed the
presentation of
effect of estimation uncertainty
information.
Management’s The amount selected by Auditors should perform a retrospective review
point estimate management for of management judgments and assumptions
recognition or disclosure related to significant accounting estimates
in the financial
included in the prior period financial statement.
statements as an
When applicable, they should review their re-
accounting estimate
Outcome of an He actual monetary estimation for the purpose of the current period.
accounting amount which results This review takes into consideration the nature
estimate from the resolution of the of the accounting estimates, and whether the
underlying transactions, information obtained from the review would be
events, or conditions relevant to identifying and assessing risks of
addressed by the material misstatement of accounting estimates
accounting estimate. made in the current period financial statements.
However, it is not intended to question
professional judgements that the auditor made
in the prior periods that were based on
information available at the time.
IDENTIFYING AND ASSESSING THE RISKS OF
MATERIAL MISSTATEMENT
When identifying and assessing the risks of
material misstatement, auditor should evaluate
the degree of estimation uncertainty associated
with an accounting estimate and determine
whether, in their judgment, any of those
accounting estimates that have been identified
as having high estimation uncertainty give rise
to significant risks.
The degree of estimation uncertainty associated
with an accounting estimate may be influenced
by factors such as:
(1) The extent to which the accounting
estimate depends on judgment.
(2) The sensitivity of the accounting
estimate to changes in assumptions.
(3) The existence of recognized
measurement techniques that may
mitigate the estimation uncertainty.
(4) The length of the forecast period, and the
relevance of data drawn from past events
to forecast future events.
(5) The availability of reliable data from
external sources.
(6) The extent to which the accounting
estimate is based on observable or
unobservable inputs.
(7) The actual or expected magnitude of an
accounting estimate.
(8) The recorded amount of the accounting
estimate (i.e., management's point
estimate) in relation to the amount you
expected to be recorded.
(9) Whether management has used an
expert in making the accounting
estimates.
(10) The outcome of the review of prior period
accounting estimates.
In this regard, a seemingly immaterial
accounting estimate can potentially result in a
material misstatement because the size of the
amount of an accounting estimate recognized or
disclosed in the financial statements may not
indicate uncertainties. In some circumstances,
such as the outcome of litigation, the estimation
uncertainty may be so high that a reasonable
accounting estimate cannot be made.
Depending upon the requirements of the
applicable financial reporting framework, there
can be audit concerns not only whether an
accounting estimate should be recognized, or
whether it should be measured at fair value, but
also to the adequacy of the disclosures. With
respect to such accounting estimates, the
applicable financial reporting framework may
require disclosure of the accounting estimates
and the high estimation uncertainty associated
with them.
RESPONSES TO THE ASSESSED RISKS OF
MATERIAL MISSTATEMENT
If the auditor concludes that an accounting
estimate has a high degree of estimation
uncertainty, the auditor should determine
whether, in their judgment, any of the
accounting estimates identified as having high
estimation uncertainty give rise to significant
risks.
Auditors should determine, based on their
assessed risks of material misstatement,
whether the.
(1) Management has appropriately applied
the requirements of the applicable
financial reporting framework relevant to
the accounting estimate.
(2) Methods for making the accounting
estimates are appropriate and have been
applied consistently.
(3) Changes, if any, in accounting estimates
or in the method for making them from
the prior period are appropriate in the
circumstances.
In responding to the assessed risks of material
misstatement, the auditor should Undertake one
or more of the following, taking account of the
nature of the accounting estimate:
(1) Determine whether subsequent events
(occurring up to the date of the auditor's
report) provide audit evidence about the
accounting estimate.
(2) Test how management made the
accounting estimate and the data on
which it is based and evaluates whether
the method of measurement used is
appropriate in the circumstances and
assumptions used by management are
reasonable.
(3) Test the operating effectiveness of the
controls over how management made the