“You are the manager of the ex
“You are the manager of the examination engagement of thefinancial projection of Honey’s Health Foods as of December 31,2018, and for the year then ended. The audit senior, Currie, hasprepared the following draft of the examination report:”
To the Board of Directors of Honey’s Health Foods:We haveexamined the accompanying projected balance sheet and statements ofincome, retained earnings, and cash flows of Honey’s Health Foodsas of December 31, 2018, and for the year then ending. Ourexamination was made in accordance with standards for anexamination of a projection and accordingly included suchprocedures as we considered necessary to evaluate the assumptionsused by management.In our opinion, the accompanying forecast ispresented in conformity with guidelines for presentation of aforecast established by the American Institute of Certified PublicAccountants, and the underlying assumptions provide a reasonablebasis for management’s projection. However, there will usually bedifferences between the projected and actual results because eventsand circumstances frequently do not occur as expected, and thosedifferences may be material.”
Answer:
The auditor is responsible for evaluation of reasonableness ofmanagement estimate. As estimates are based on subjective as wellas objective factors, it may be difficult for management toestablish controls over them. Accordingly, when planning andperforming procedures to evaluate accounting estimates, the auditorshould consider, with an attitude of professional skepticism, boththe subjective and objective factors.
The risk of material misstatement of accounting estimatesnormally varies with the complexity and subjectivity associatedwith the process, the availability and reliability of relevantdata, the number and significance of assumptions that are made, andthe degree of uncertainty associated with the assumptions
Auditor should analysze, evaluate the reasonableness andconsider available documentation.
In cases, where there is material difference between estimateand actual amounts, an auditor should understand the source of suchdifferences. If auditor understands and conclude that suchdifferences are not due to error of estimation than auditor oughtnot to perform any additional procedure.
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