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How do you audit accounting estimates given their risk?

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Answer

Estimates (provisions, fair values, impairments) carry high inherent risk and estimation uncertainty. The auditor evaluates management's method, assumptions, and data; considers management bias; may develop an independent estimate or range; reviews subsequent events; and tests the controls over the estimation process. Higher uncertainty demands more scrutiny and possibly specialists.

Real-world example To audit a warranty provision, the team tests historical claim rates, challenges assumptions, and compares to actual subsequent claims.

Common follow-ups: How do you detect management bias in estimates? | When would you use an auditor's expert?

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