Accounting estimate
An accounting estimate is a measurement or recognition in the financial
statements of (or a decision not to recognize) an account, disclosure,
transaction, or event that generally involves subjective assumptions and
measurement uncertainty. For this standard, a fair value measurement is a form
of an accounting estimate.
In performing substantive procedures to respond to the identified and
assessed risks of material misstatement associated with accounting estimates,
the auditor should test an accounting estimate using one or a combination of the
following approaches:
- Test the company's process used to develop the accounting
estimate;
- Develop an independent expectation for comparison to the
company's estimate;
- Evaluate audit evidence from events or transactions occurring after
the measurement date related to the accounting estimate for
comparison to the company's estimate [PCAOB].
Estimates are used in accrual basis accounting to make the financial
statements more complete, usually to anticipate events that have not yet
occurred but are considered probable. These estimates may be subsequently
revised as more information becomes available. Changes in accounting
estimates impact the current period and future periods but have no impact on
prior periods. The amount of an accounting estimate is based on historical
evidence and the accountant's judgment. The basis upon which an accounting
estimate is made should be fully documented in case it is audited later
[AccountingTools].
AS 2501: Auditing Accounting Estimates, Including Fair Value Measurements. PCAOB. Retrieved from: https://pcaobus.org/oversight/standards/auditing-standards/details/AS2501
Accounting estimate definition. AccountingTools. Retrieved from: https://www.accountingtools.com/articles/accounting-estimate