Question

In order to evaluate management's estimation process, _______.

1) auditors use the knowledge gained about the industry and the applicable financial reporting framework during risk assessment
2) auditors use the knowledge gained about other industries and the applicable financial reporting framework during risk assessment
3) auditors compare management estimates with other management estimates at other companies
4) the auditors ask the internal audit function to review and come to a conclusion which can be included in the audit report

Answer 1

Auditors evaluate management's estimation process primarily by using knowledge about the industry and the applicable financial reporting framework.

Step-by-step explanation:

This approach enables auditors to make informed judgments by considering the particularities of the company's operating environment and the standards it must adhere to. While it may also be helpful to understand practices in other industries for a broader perspective, the primary focus is generally on the industry in question.

Additionally, gathering evidence is a critical component of the auditing process. This may involve reviewing financial documents multiple times, conducting thorough analysis, and possibly engaging with the internal audit function to ensure that a comprehensive evaluation is carried out.

Expert judgment also plays a central role in this process. Auditors leverage their experience and expertise to assess the reasonableness of management's estimates, considering potential variables and outcomes. This skillful estimation is crucial in formulating a meaningful audit opinion on the financial statements.