7073.8 Step 8: Address Estimation Uncertainty and Test Disclosures

Sep-2020

Depreciation expense for plant and machinery and office equipment calculated on a straight‑line basis using estimated useful economic lives and residual values.

Estimated net realizable value of inventory, measured at the product level.

Estimated damages and costs payable in association with a legal claim.

Estimate of recoverable amount of specialized assets to assess whether an impairment loss exists.

Normal—Lower

(Based on low assessments of estimation uncertainty, complexity, subjectivity and other inherent risk factors)

Elevated

(Based on moderate assessments of estimation uncertainty, subjectivity and an other inherent risk factor resulting from susceptibility to management bias)

Elevated

(Based on moderate assessments of estimation uncertainty, subjectivity and an other inherent risk factor resulting from susceptibility to management bias)

Significant

(Based on high assessments of estimation uncertainty, subjectivity and an other inherent risk factor resulting from changes in the entity’s environment during the period due to the emergence of new technologies amongst competitors).

Test how management made the estimate by performing substantive analytical procedures.

The selected approach was based on a determination that using a substantive analytical approach to perform a reasonableness test of the reported depreciation charge for the period is considered a suitable procedure for the relevant assertions.

(Note that in performing substantive analytical procedures in accordance with CAS 520, including our four step process addressed in global OAG Audit 7033, it will also be necessary to address the requirements of CAS 540 when testing how management made the estimate, including those regarding methods, significant assumptions and data.)

Test evidence from events occurring up to the date of our audit report combined with testing how management made the estimate by performing a test of details.

The decision to select this approach was based on a number of factors, including:

• evidence from events occurring up to the date of our audit report for those products where there is enough sales activity to provide sufficient appropriate audit evidence; and

• our review of the outcome of similar accounting estimates made in previous periods suggests that management’s current period process for estimating net realizable value of inventory is appropriate.

Test how management made the estimate by performing a test of details.

The decision to select this approach was based on a number of factors, including:

• evidence from events occurring up to the date of our audit report is not expected to provide sufficient appropriate audit evidence for this estimate given the legal claim is not expected to be resolved before the date of the audit report;

• our review of the outcome of similar accounting estimates made in previous periods suggests that management’s current period process is appropriate; and

• the applicable financial reporting framework specifies how management is expected to make the accounting estimate.

Test how management made the estimate by performing a test of details.

The decision to select this approach was based on a number of factors including:

• evidence from events occurring up to the date of our audit report is not expected to provide sufficient appropriate audit evidence for this estimate;

• our review of similar accounting estimates made in previous periods suggests that management’s current period process is appropriate;

• the applicable financial reporting framework specifies how management is expected to make the accounting estimate; and

• the approach is expected to be more effective/practicable than developing an auditor’s independent point estimate or range estimate.

Determined that the straight‑line method applied by management is permitted by the applicable financial reporting framework (e.g., IAS 16) and is appropriate in the circumstances.

Determined whether the calculations are applied in accordance with the method and are mathematically accurate.

The model used to calculate the straight‑line depreciation was not considered to be a complex model.

Determined whether a write down to reduce the carrying amount of inventory is necessary by calculating a write down based on reductions in sale prices of product types or inventory lines. No method is prescribed by the IAS 2, but the approach is consistent with the standard measurement requirements.

Determined whether the calculations are applied in accordance with the method and are mathematically accurate.

The model used to calculate the potential write down was not considered to be a complex model.

Determined that the most likely outcome method applied by management is permitted by the applicable financial reporting framework (e.g., IAS 37) and is appropriate in the circumstances.

Determined whether the calculations are applied in accordance with the method and are mathematically accurate.

The model used to calculate the most likely outcome was not considered to be a complex model.

Determined whether the value‑in‑use calculation method used by management was selected, designed and applied in accordance with the applicable financial reporting framework.

Determined whether the calculations are applied in accordance with the method and are mathematically accurate.

As we determined the discounted cash flow model used to estimate value‑in‑use to represent a complex model, performed appropriate additional procedures, including:

• testing model validation procedures implemented by management; and

• specific procedures related to any adjustments made to the output of the model.

The single significant assumption was determined to be the useful economic lives ("UEL") of the property, plant and equipment (residual values were determined to not be a significant assumption on the basis that management assumes zero residual values which was determined to be reasonable based on our testing of residual values performed in prior audits).

Based on the fact that the entity had a small number of asset classes and a single UEL is assigned to each asset class, evaluation of the reasonableness of UELs was performed at an asset class level.

Evaluated the appropriateness of each of the significant assumptions used in calculating the net realizable value of inventory, including:

• estimated selling prices based on forecasted demand and expected market conditions;

• forecasts of demand based on the historical patterns; and

• estimated costs of completion, disposal and transportation.

Determined whether the significant assumptions are consistent with each other and those used in other accounting estimates.

Evaluated the appropriateness of each of the significant assumptions used in the model, including:

• settlement and legal costs expected to be paid in the event of a range of different litigation outcomes; and

• assessed probabilities of different outcomes.

Determined whether the significant assumptions are consistent with each other and those used in other accounting estimates.

Evaluated the appropriateness of each of the significant assumptions used in the discounted cash flow model, including:

• projected growth rates;

• discount rates;

• working capital requirement assumptions; and

• capital expenditure assumptions.

Determined whether the significant assumptions are consistent with each other and those used in other accounting estimates.

Performed detailed testing of the historic cost data used in the depreciation expense for a selection of assets, by agreeing the amount back to the asset register over which we had separately performed completeness and accuracy testing procedures (e.g., additions testing).

No significant data sources were identified as being used in the development of the significant assumption regarding UEL.

Performed detailed testing of the data used by management in estimating the write down of inventory, including the inventory cost and quantity, purchase or manufacturing date, selling prices and quantities (historical, expected or actual sales) and industry or market data which demonstrates that there may be a reduction in future demand.

Performed detailed testing over the data used by management’s legal expert in estimating the most likely outcome, including agreeing this information to legal correspondence and other supporting documents.

Performed detailed testing of whether the data used in the model was appropriate in the context of the applicable financial reporting framework, was relevant and reliable and, if applicable, that changes in the data used from the prior period were appropriate. The data tested included, among others, the following types of data:

• Historical cash flows

• Historical asset book values

• Enacted tax rates

• Risk-free interest rates used in the development of the discount rate assumptions

Determined whether the data used had been appropriately understood and interpreted by management, including with respect to contractual terms.

No use was made of the work of any specialists or experts.

No use was made of the work of any specialists or experts.

Inspected correspondence and professional opinions provided to the entity by its legal counsel (management’s expert). Evaluated the capabilities and objectivity of the expert and evaluated the appropriateness of their work, testing methods, significant assumptions and data used by the expert in Steps 4–6 above.

Reviewed the memorandum prepared by the valuation specialist (involved in a completing role as described in the section Considerations and responsibilities of specialists in accounting or auditing in OAG Audit 3101), evaluated the relevance and reasonableness of the specialist’s findings, performed follow‑up actions required on outstanding issues raised by the specialist and determined that final versions of the agreed deliverables (e.g., memoranda and any supporting schedules prepared by specialists) were included within the audit workpapers.

Based on the testing performed, concluded whether management had taken appropriate steps to understand and address estimation uncertainty.

No specific disclosures related to estimation uncertainty arising from the calculation were included by management on the basis that management did not consider it to be a significant area of estimation uncertainty.

Based on the testing performed, concluded whether management had taken appropriate steps to understand and address estimation uncertainty.

As management included specific financial statement disclosures regarding the uncertainties associated with fluctuations of price, cost or demand, evaluated whether the disclosures demonstrate that management has appropriately understood and that the disclosures adequately describe estimation uncertainty.

Based on testing performed, concluded whether management had taken appropriate steps to understand and address estimation uncertainty.

As management included specific financial statement disclosures regarding the uncertainties associated with the amount and timing of outflows, evaluated whether the disclosures demonstrate that management has appropriately understood and that the disclosures adequately describe estimation uncertainty.

Based on the testing performed, concluded whether management had taken appropriate steps to understand and address estimation uncertainty.

As management included specific financial statement disclosures describing the estimation uncertainty associated with their impairment evaluation process (e.g., disclosure of the range of possible outcomes and the assumptions used in determining the range), evaluated whether the disclosures demonstrate that management has appropriately understood and that the disclosures adequately describe the estimation uncertainty.

Detailed testing of the disclosures related to depreciation expense required by the applicable financial reporting framework (e.g., useful economic lives used) was performed.

Detailed testing of the disclosures related to net realizable value of inventory required by the applicable financial reporting framework

(e.g., write‑down of inventories recognized as an expense in the period) was performed.

Detailed testing of the disclosures related to provisions (e.g., movement schedule showing opening and closing carrying amount and movements in the period) was performed.

Detailed testing of the disclosures related to impairment and, where applicable, fair value disclosures required by the applicable financial reporting framework

(e.g., for each asset or cash‑generating unit for which an impairment loss has been recognized or reversed during the period, disclosure of the recoverable amount and of whether the recoverable amount is its fair value less costs of disposal or its value in use) was performed.