Question

"You are the manager of the examination engagement of the financial projection of Honey’s Health Foods as of December 31, 2018, and for the year then ended. The audit senior, Currie, has prepared the following draft of the examination report:"

To the Board of Directors of Honey’s Health Foods:We have examined the accompanying projected balance sheet and statements of income, retained earnings, and cash flows of Honey’s Health Foods as of December 31, 2018, and for the year then ending. Our examination was made in accordance with standards for an examination of a projection and accordingly included such procedures as we considered necessary to evaluate the assumptions used by management.In our opinion, the accompanying forecast is presented in conformity with guidelines for presentation of a forecast established by the American Institute of Certified Public Accountants, and the underlying assumptions provide a reasonable basis for management’s projection. However, there will usually be differences between the projected and actual results because events and circumstances frequently do not occur as expected, and those differences may be material."

Answer 1

The auditor is responsible for evaluation of reasonableness of management estimate. As estimates are based on subjective as well as objective factors, it may be difficult for management to establish controls over them. Accordingly, when planning and performing procedures to evaluate accounting estimates, the auditor should consider, with an attitude of professional skepticism, both the subjective and objective factors.

The risk of material misstatement of accounting estimates normally varies with the complexity and subjectivity associated with the process, the availability and reliability of relevant data, the number and significance of assumptions that are made, and the degree of uncertainty associated with the assumptions

Auditor should analysze, evaluate the reasonableness and consider available documentation.

In cases, where there is material difference between estimate and actual amounts, an auditor should understand the source of such differences. If auditor understands and conclude that such differences are not due to error of estimation than auditor ought not to perform any additional procedure.