Summary of SA 540 Auditing Standards on Accounting Estimate

1. "Accounting estimate" means an estimate of the amount of an item in the absence of an exact

measurement. Examples are: Provision for taxation, Provision for a loss from a lawsuit.

2. Management is responsible for making accounting estimates.

3. Approaches in audit: Auditor has to follow one or more methods in the audit of estimate:

a. Review and testing the process used by management to develop the estimate.

b. Use independent estimate for comparison with that prepared by management.

c. Review subsequent events which confirm the estimate made.

8. Difference: When there is a difference between the auditor's estimate of the amount and the

estimated made by the management:

a. If the difference is small it may not require adjustment.

b. If the difference is big, management would be requested to make the adjustment.