The audit of accounting estimates in Malta : an analysis

Abstract

Purpose: Over recent years the acceleration in the speed of financial reporting and the changes in the accounting frameworks have led to the increase in the amount of estimation that is needed in preparing financial statements. Accounting has changed and this in turn has rendered auditing more difficult. In response, the IAASB has redrafted ISA 540 to provide further guidance on the audit of accounting estimates, which has become effective for audits of financial statements for periods beginning on or after December 15, 2009. The purpose of this study is to better understand the challenges encountered when auditing accounting estimates and identify which client is most exposed to significant accounting estimates. Additionally, the study also takes into account any impact, the new clarified ISA 540 has had on the auditors being the first year audit after the clarification. Design: A qualitative approach was adopted and interviews were conducted with auditors from local audit firms including the big four and Grant Thornton Malta and with financial controllers from local audit clients. Findings: The study highlights two main difficulties encountered by the auditor which include validating management's assumptions and the lack of market transactions and reliable data for certain assets. Additionally, results have indicated that any type of client can have its own accounting estimates however, most challenging estimates arise in financial services companies. The study also suggests that ISA 540 has provided more guidance and direction in the evaluation of estimates through a risk assessment approach and has put more emphasis on the right type of documentation. Conclusions: It was revealed that the audit of accounting estimates can be very challenging for auditors due to the element of uncertainty and the subjective components. Conclusions are drawn that the challenges encountered will remain no matter the extent of auditing.