Auditing Estimates paper

Auditing Estimates paper - Auditing Estimates: A Task...

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Auditing Estimates: A Task Analysis and Propositions for Improving Auditor Performance Emily E. Griffith University of Georgia esemrau@uga.edu Jacqueline S. Hammersley University of Georgia jhammers@uga.edu Kathryn Kadous Emory University kkadous@bus.emory.edu October 2010 We are grateful to John Fogarty for his feedback and to the auditors and their firms who have given their time assisting with the interviews. Jackie Hammersley is grateful for the support provided by a Terry Sanford Research Award.
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Auditing Estimates: A Task Analysis and Propositions for Improving Auditor Performance Market participants rely on accounting estimates, including fair values and impairments, to get a clear picture of a company’s financial condition; however, estimates are difficult to audit. We analyze how auditors assess the reasonableness of accounting estimates with the goals of identifying what difficulties auditors experience in performing the task and how their performance can be improved. We interview 15 very experienced auditors from the set of firms that perform over 100 audits of public companies annually to assess how auditors perform the task and what difficulties they experience. We compare interview results with audit standards to evaluate how well auditors match required steps in the process. We perform a content analysis of PCAOB inspection reports to further shed light on difficulties auditors experience in auditing estimates. We find that both auditors and regulators report auditor difficulties with over-reliance on management assertions. That is, auditors sometimes fail to understand management’s process for generating the estimate, fail to adequately test the underlying data and assumptions, and fail to notice inconsistencies of the estimate with other internal data or external conditions. We draw on the mindset literature in judgment and decision making to suggest ways that auditors can improve their performance in this important task. Key Words: Accounting estimates, audit quality, fair value, impairment, interview
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1 Auditing Estimates: A Task Analysis and Propositions for Improving Auditor Performance 1. Introduction Estimates are items included in financial statements for which the measurement or valuation of some amounts is uncertain. Relatively simple accruals, such as accrued expenses, are included in this category as are accounts requiring more sophisticated estimation procedures such as fair value measurements and impairments. The uncertainty in the account may depend on the outcome of future events or on data that cannot be accumulated on a timely, cost-effective basis (American Institute of Certified Public Accountants (AICPA) 1988). Recent changes in accounting principles have increased the importance of estimates, such
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Auditing Estimates paper - Auditing Estimates: A Task...

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