| A77. | The auditor's evaluation of the assumptions used by management is based only on information available to the auditor at the time of the audit. Audit procedures dealing with management assumptions are performed in the context of the audit of the entity's financial statements, and not for the purpose of providing an opinion on assumptions themselves. |
| A78. | Matters that the auditor may consider in evaluating the reasonableness of the assumptions used by management include, for example: |
| Whether individual assumptions appear reasonable. |
| Whether the assumptions are interdependent and internally consistent. |
| Whether the assumptions appear reasonable when considered collectively or in conjunction with other assumptions, either for that accounting estimate or for other accounting estimates. |
| In the case of fair value accounting estimates, whether the assumptions appropriately reflect observable marketplace assumptions. |
| A79. | The assumptions on which accounting estimates are based may reflect what management expects will be the outcome of specific objectives and strategies. In such cases, the auditor may perform audit procedures to evaluate the reasonableness of such assumptions by considering, for example, whether the assumptions are consistent with: |
| The general economic environment and the entity's economic circumstances. |
| The plans of the entity. |
| Assumptions made in prior periods, if relevant. |
| Experience of, or previous conditions experienced by, the entity, to the extent this historical information may be considered representative of future conditions or events. |
| Other assumptions used by management relating to the financial statements. |
| A80. | The reasonableness of the assumptions used may depend on management's intent and ability to carry out certain courses of action. Management often documents plans and intentions relevant to specific assets or liabilities and the financial reporting framework may require it to do so. Although the extent of audit evidence to be obtained about management's intent and ability is a matter of professional judgment, the auditor's procedures may include the following: |
| Review of management's history of carrying out its stated intentions. |
| Review of written plans and other documentation, including, where applicable, formally approved budgets, authorizations or minutes. |
| Inquiry of management about its reasons for a particular course of action. |
| Review of events occurring subsequent to the date of the financial statements and up to the date of the auditor's report. |
| Evaluation of the entity's ability to carry out a particular course of action given the entity's economic circumstances, including the implications of its existing commitments. |
| Certain financial reporting frameworks, however, may not permit management's intentions or plans to be taken into account when making an accounting estimate. This is often the case for fair value accounting estimates because their measurement objective requires that assumptions reflect those used by marketplace participants. |
| A81. | Matters that the auditor may consider in evaluating the reasonableness of assumptions used by management underlying fair value accounting estimates, in addition to those discussed above where applicable, may include, for example: |
| Where relevant, whether and, if so, how management has incorporated market-specific inputs into the development of assumptions. |
| Whether the assumptions are consistent with observable market conditions, and the characteristics of the asset or liability being measured at fair value. |
| Whether the sources of market-participant assumptions are relevant and reliable, and how management has selected the assumptions to use when a number of different market participant assumptions exist. |
| Where appropriate, whether and, if so, how management considered assumptions used in, or information about, comparable transactions, assets or liabilities. |
| A82. | Further, fair value accounting estimates may comprise observable inputs as well as unobservable inputs. Where fair value accounting estimates are based on unobservable inputs, matters that the auditor may consider include, for example, how management supports the following: |
| The identification of the characteristics of marketplace participants relevant to the accounting estimate. |
| Modifications it has made to its own assumptions to reflect its view of assumptions marketplace participants would use. |
| Whether it has incorporated the best information available in the circumstances. |
| Where applicable, how its assumptions take account of comparable transactions, assets or liabilities. |
| If there are unobservable inputs, it is more likely that the auditor's evaluation of the assumptions will need to be combined with other responses to assessed risks in paragraph 13 in order to obtain sufficient appropriate audit evidence. In such cases, it may be necessary for the auditor to perform other audit procedures, for example, examining documentation supporting the review and approval of the accounting estimate by appropriate levels of management and, where appropriate, by those charged with governance. |
| A83. | In evaluating the reasonableness of the assumptions supporting an accounting estimate, the auditor may identify one or more significant assumptions. If so, it may indicate that the accounting estimate has high estimation uncertainty and may, therefore, give rise to a significant risk. Additional responses to significant risks are described in paragraphs A102-A115. |
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