PCAOB Publishes New Resource to Help Smaller Audit Firms Address Challenges of Auditing Accounting Estimates

A new PCAOB publication – “Audit Focus: Auditing Accounting Estimates” – provides auditors with reminders and good practices about accounting estimates, an especially challenging aspect of financial statements.

Accounting estimates – such as impairments of long-lived assets or allowances for credit losses – are pervasive in financial statements, often substantially affecting a company's financial position and results of operations. By their nature, accounting estimates generally involve subjective assumptions and measurement uncertainty, making them susceptible to management bias. Some estimates involve complex processes and methods. As a result, accounting estimates are often some of the areas of greatest risk in an audit.

The PCAOB’s inspection staff continues to identify deficiencies related to auditors’ testing of accounting estimates. The deficiencies include, among others, not identifying the significant assumptions used by the company to determine an accounting estimate.

This edition of Audit Focus shares:

• Key reminders for auditors from the PCAOB standards related to auditing accounting estimates;
• Staff’s perspectives on common deficiencies in auditors’ work; and
• Good practices that audit firms that audit smaller companies have implemented in the area of accounting estimates.

About Audit Focus

Audit Focus is a series of PCAOB publications that aims to provide easy-to-digest information to auditors, especially those who audit smaller companies. Each edition of Audit Focus reiterates the applicable auditing standards and/or staff guidance, as well as offers reminders and good practices tailored to PCAOB-registered auditors of smaller companies – all with an eye toward protecting investors and improving audit quality. Previous editions of Audit Focus – which have covered topics such as journal entries, audit committee communications, and critical audit matters – can be found at the PCAOB’s Staff Publications and Information for Smaller Firms pages.