Audit of Highly Uncertain Accounting Estimates - A Field-based Study of Auditors' Attitudes Towards Proposed Audit Responses in ISA 540

Abstract: Current audit standards (IAASB 2008b, para. 13) provide auditors with four potential responses to the assessed risks of material misstatements in the audit of highly uncertain accounting estimates. Although research on the audit of such account balances is limited (Griffith et al. 2013, Nusbaum 2007, Martin et al. 2006), several previous studies have advocated that the auditor should more often undertake the Audit response Develop estimate in order to evaluate the reasonableness of management's estimate as it is argued to place auditors in a better position to detect management bias and inconsistencies in the account balance (Griffith et al. 2013). Nevertheless, the limited field- based research available indicates that practicing auditors predominantly undertake the Audit response Test management's estimate (Griffith et al. 2013, Cannon & Bedard 2014). The purpose of this study is to shed light on this phenomenon and investigate experienced auditors' attitudes towards these Audit responses in general and the Audit response Develop estimate specifically. Therefore we conduct interviews with 16 experienced auditors and valuation experts often engaged in the audit of such account balances. Our findings suggest that auditors prefer Test management's estimate mainly due to a higher perceived efficiency and conversely, that the suggested benefits of Develop estimate does not justify the additional effort required. Additionally, we identify a confusion of concepts related to the Audit response Develop estimate and therefore we initiate a more nuanced discussion of what is to be considered to undertake the Audit response Develop estimate.