Audit Q1

Q1. In auditing the adequacy of the provision regards the estimate loss from the compensatory claim, the following matters should be consider as the procedures.

According to HKSA 540

The auditor (Man & Co) is required to obtain sufficient appropriate audit evidence about whether the accounting estimates in the financial statement, either recognized or disclosed, are reasonable; and related disclosures in the financial are adequate, in context of the applicable financial reporting framework.

As the provision involving relatively high estimation uncertainty that may give rise to higher risks of material misstatements in relation to the outcome of litigation, auditor is required to obtain an understanding of the entity’s controls, including control activities.

As required by HKSA 330 & HKSA 540, Man & Co shall:

* consider whether the compensatory claim occurring up to the date of the auditor report provides audit evidence regarding the accounting estimate.

* test how management made the estimate loss and the data on which it is based.

* evaluate whether the method of measurement used is appropriate in the circumstances; and the assumptions used by management are reasonable.

* test the operating effectiveness of the controls over how management made the accounting estimate, together with appropriate substantive procedures.

* evaluate how management has addressed estimation uncertainty in making the accounting estimate.

* consider management’s intent to carry out specific courses of action and its ability to do so.

* obtain sufficient appropriate audit evidence about whether management’s decision to recognize, or to not recognize, the accounting estimates in the financial statements; and the selected measurement basis for the accounting estimates, are in accordance with the requirements of the applicable financial reporting framework.

If, ABC’s management has not adequately addressed the effects of estimation...