Audit of Accounting Estimates

Niclas Leonard Fønss & Rune Andreas Berg Vølding

Student thesis: Master thesis


The purpose of this thesis is to investigate the increase in annotations auditors and auditing firms received by the Danish business authorities, more specifically from the Audit Inspection in Denmark. This thesis' objective is to identify the scope in which auditors inaccurately audit fair value estimates on the basis of the international standards ISA 540, "Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures”, and IFRS 13, "Fair Value Measurement". Furthermore, this thesis will describe the increase in requirements made in ISA 540 (Revised) and lastly, develop audit proceduresthat auditors and their auditing firmsshould use in order to avoid further annotations. Lastly, this is supported by an interview with an expert on the subject. The research questions are as follows: "What are the most radical and frequent annotations auditors get from the Audit Inspection in Denmark, when conducting an audit using ISA 540 and auditing fair value estimates in accordance with IFRS 13? What increased requirements have been made with ISA 540 (Revised) and what additional procedures do auditors need to perform in order to avoid annotations?" This thesis concludes that auditors and audit firms frequently received annotations when auditing fair value of investment properties under ISA 540. The next conclusion reached was that by performing the following procedures, auditor and audit firms overall most likely will see a decrease in annotations received within this area. These are split between planning and risk assessment procedures and substantive procedures which are listed below: Planning and risk assessment procedures: ‐ Identification and risk assessment of relevant data elements and assumptions used by management ‐ Assessment of the need for involvement of a specialist ‐ Assessment of biased managements based on the applied assumption and data in the fair value estimate ‐ Performance of a retrospective review Substantive procedures: ‐ Performance of estimate range ‐ Performance of a sensitivity analysis ‐ Challenge of budget period chosen by management The above perspectives were discussed with Michael Tuborg, State Authorized Accountant and Head of Real Estate at KPMG Denmark. The expert’s perspective was, in many aspects, in accordance with our findings; therefore, the conclusion wassupported on what procedures auditors and auditing firmsshould perform when auditing fair value estimates in relation to investment properties prepared under IFRS 13 using ISA 540.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2020
Number of pages128