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Part b (ii) of the above mentioned question asks to recommend principal audit procedures regarding the recoverability of the deferred tax asset. The examiner writes a procedure in her answer to this question as:
“Develop an independent expectation of the estimate to corroborate the reasonableness of management’s estimate.”
I don’t understand this point of hers? Is this a recalculation by us as auditors of the deferred tax asset? Could you please explain this procedure to me.
Yes, it’s a recalculation.
But it’s also an assessment by the auditor of the reasonableness of the directors’ assertion that the company will return to profitable ways in the foreseeable future earning sufficient levels of profit in order that the deferred tax asset will likely be fully usable
How does an auditor reach an opinion about the prospects of a client returning to profitability within the next twelve months? Well, by the application of skill, experience, dash, élan and professional judgement, of course
Review the (written) premises of the directors to assess the reasonableness of the assumptions that they have used in predicting a return to profitability and thus the likelihood of achieving profitability
Ok?
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