Provisions audit procedures

It depends what the provision is for: (1) something "one-off" - e.g. a legal claim (2) something based on a class of transactions - e.g. product warranty In either case management should make a best estimate of the liability i.e.: (1) most likely outcome (2) expected value. Auditor then needs to obtain evidence that management's estimate is not materially misstated, e.g.: (1) obtain written confirmation from legal advisor (if not settled)/confirm payment (bank statement) if settled after the reporting date (adjusting event) (2) confirm how EV has been calculated - not just reperform calculation but assess the reasonableness of underlying assumptions (e.g. % defective products returned under warranty, average cost of a repair/replacement). Especially for a "one-off" it will be necessary to assess the probability/likelihood of settlement - if less than probable (i.e. 50%) it should be contingent (disclosure) not a provision - see Chapter 27.