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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AA Exams › Provisions audit procedures
Good day Sir
I am finding difficulties in understanding how one can audit provisions.
Basically which areas can one look into
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.