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Provisions audit procedures

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AA Exams › Provisions audit procedures

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by Kim Smith.
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  • June 1, 2021 at 1:05 pm #622622
    goldenthandi22
    Member
    • Topics: 22
    • Replies: 30
    • ☆☆

    Good day Sir

    I am finding difficulties in understanding how one can audit provisions.
    Basically which areas can one look into

    June 1, 2021 at 1:18 pm #622625
    Kim Smith
    Keymaster
    • Topics: 100
    • Replies: 6786
    • ☆☆☆☆☆

    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.

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