ACCA Audit and Assurance (F8) Practice Exam

Which is an example of an allowance typically included as an estimate in financial audits?

1. Inventory write-downs

2. Salaries payable

3. Loan receivables

4. Interest income

The correct answer is: Inventory write-downs

An allowance typically included as an estimate in financial audits refers to amounts that a company anticipates will not be realized, necessitating a reduction in the value of certain assets. Inventory write-downs are a prime example of this concept. In auditing, inventory is assessed for net realizable value, and if the carrying amount exceeds what is expected to be realized through sale, an adjustment is made to reflect this potential loss. This estimation helps ensure that financial statements present a fair view of the company’s financial health by not overstating the value of inventory on hand. Other options like salaries payable represent obligations that are accrued and not typically subject to estimation in the same manner as inventory write-downs. Similarly, loan receivables are recorded based on existing agreements, while interest income is recognized as earned and does not inherently require estimation for the purpose of the audit. Therefore, inventory write-downs stand out as the type of allowance that is inherently linked to estimates based on expected future realizations, making it the correct choice.