ACCA Audit and Assurance (F8) Practice Exam

Which of the following is a key factor in auditing accounting estimates?

1. Reasonableness of assumptions

2. Management involvement

3. Historical financial performance

4. Computer processing methods

The correct answer is: Reasonableness of assumptions

In auditing accounting estimates, the reasonableness of assumptions is crucial. This is because accounting estimates often rely on various assumptions made by management, which can significantly impact the financial statements. Auditors must evaluate whether these assumptions are valid and reasonable within the context of the business and its environment. This assessment includes analyzing the basis for the assumptions, including any relevant historical data, current market conditions, and industry trends. By focusing on the reasonableness of the assumptions, auditors can determine the reliability of the estimates and ultimately the integrity of the financial statements. While management involvement is also important when considering how estimates are developed, it does not directly assess the validity of the assumptions themselves. Similarly, historical financial performance provides context but does not inherently evaluate the reasonableness of current assumptions. Computer processing methods pertain more to the tools used in the accounting process rather than the assessment of estimates. Thus, the primary factor that enables auditors to gauge the accuracy of accounting estimates is indeed the reasonableness of the underlying assumptions.