ACCA Advanced Audit and Assurance (AAA) Practice Exam

ISA 540 requires auditors to evaluate which aspect of accounting estimates?

1. Management's adherence to tax compliance

2. The reasonableness of management's assumptions

3. The presentation of estimates in financial statements

4. The independence of the internal audit function

The correct answer is: The reasonableness of management's assumptions

The correct response focuses on the importance of assessing the reasonableness of management's assumptions in accounting estimates, as outlined in ISA 540. This standard emphasizes that accounting estimates are often based on subjective judgements and assumptions made by management about future events, which can significantly impact the financial statements and the audit process. When auditors evaluate the reasonableness of these assumptions, they are looking to ensure that the estimates are not only based on appropriate data but also reflect a plausible view of future outcomes. This involves comparing the assumptions used by management against historical data, industry benchmarks, and any other available relevant information that could provide insights into the validity of the estimates. Understanding this evaluation is crucial for auditors because material misstatements often arise from biased estimates or poorly founded assumptions. Thus, by focusing on the reasonableness of management's assumptions, auditors help ensure that the accounting estimates are reliable and that the financial statements present a true and fair view of the entity's financial position. Other options do not align with the specific requirements of ISA 540. For instance, while the presentation of estimates is important (as covered in some other standards), it is not the primary focus of ISA 540. The standard emphasizes evaluating the assumptions behind the estimates rather than simply their