Subsection 2: Certification of accounts

The professional practice standard relating to the assessment of accounting estimates, approved by the Minister of Justice, is set out below:

PROFESSIONAL PRACTICE STANDARD RELATING TO THE ASSESSMENT OF ACCOUNTING ESTIMATES

Introduction

1. Some items in the accounts cannot be measured precisely and can only be estimated. These estimates may result in a risk that the accounts contain material misstatements.

2. The purpose of this standard is to set out the specific audit procedures for:

- identifying and assessing the risks of material misstatement arising from accounting estimates, in the accounts;

- designing audit procedures in response to that assessment.

3. This standard applies to accounting estimates, including present value and fair value estimates, used by management in preparing the financial statements and to the information about those estimates provided in the notes to the financial statements.

Characteristics of accounting estimates

4. Depending on the requirements of the applicable financial reporting framework and the characteristics of the asset or liability concerned, accounting estimates may be simple or complex and contain a greater or lesser degree of uncertainty and judgement.

5. Some accounting estimates are likely to result in only a low risk of material misstatement.

This is the case, for example, for accounting estimates relating to routine transactions, which are regularly performed and updated, for which the methods prescribed by the accounting framework are simple and easily applicable.

6. Accounting estimates relating to non-routine transactions, by virtue of their size and nature, or which are based on strong assumptions that leave significant room for management judgement may give rise to a high risk of material misstatement.

This is the case for accounting estimates relating to the costs that certain pending litigation is likely to generate or accounting estimates for financial instruments for which there is no market.

7. Where accounting estimates involve a significant degree of judgement, the objectives pursued by management, which may, intentionally or unintentionally, guide the choice of assumptions on which those estimates are based, may give rise to a risk of material misstatement.

Obtaining an understanding of the entity's valuation process and assessing the risk of material misstatement resulting from accounting estimates

8. In order to identify and assess the risk of material misstatement resulting from accounting estimates, the statutory auditor performs audit procedures that involve obtaining an understanding of:

- the accounting rules and principles prescribed by the applicable accounting standards with regard to accounting estimates;

- the process followed by the entity to make accounting estimates, any changes in the calculation methods used and the reasons for these changes;

- whether the entity has used the work of an expert;

- the unwinding or re-evaluation of accounting estimates of the same nature made in previous years.

9. The statutory auditor also takes cognisance of the data used to calculate accounting estimates.

10. Because management is responsible for the internal control implemented in the entity and for the preparation of the accounts, and because it can influence the choices of valuation methods used, the statutory auditor enquires of it:

- about the internal control procedures put in place to ensure that the process followed in making accounting estimates complies with its directives;

- about its intentions and its ability to carry out its action plans with regard to the elements of the accounts that are the subject of significant accounting estimates.

Audit procedures to be performed in response to the risk of material misstatement relating to accounting estimates

11. In response to its assessment of the risk of material misstatement of the financial statements resulting from accounting estimates, the statutory auditor designs and performs audit procedures to obtain sufficient appropriate evidence to conclude on the reasonableness of accounting estimates used by management, and, where applicable, of the disclosures in the notes to the financial statements about those estimates.

12. The statutory auditor assesses whether the accounting estimates comply with the accounting rules and principles prescribed by the applicable financial reporting framework.

13. Depending on the accounting estimate that he wishes to audit, the statutory auditor chooses to perform one or more of the following audit procedures:

- verification of the method of calculation used to make the estimate;

- use of his own estimate to compare it with the estimate used by management;

- examination of the post-closing settlement of the estimate.

14. When verifying the calculation method used, the statutory auditor assesses the relevance of the basic data used and the assumptions on which the accounting estimate is based and checks the calculations made by the entity.

In addition, the statutory auditor verifies, where applicable, that the estimate used has been validated by management, at the appropriate level of responsibility, in accordance with the process defined by the entity.

15. In performing audit procedures in response to the risk of material misstatement relating to accounting estimates, the statutory auditor may decide to use the work of an expert.

Management representations

16. The statutory auditor requests written statements from management in which it declares that the main assumptions used are reasonable and that they correctly reflect its intentions and its ability to carry out the actions envisaged.