Audit issues and trends to consider:

1. Auditing accounting estimates

Every set of financial statements contains accounting estimates made by management. Estimates may, however, contain an element of management bias, and the auditor should remain aware of this possibility. It is, therefore, important for the auditor to critically assess the risk of material misstatement, possible management incentives to commit fraud, and other indicators of bias related to these estimates, as well as the consistency of the methods applied, and to perform appropriate procedures to respond to the risks identified, applying professional scepticism throughout the process.

Areas that auditors often address inadequately in their documentation of work performed on testing how management made the estimates include:

• ISA 540 (Revised) para 24: Verification of the significant assumptions and management judgments
• ISA 540 (Revised) para 25: Audit procedures on the data used
• ISA 540 (Revised) para 26: Steps taken by management to understand and address estimation uncertainty.

The auditor must document the audit work and considerations in a re-performable manner, providing the identifying details of the nature, timing and extent of the audit procedures performed. This means that the auditor must reflect the detailed audit considerations, sources and comparisons used to verify these aspects, and not merely draw a conclusion regarding the reasonableness of each aspect.

2.  Useful lives of property, plant and equipment

In small businesses, management often uses SARS rates to determine the useful lives of property, plant and equipment. This is not in line with the IFRS and IFRS for SMEs framework, as it does not allocate the depreciation over the expected useful life in the pattern of usage. This practice often leads to fully depreciated assets remaining on the asset register, as many of the assets remain in use beyond the initial estimated useful life. Management should re-estimate the useful lives of the assets to ensure that the value of the assets reflects the economic value to be utilised over the remaining useful life.

Residual values should not reflect the amount of usage of the asset remaining at the end of its life, but the sale value less selling costs. Having no residual value increases the risk of an asset being over depreciated, which causes problems when the life is extended and the carrying value is too low, or zero.

The auditor should not accept this practice without challenging management on their assessment of the useful lives of assets. This is especially the case where these assets are directly used in the production of income, such as mining equipment or network infrastructures. The nature and circumstances of the entity should be considered, as well as the possibility of separate asset components being used at different rates.