Document ID: chunk:federal_register_of_legislation:F2022C01152:reg:4:p13
Version: federal_register_of_legislation:F2022C01152
Segment Type: reg
Provision Reference: reg 4 (pt 13/63)
Character Range: 49364–52575

Methods

A2.             A method is a measurement technique used by management to make an accounting estimate in accordance with the required measurement basis. For example, one recognised method used to make accounting estimates relating to share‑based payment transactions is to determine a theoretical option call price using the Black‑Scholes option pricing formula. A method is applied using a computational tool or process, sometimes referred to as a model, and involves applying assumptions and data and taking into account a set of relationships between them.

Assumptions and Data

A3.             Assumptions involve judgements based on available information about matters such as the choice of an interest rate, a discount rate, or judgements about future conditions or events. An assumption may be selected by management from a range of appropriate alternatives. Assumptions that may be made or identified by a management's expert become management's assumptions when used by management in making an accounting estimate.

A4.             For purposes of  this Auditing Standard, data is information that can be obtained through direct observation or from a party external to the entity. Information obtained by applying analytical or interpretive techniques to data is referred to as derived data when such techniques have a well‑established theoretical basis and therefore less need for management judgement. Otherwise, such information is an assumption.

A5.             Examples of data include:

           * Prices agreed in market transactions;

           * Operating times or quantities of output from a production machine;

           * Historical prices or other terms included in contracts, such as a contracted interest rate, a payment schedule, and term included in a loan agreement;

           * Forward‑looking information such as economic or earnings forecasts obtained from an external information source, or

           * A future interest rate determined using interpolation techniques from forward interest rates (derived data).

A6.             Data can come from a wide range of sources. For example, data can be:

           * Generated within the organisation or externally;

           * Obtained from a system that is either within or outside the general or subsidiary ledgers;

           * Observable in contracts; or

           * Observable in legislative or regulatory pronouncements.

Scalability (Ref: Para. 3)

A7.             Examples of paragraphs that include guidance on how the requirements of this Auditing Standard can be scaled include paragraphs A20–A22, A63, A67, and A84.

Key Concepts of this Auditing Standard

Inherent Risk Factors (Ref: Para. 4)

A8.             Inherent risk factors are characteristics of events or conditions that affect susceptibility to misstatement, whether due to fraud or error, of an assertion about a class of transactions, account balance or disclosures, before consideration of controls.[32] Appendix 1 further explains the nature of these inherent risk factors, and their inter‑relationships, in the context of making accounting estimates and their presentation in the financial report.

A9.             When assessing