Document ID: chunk:federal_register_of_legislation:F2022C01152:reg:4:p23
Version: federal_register_of_legislation:F2022C01152
Segment Type: reg
Provision Reference: reg 4 (pt 23/63)
Character Range: 78450–81704

as significant assumptions in this Auditing Standard if a reasonable variation in the assumption would materially affect the measurement of the accounting estimate. A sensitivity analysis may be useful in demonstrating the degree to which the measurement varies based on one or more assumptions used in making the accounting estimate.

Inactive or illiquid markets

A43.         When markets are inactive or illiquid, the auditor's understanding of how management selects assumptions may include understanding whether management has:

           * Implemented appropriate policies for adapting the application of the method in such circumstances. Such adaptation may include making model adjustments or developing new models that are appropriate in the circumstances;

           * Resources with the necessary skills or knowledge to adapt or develop a model, if necessary on an urgent basis, including selecting the valuation technique that is appropriate in such circumstances;

           * The resources to determine the range of outcomes, given the uncertainties involved, for example by performing a sensitivity analysis;

           * The means to assess how, when applicable, the deterioration in market conditions has affected the entity's operations, environment and relevant business risks and the implications for the entity's accounting estimates, in such circumstances; and

           * An appropriate understanding of how the price data, and the relevance thereof, from particular external information sources may vary in such circumstances.

Data (Ref: Para. 13(h)(ii)(a)(iii))

A44.         Matters that the auditor may consider in obtaining an understanding of how management selects the data on which the accounting estimates are based include:

           * The nature and source of the data, including information obtained from an external information source.

           * How management evaluates whether the data is appropriate.

           * The accuracy and completeness of the data.

           * The consistency of the data used with data used in previous periods.

           * The complexity of IT applications or other aspects of the entity's IT environment used to obtain and process the data, including when this involves handling large volumes of data.

           * How the data is obtained, transmitted and processed and how its integrity is maintained.

How management understands and addresses estimation uncertainty (Ref: Para. 13(h)(ii)(b)–13(h)(ii)(c))

A45.         Matters that may be appropriate for the auditor to consider relating to whether and how management understands the degree of estimation uncertainty include, for example:

           * Whether and, if so, how management identified alternative methods, significant assumptions or sources of data that are appropriate in the context of the applicable financial reporting framework.

           * Whether and, if so, how management considered alternative outcomes by, for example, performing a sensitivity analysis to determine the effect of changes in the significant assumptions or the data used in making the accounting estimate.

A46.         The requirements of the applicable financial reporting framework may specify the approach to selecting