This master’s thesis presents a critical view on the revised ISA 540 guideline for auditors auditing accounting estimates. Both management bias and measurement imprecision impose a risk on the ac- curacy of the auditing of complex accounting estimates. The aim of this thesis is to assess how the guidelines are presented in the ISA 540 standard and how this set up might affect the auditor’s risk assessment. It does so by reviewing existing literature and studies from several different scientific fields relevant to the subject.
The main objective of the thesis is to examine the intercorrelated relationship between auditors’ focus on management bias and measurement imprecision and to discuss if the overall audit quality poten- tially could be threatened by an excessive emphasis on management bias. The thesis focuses on the neurological and psychological mechanisms that influence the management when constructing an estimate. Furthermore, it also sheds light on how the natural human focus might be an obstacle when auditing accounting estimates containing a high possibility for intentional misstatements.
In addition, the thesis reviews studies focusing on the auditor's development of their own estimation ranges. This includes an introduction to the statistical probability reasoning methodology surrounding the development of the auditor’s own estimation range and the issues regarding the reasonableness and accounting risks associated with the range.
Based on an extensive literature review and a discussion of recent study findings combined with public figures relating to cases regarding audit failures of accounting estimates, the thesis concludes that the ISA 540 (R) standards’ focus on management bias may have unintended consequences for the audit quality of accounting estimates. Furthermore, the authors of the thesis find it difficult to justify this increased focus on management bias as a large amount of empirical evidence points to measurement imprecision and particularly the auditor's development of their own estimate ranges as an area needing more attention and improvement. By reading this thesis, the auditor will become more aware of the components that each constitute a risk in accounting estimates and with this knowledge, he will be able to reduce his own tendency to let the focus on management bias influence the following risk assessment.