Shubham MangalShubham asked 2 years ago

Unable to understand the statement ” In addition, many
financial statement items involve subjective decisions or assessments or a
degree of uncertainty, and there may be a range of acceptable interpretations or
judgments that may be made. Consequently, some financial statement items are
subject to an inherent level of variability which cannot be eliminated by the
application of additional auditing procedures.”

2 Answers
Auditaudit Staff answered 2 years ago

In addition, many
financial statement items involve subjective decisions or assessments or a degree of uncertainty, and there may be a range of acceptable interpretations or judgments that may be made. Consequently, some financial statement items are
subject to an inherent level of variability which cannot be eliminated by the application of additional auditing procedures.

RaviRavi Staff answered 2 years ago

See Lecture on SA 200 Question on On Inherent Limitations of Audit
Below is extract from notes along with examples, it simply indicates problems with financial reporting (accounting)
Nature of Financial Reporting

  • Judgement by Management in applying FRF (Eg While applying AS 19 Leases management has to decide in Finance Lease Vs Operating Lease)
  • Subjective decisions or assessments (For example whether impairment of assets is required or not) (Revaluation should be done or not is subjective decision)
  • Degree of Uncertainty (Because of above) (Difficult for analyst to predict)
  • Range of acceptable interpretations (Accounting for exchange of assets can be on the basis of fair value or on the basis of book value) (Reversal of Inventory W/off)

      Because of this there is Inherent Level of Variability which cannot be eliminated and this can be misused by                        management to manipulate financial statements as per there requirement.

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