Challenges and solutions: an auditor’s point of view

Joseph D Bielecki

It has always been challenging to audit an estimate, especially the allowance for bad debts (ie, the uncollectible portion of accounts receivables) or allowance for loan and lease losses (ALLL, ie, the uncollectible portion of loans). There is nothing concrete to tie the audit to: no market price, or even an industry standard valuation approach (such as the Black–Scholes pricing model). It is insufficient to merely verify that financial statements agree to the calculation, or that the data utilised in the calculation was complete and accurate. An auditor should also consider the methods and assumptions utilised in producing that estimate, the external (environmental) and internal information considered, and even the information that may not have been considered.

An auditor must develop an understanding of how management’s bias could have influenced the estimate. An auditor must understand the potential impact of any matter that is a matter of judgement. Very often, matters of judgement appear as an assumption that exists within a spectrum of potentially acceptable (or reasonable) outcomes. The challenge is often that these outcomes, which may each be reasonable, could result in