RST Ltd. is a manufacturing company. While auditing its financial statements for FY 2025-26, the auditor notes that: (i) Management has recognised a…

As per SA 540, Auditing Accounting Estimates and Related Disclosures, in respect of accounting estimates that give rise to significant risks, the auditor shall, in addition to other substantive procedures performed to meet the requirements of SA 330, evaluate the following matters with respect to estimation uncertainty: (i) How management has: considered alternative assumptions or outcomes; why it has rejected them; and how management has otherwise addressed estimation uncertainty in making the accounting estimate. (ii) Whether the significant assumptions used by management are reasonable. (iii) Where relevant to the reasonableness of the significant assumptions or the appropriate application of the applicable financial reporting framework, management's intent to carry out specific courses of action and its ability to do so. In view of above, the auditor should apply appropriate audit procedures to the estimates in RST Ltd. as follows: (i) Warranty provision: The auditor should evaluate the method for the ₹ 80 lakh warranty provision and past claim trends used by management, including whether previous estimates align with actual claims. The auditor should assess the reasonableness of significant assumptions, alternative outcomes and estimation uncertainty relating to future warranty claims. (ii) Unquoted investment: Since the valuation involves significant estimation uncertainty due to the use of unobservable inputs, the auditor should evaluate the valuation model and methodology used, test relevant data and assess the reasonableness of significant assumptions. The auditor should also consider whether alternative assumptions or valuation outcomes have been appropriately considered and whether the related fair value disclosures adequately describe the estimation uncertainty. (iii) Provision for doubtful debts: The auditor should critically evaluate the basis for reducing the provision, particularly since the ageing of receivables has worsened. The auditor should examine subsequent collections, ageing analysis, historical loss experience and other relevant evidence, and assess whether the revised assumption is reasonable and whether there is sufficient appropriate audit evidence supporting the expected recoverability of the receivables. Thus, the auditor should not merely accept management's estimates. The auditor should obtain sufficient appropriate audit evidence by evaluating the methods, data, significant assumptions, estimation uncertainty and management's consideration of alternative outcomes, and should determine whether the resulting accounting estimates and related disclosures are reasonable in the circumstances.