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Statement on Auditing Standards Issued by the Auditing Standards Board AICPA American Institute of Certified Public Accountants April 1988 57 Auditing Accounting Estimates 1. This Statement provides guidance to auditors on obtaining and evaluating sufficient competent evidential matter to support significant accounting estimates in an audit of financial statements in accord-ance with generally accepted auditing standards. For purposes of this Statement, an accounting estimate is an approximation of a financial statement element, item, or account. Accounting estimates are often included in historical financial statements because— a. The measurement of some amounts or the valuation of some accounts is uncertain, pending the outcome of future events. b. Relevant data concerning events that have already occurred cannot be accumulated on a timely, cost- effective basis. 2. Accounting estimates in historical financial statements measure the effects of past business transactions or events, or the present status of an asset or liability. Examples of accounting estimates include net realizable values of inventory and accounts receivable, property and casualty insurance loss reserves, revenues from contracts accounted for by the percentage- of- completion method, and pension and warranty expenses. 1 3. Management is responsible for making the accounting estimates included in the financial statements. Estimates are based on subjective 1Additional examples of accounting estimates included in historical financial statements are presented in the Appendix. Copyright © 1988 by the American Institute of Certified Public Accountants Inc. 1211 Avenue of the Americas, New York, N. Y. 10036- 8775 1234567890 AudS 898