Which of the following audit procedures helps address possible management bias in estimates?

Which of the following audit procedures helps address possible management bias in estimates?

• A. Analyzing past performance only
• B. Evaluating the reasonableness of assumptions
• C. Confirming balances with third parties
• D. Reviewing audit team composition

Answer: (B)

The correct response is to evaluate the reasonableness of assumptions. This audit procedure is directly aimed at addressing potential management bias in estimates, particularly when management is required to make subjective judgments about future events that affect accounting estimates. By critically assessing the assumptions underpinning the estimates—such as growth rates, discount rates, and market conditions—the auditor can determine whether management's judgments are reasonable and grounded in verifiable data. This approach allows auditors to challenge and validate the basis on which management has formulated its estimates, helping to ensure that those estimates reflect a true and fair view of the financial statements without undue optimism or pessimism. Moreover, considering the context in which these estimates are made can highlight possible biases, thereby enabling a more accurate and fair depiction of the company’s financial position. The other options do not directly or effectively address management bias in the context of accounting estimates. Analyzing past performance focuses more on historical data rather than on the subjective nature of current estimates. Confirming balances with third parties is a procedure that assists in the verification of balances but does not address management's judgment in estimating accounts. Finally, reviewing audit team composition pertains to the qualifications and diversity of the audit team rather than assessing management’s biases in estimates. These procedures may contribute to an

The correct response is to evaluate the reasonableness of assumptions. This audit procedure is directly aimed at addressing potential management bias in estimates, particularly when management is required to make subjective judgments about future events that affect accounting estimates. By critically assessing the assumptions underpinning the estimates—such as growth rates, discount rates, and market conditions—the auditor can determine whether management's judgments are reasonable and grounded in verifiable data.

This approach allows auditors to challenge and validate the basis on which management has formulated its estimates, helping to ensure that those estimates reflect a true and fair view of the financial statements without undue optimism or pessimism. Moreover, considering the context in which these estimates are made can highlight possible biases, thereby enabling a more accurate and fair depiction of the company’s financial position.

The other options do not directly or effectively address management bias in the context of accounting estimates. Analyzing past performance focuses more on historical data rather than on the subjective nature of current estimates. Confirming balances with third parties is a procedure that assists in the verification of balances but does not address management's judgment in estimating accounts. Finally, reviewing audit team composition pertains to the qualifications and diversity of the audit team rather than assessing management’s biases in estimates. These procedures may contribute to an