Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

Which statement is a basic element of the auditor's report under U.S. auditing standards?

1. An audit includes evaluating significant estimates made by management.

2. The disclosures provide reasonable assurance of no material misstatement.

3. The financial statements are consistent with prior periods.

4. The auditor evaluated the overall internal control.

The correct answer is: An audit includes evaluating significant estimates made by management.

The statement that an audit includes evaluating significant estimates made by management is a fundamental aspect of the auditor's responsibilities. In the context of U.S. auditing standards, auditors are required to collect sufficient appropriate audit evidence regarding the reasonableness of accounting estimates and related disclosures made by management. Evaluating significant estimates is crucial because these estimates can significantly impact the financial statements, often involving subjective judgment or interpretation of financial and operational data. This involves assessing the methodology used by management, the appropriateness of the underlying assumptions, and the consistency with prior periods or industry standards. It ensures that the estimates are not only reasonable but also free from bias and reflective of the company's situation. The other statements, while relevant to auditing, do not capture the essence of the auditor's responsibilities as distinctly. For instance, the notion of disclosures providing reasonable assurance of no material misstatement is somewhat misleading as the auditor’s role is not to provide absolute assurance but reasonable assurance. Similarly, financial statements being consistent with prior periods or evaluating overall internal control, while important considerations, are not as directly tied to the core elements of an auditor's report as the evaluation of significant estimates is. Thus, the assessment of estimates emerges as a critical focus area in any audit engagement, making it a basic element