Published by Shah Teelani & Associates | PCAOB-Registered Audit Firm | Reg. No. 7161
Auditing accounting estimates consistently ranks among the top deficiency areas in PCAOB inspection reports. Nearly every set of public company financial statements contains estimates — goodwill impairment, allowance for credit losses, fair value measurements, revenue recognition under complex arrangements, contingent liabilities, and more. Each one involves subjective assumptions, measurement uncertainty, and management judgment. Consequently, each one carries significant audit risk.
The use of complex accounting estimates and fair value measurements continues to grow in financial reporting. Estimates often have a significant impact on a company’s reported financial position and results of operations. Accounting estimates are often some of the areas of greatest risk in an audit, requiring additional audit attention and appropriate application of professional skepticism. The Board’s oversight activities have revealed a recurring pattern of deficiencies in this area.
Furthermore, the challenges of auditing estimates may be compounded by cognitive bias, which could lead auditors to anchor on management’s estimates and inappropriately weigh confirmatory over contradictory evidence.
At Shah Teelani & Associates, we treat accounting estimates as one of the highest-risk areas in every engagement. This blog explains what PCAOB AS 2501 requires — including the three testing approaches, management bias evaluation, and the complex areas that demand the most rigorous audit attention in 2026.
What Makes Accounting Estimates Uniquely Risky
An accounting estimate is a measurement or recognition in the financial statements of an account, disclosure, transaction, or event that generally involves subjective assumptions and measurement uncertainty. For purposes of this standard, a fair value measurement is a form of accounting estimate.
Unlike transactions supported by external documents and agreed prices, estimates depend on models, assumptions, and inputs that management selects. Different assumptions produce materially different results. Moreover, management’s incentives — earnings targets, debt covenant compliance, compensation arrangements — can consciously or unconsciously influence how those assumptions are set.
By their nature, accounting estimates involve subjective assumptions and measurement uncertainty, making them susceptible to management bias. Some estimates involve complex processes and methods. As a result, accounting estimates are often some of the areas of greatest risk in an audit, requiring additional audit attention and appropriate application of professional skepticism.
Therefore, the audit of estimates is not merely a technical exercise. It requires the auditor to challenge management’s judgment independently — not simply confirm it.
The Three Approaches Under AS 2501
PCAOB AS 2501 provides auditors with three approaches for testing accounting estimates. These can be used individually or in combination depending on the nature and risk of the estimate.
Approach 1 — Testing the Company’s Process
This approach involves performing procedures to test and evaluate the methods, data, and significant assumptions management uses. It includes assessing whether methods are appropriate, data is accurate and complete, and assumptions are reasonable and consistent with external evidence such as industry benchmarks or economic indicators.
Testing the company’s process requires more than reviewing management’s documentation. The auditor must evaluate whether the method management selected is appropriate for the type of estimate and consistent with the applicable accounting framework. Furthermore, the data underlying the estimate must be tested for completeness and accuracy — not accepted as reliable simply because management provided it. Finally, the auditor must challenge the significant assumptions — asking whether each assumption is supportable by external, independent evidence rather than internal management views.
Approach 2 — Developing an Independent Expectation
Using their own methods, data, and assumptions — or a hybrid — the auditor creates an independent estimate for comparison. Substantial differences prompt inquiries to management and may involve specialists such as valuators for complex items.
Developing an independent expectation is often the most powerful approach for high-risk estimates. Where the auditor uses a different method, different data sources, and independently selected assumptions, the result provides genuine corroboration — or identifies a material difference requiring further investigation. Consequently, this approach most directly satisfies the professional skepticism requirement by producing a conclusion the auditor reached independently of management.
Approach 3 — Evaluating Subsequent Events
Auditors examine events or transactions after the balance sheet date that provide insight into the estimate’s accuracy.
Subsequent events can confirm or contradict management’s estimate. A receivable written off shortly after year-end suggests the allowance estimate was inadequate. An asset sold at a price significantly different from its recorded fair value raises questions about the valuation method used. Moreover, subsequent events provide evidence the auditor can obtain independently — they do not rely on management’s models or assumptions. Therefore, this approach is particularly effective for estimates involving future cash flows, asset realizations, or resolution of contingent liabilities.
Evaluating Management Bias: A Required Obligation
One of the most significant obligations under AS 2501 is the evaluation of management bias. This goes beyond evaluating whether individual estimates are reasonable. It requires the auditor to consider whether the pattern of estimates — taken together — reflects a systematic bias toward achieving particular financial reporting outcomes.
Evaluating potential bias in accounting estimates includes evaluating bias in estimates individually and in aggregate. It also includes evaluating whether bias results from the cumulative effect of changes in estimates.
Management bias is not always intentional. However, it is always a risk where management makes subjective judgments about uncertain amounts. Earnings targets, compensation plans, loan covenants, and analyst expectations all create pressure — and that pressure can manifest in estimates that consistently land at the optimistic end of a reasonable range.
Consequently, auditors must document their evaluation of management bias explicitly. Workpapers that simply confirm management’s estimate was within a reasonable range — without examining whether that estimate consistently lands at the favorable end of that range — do not satisfy AS 2501.
Professional Skepticism in Estimates: What It Requires
AS 2501 emphasizes that auditors need to apply professional skepticism, including addressing potential management bias, when auditing accounting estimates. The PCAOB continues to identify deficiencies at both larger and smaller audit firms in this area, raising concerns about auditors’ application of professional skepticism.
Professional skepticism in the context of estimates means the auditor approaches every assumption with a questioning mind. Where management assumes a 5 percent growth rate, the auditor asks what evidence supports that rate — and what contradictory evidence might suggest otherwise. Where management applies a discount rate, the auditor evaluates whether that rate is consistent with external market data.
The challenges of auditing estimates may be compounded by cognitive bias, which could lead auditors to anchor on management’s estimates and inappropriately weigh confirmatory over contradictory evidence.
Breaking that anchoring pattern requires deliberate effort. Before reviewing management’s estimate, the auditor should form an independent view of what the estimate should be — based on available external data and market information. After reviewing management’s estimate, the auditor should specifically seek evidence that contradicts management’s assumptions — not just evidence that supports them. Furthermore, the documentation must show that this process occurred — not just that the auditor reviewed management’s work.
High-Risk Estimate Areas That Demand the Most Attention
Certain categories of accounting estimates carry persistently higher risk. PCAOB inspection findings and the May 2025 Audit Focus publication specifically highlight these areas as requiring heightened scrutiny.
Goodwill and intangible asset impairment. Impairment testing involves significant assumptions about future cash flows, discount rates, and market conditions. Management has strong incentives to avoid impairment charges. Consequently, auditors must independently evaluate the reasonableness of key assumptions — particularly discount rates and long-term growth rates — using external data sources rather than management-provided benchmarks.
Allowance for credit losses. Under CECL and similar forward-looking models, the allowance depends on assumptions about future economic conditions, historical loss rates, and portfolio characteristics. Moreover, each assumption interacts with others in complex ways. Auditors must understand the model, test the underlying data, and evaluate whether the economic forecasts management selected are consistent with observable external conditions.
Fair value measurements. Level 2 and Level 3 fair value measurements involve significant unobservable inputs. Where management uses internal valuation models, auditors must evaluate whether the methodology is appropriate, whether inputs are consistent with market data, and whether the specialist whose work management relied upon has the necessary expertise and independence.
Revenue recognition involving variable consideration. Where contracts include performance bonuses, refund obligations, rebates, or variable pricing, management must estimate the amount of variable consideration to include in revenue. Furthermore, these estimates affect revenue timing — creating both overstatement and understatement risk. Auditors must evaluate the estimation methodology, test the data inputs, and compare management’s estimates to historical patterns.
Going concern assessments. Management’s ability and intent to execute mitigation plans drives the going concern conclusion. Where an estimate depends on the company’s intent and ability to execute a course of action — such as a restructuring plan that supports asset impairment recoverability — AS 2501 requires auditors to consider any third-party involvement and evaluate the realism of the assumption, not just its theoretical logic.
Contingent liabilities. Litigation, environmental obligations, and warranty provisions all require estimates of probable outcomes and amounts. Legal counsel letters provide evidence — but auditors must evaluate whether management’s assessment of probability and amount reflects all available information, including unfavorable developments.
Using Specialists in Complex Estimate Audits
The use of the work of specialists continues to increase in both frequency and significance as complex accounting estimates and fair value measurements grow in financial reporting.
Where an estimate involves specialized knowledge — actuarial calculations, real estate valuations, financial instrument pricing, environmental liability assessments — the auditor must evaluate whether to use an auditor-engaged specialist to develop an independent expectation or evaluate management’s specialist. This is not optional where the auditor lacks the necessary expertise.
Using a specialist does not transfer audit responsibility. The auditor must evaluate the specialist’s qualifications, objectivity, and the reasonableness of the specialist’s work — including the appropriateness of the methodology and inputs the specialist selected. Moreover, where a management specialist and an auditor specialist produce materially different results, the auditor must investigate the source of the difference and evaluate which conclusion is better supported by available evidence.
Common Deficiencies in Estimates Testing
The PCAOB’s May 2025 Audit Focus publication identified specific recurring deficiencies in how auditors test accounting estimates. Understanding these patterns helps teams avoid them.
Common failures include accepting management’s method without evaluating whether it is appropriate for the estimate and accounting framework. Additionally, testing data accuracy and completeness superficially — without genuinely evaluating whether the inputs underlying the estimate are reliable — is a persistent issue. Evaluating only confirmatory evidence while failing to seek or document contradictory evidence represents a professional skepticism failure. Furthermore, comparing management’s estimate to a reasonable range without evaluating where within that range the estimate falls — and whether bias drove it to one end — is specifically flagged in PCAOB guidance. Finally, failing to aggregate the bias evaluation across all estimates rather than treating each one in isolation produces an incomplete conclusion.
What Issuers and Finance Teams Should Know
The audit of accounting estimates places significant demands on finance teams. Management must document the basis for every significant estimate — the method selected, the data used, the assumptions applied, and the rationale for each significant judgment.
Strong estimate documentation enables auditors to evaluate management’s process more efficiently. Moreover, proactively disclosing the range of reasonable estimates — rather than presenting only the point estimate — helps auditors understand how management exercised judgment and supports a more transparent audit process. Finance teams should also engage external auditors early on estimates involving specialists to ensure adequate time for independent evaluation.
The Bottom Line
Auditing accounting estimates requires the highest levels of professional skepticism, technical expertise, and independent evaluation. These are not areas where auditors can confirm management’s work and move on. They are areas where the auditor must challenge, independently test, evaluate bias, and document a conclusion reached through genuine professional judgment.
In 2026, with PCAOB inspections continuing to flag estimate-related deficiencies and the May 2025 Audit Focus reinforcing specific requirements under AS 2501, every registered firm must treat the audit of estimates as a primary engagement risk — not a secondary consideration.
Shah Teelani & Associates (PCAOB Reg. No. 7161) applies rigorous, skepticism-driven procedures to every significant accounting estimate on every engagement. We work with US-listed and OTC public companies that understand what defensible estimate conclusions require.
If your organization requires a PCAOB-registered auditor with deep expertise in complex accounting areas, we welcome the conversation.
Shah Teelani & Associates PCAOB-Registered Audit Firm | Reg. No. 7161 Ahmedabad | Dubai | United States
