An auditor is evaluating the sufficiency of audit evidence for a nonissuer's fair value estimate of investment property. The auditor has tested management's significant assumptions and found them to be reasonable. However, the auditor notes that the valuation is highly sensitive to minor changes in the capitalization rate. What is the auditor's BEST course of action?

Answer options:

Conclude that the estimate is unreasonable due to the high sensitivity.

Require management to use a fixed capitalization rate from an industry guide.

Issue a qualified opinion due to estimation uncertainty.

Evaluate whether the disclosures in the financial statements adequately describe the estimation uncertainty and sensitivity.

How to approach this question

High Uncertainty/Sensitivity = High Disclosure Requirement. If the number is a guess, the notes must explain it's a guess.

Full Answer

D.Evaluate whether the disclosures in the financial statements adequately describe the estimation uncertainty and sensitivity.✓ Correct

For estimates with high estimation uncertainty (sensitivity), AU-C 540 requires the auditor to evaluate whether the financial statement disclosures are adequate in the context of the applicable financial reporting framework. The disclosures should inform users about the sensitivity of the estimate to changes in assumptions.

Common mistakes

Thinking high uncertainty means the number is wrong (Option A). It just means it's volatile.

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