What does retrospective review mean on the CPA exam?
Last reviewed
Retrospective review. Comparing last period's accounting estimates against what actually happened, to see whether management's judgments lean consistently in one direction.
Defined against AU-C 540.14.
Worked example
Last year a client recorded a warranty reserve of $400,000, an allowance for credit losses of $250,000 and an estimated obsolescence write-down of inventory of $120,000. This year the auditor compares them with what happened: the warranty period on those sales has expired with claims of $310,000, the receivables have all been collected or written off with write-offs of $180,000, and the obsolete stock has been disposed of at a loss of $85,000.
What does the review show, and how does the auditor use it?
| Warranty reserve above the claims that followed400,000 - 310,000 | 90,000 |
| Allowance above the write-offs that followed250,000 - 180,000 | 70,000 |
| Obsolescence write-down above the actual loss120,000 - 85,000 | 35,000 |
| Total by which last year's estimates exceeded the outcomes90,000 + 70,000 + 35,000 | 195,000 |
Answer: All three estimates came out high, by $195,000 in total. One miss proves little, but a pattern in one direction points to possible management bias, so the auditor treats this year's estimates with more skepticism and looks hard at the assumptions behind them.
The trap: Treating the $195,000 as a prior-year error to correct. Outcomes that arrive later do not make last year's estimates wrong; the review is a risk assessment tool about how management estimates, not a restatement test.
Based on AU-C 540.14; AU-C 240.32.
Which CPA exam sections use retrospective review?
Retrospective review appears in the AUD section of the CPA exam.
Related terms
- engagement quality review: An objective evaluation of the significant judgments and the conclusions reached, performed by someone not on the engagement team before the report is released.
- tentative minimum tax: The alternative minimum tax computed on its own, before comparing it to the regular tax.
- balance sheet date: The last day of the reporting period.
- recognized gain: The part of realized gain that actually goes on the return this year.
- suitably designed: The controls, if they operated as described, would achieve the stated objective.
- applicable financial reporting framework: The framework management adopts for the statements, such as GAAP or a special purpose framework.