Accounting Estimates Practice Test

You are conducting an attestation engagement (examination) for a nonissuer service organization over management’s assertion about compliance with a debt covenant that uses EBITDA as defined in the loan agreement. Management’s EBITDA calculation includes an add-back for “nonrecurring restructuring costs” based on an estimate of future severance payouts not yet approved by the board, and the add-back is necessary to show compliance. Which procedure should the practitioner apply to test the reasonableness of the estimate used in the subject matter?

In an audit of an issuer technology company, management measured the fair value of a privately held equity investment (Level 3) using a discounted cash flow model with a 25% revenue growth assumption for five years and a 10% discount rate. The key inputs are based on management’s internal budgets and no recent market transactions exist; the investment is material. Which procedure should the auditor apply to test the reasonableness of the estimate?