Preliminary Draft We are grateful to John Fogarty for helpful discussions about this project. We also thank Wendy Bailey, Dan Stone, Arnie Wright, and workshop participants at Notre Dame, Kentucky, and the Northeast Behavioral Accounting Research Seminar for comments on prior drafts of this paper. Additionally, we thank the auditors and their firms who have given their time assisting with the interviews. Jackie Hammersley is grateful for the support provided by a Terry Sanford Research Award. Accounting estimates, including fair values and impairments, are increasingly important to the interpretation of financial statements. Auditors are charged with assessing the reasonableness of management's accounting estimates; however, estimates are difficult to audit. We perform a task analysis to determine how they audit estimates and what problems they experience. We rely on several data sources. First, we analyze auditing standards and interview 24 managers and partners to assess how auditors perform the task and how well their performance matches the required process. Next, we rely on the interviews and a content analysis of recent PCAOB inspection reports to shed light on the difficulties auditors experience in auditing estimates. We find that while auditors' reported processes generally match standards, they generally evaluate estimates by focusing on auditing the details of management's estimate instead of creating an independent one. Further, no auditors mentioned considering whether any important conditions were omitted from management's model. We also find that both auditors and regulators report auditor difficulties with over-reliance on management's process. That is, auditors sometimes fail to understand management's process for generating the estimate, fail to adequately test the underlying data and assumptions, and fail to notice inconsistencies among the estimate and other internal data or external conditions. We draw conclusions about underlying causes of these problems and make recommendations for changes to auditing standards, practices, and auditor training to improve the audits of estimates.
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