An often contentious area of discussion between the auditor and the client is the preciseness with which an estimate is to be made, for example, an estimate of the warranty liability of an automotive manufacturer.

a. Scenario: Your client argues that because an estimate is subjective, the range for materiality ought to be larger than it would be for a less subjective account. Do you agree or disagree? Explain your rationale.

b. Regarding the preciseness of the estimate, respond to the following quote from an ex-audit partner: "The preciseness of the estimate is dependent on the soundness of the underlying prediction model. If the auditor determines that the inputs are correct and agrees on the model, there is no need for audit judgment."

i. Indicate the extent to which you agree or disagree with the statement.

ii. How might an auditor verify that the model is sound?

iii. If there is a precise answer, should the auditor overrule the answer with a judgment that contains subjectivity? If you believe the answer is yes, identify the factors that should lead the auditor to override the judgment. If you believe the answer is no, state your rationale.