Part I:

After the auditor completes auditing all other account balances on the balance sheet, it might appear that the retained earnings figure is a balancing figure and requires no further audit procedures. Why would an auditor still audit retained earnings?

Part II:

An often contentious area of discussion between the auditor and the client is the precision needed for an estimate, for example, an estimate of the warranty liability of an automotive manufacturer.

1. Scenario: You client argues that because an estimate is subjective, materiality should be larger than it would be for a less subjective account. How would you respond to the client?
2. Regarding the precision of an 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.
   1. Indicate the extent to which you agree or disagree with the statement
   2. How might an auditor verify that the model is sound?
   3. If there is a precise estimate, should the auditor overrule the estimate 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.