A conclusion that is made by an entity’s management in applying accounting policies. It reflects the ability of a management to reach sensible conclusions as to certain aspects of financial reporting. The preparation of financial statements requires management to make judgments about the application of accounting policies that have a significant effect on the items and amounts recognized in the financial statements. The key areas in accounting that require judgment include timing, recognition and value. For example,  judgment related to timing requires management to determine when a transaction takes place, at what date and in which financial period. This entails that management has to determine whether a transaction shall be recognized in this financial year or the next financial year.

Judgment concerns the most complex or subjective conclusions that have the most significant effect on amounts recognized and the assumptions and other sources of estimation uncertainty which gives rise to a significant risk of material adjustment to the carrying amounts of assets or liabilities, and other items, within the next year.

An entity’s audit committee is required to hold discussions with management and the external auditor, as part of the pursuit to challenge management’s judgments of key assumptions underlying critical accounting estimates, and understanding management’s thought process for making accounting judgments and estimates.

Such efforts or endeavors undertaken by an audit committee shall aim to obtain an understanding and evaluation of the facts, economics and financial reporting requirements surrounding each critical accounting judgments and estimates. This also involves assessing the appropriateness of management’s selection of accounting principles and critical accounting policies, and evaluating the method and the assumptions used in making critical accounting judgment and estimates.

An audit committee shall also challenge the degree of aggressiveness or conservatism surrounding judgments and estimates and assess the risk for management bias. It shall also ensure external audit has sufficiently established that management’s accounting policies, judgments and estimates are fit for purpose.