IAASB issues ISA 540 (Revised) for audit of accounting estimates

The International Auditing and Assurance Standards Board (IAASB) has released International Standard on Auditing (ISA) 540 (Revised), its revised standard for the audit of accounting estimates and related disclosures

Banks, insurers and other financial services firms have seen revolutionary change in their accounting practices as they moved to new accounting standards that changed the way they deal with loan provisions and insurance contracts.

ISA 540 (Revised) reflects this rapidly evolving business environment and ensures that the standard continues to keep pace with the changing market.

Although this ISA applies to all accounting estimates, the degree to which an accounting estimate is subject to estimation uncertainty will vary substantially. The nature, timing and extent of the risk assessment and further audit procedures required by this ISA will vary in relation to the estimation uncertainty and the assessment of the related risks of material misstatement.

This ISA requires a separate assessment of inherent risk for purposes of assessing the risks of material misstatement at the assertion level for accounting estimates.

This revised standard is the first to be completed as part of the IAASB’s broader programme, Addressing the Fundamental Elements of an Audit, and is an important part of the IAASB’s efforts to improve audit quality globally.

Some of the significant revisions include:

•             an enhanced risk assessment that requires auditors to consider complexity, subjectivity and other inherent risk factors in addition to estimation uncertainty. This will drive auditors to think more deeply about the risks inherent to accounting estimates.

•             a closer link between the enhanced risk assessment and the methods, data and assumptions used in making accounting estimates, including the use of complex models.

•             specific material to show how the standard is scalable to all types of accounting estimates.

•             emphasis on the importance of applying appropriate professional scepticism when auditing accounting estimates to foster a more independent and challenging sceptical mindset in auditors.

ISA 540 (Revised) becomes effective for financial statement audits for periods beginning on or after 15 December 2019.

It is critical that all parties in the financial reporting supply chain, particularly regulators, national standard-setters and firms collaborate in the implementation of a standard with such far-reaching effects on the audit of financial statements.

The IAASB will provide implementation support to help auditors navigate and apply the revised standard.

The IAASB develops auditing and assurance standards and guidance for use by all professional accountants under a shared standard-setting process involving the Public Interest Oversight Board, which oversees the activities of the IAASB, and the IAASB Consultative Advisory Group, which provides public interest input into the development of the standards and guidance.

International Standard on Auditing (ISA) 540 (Revised) issued 3 Oct 2018

Report by Sara White

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