When the International Auditing and Assurance Standards Board (IAASB) started to revise the International Standard on Auditing Accounting Estimates (ISA 540) in 2015, it was with the intention to assist auditors of financial institutions in auditing the future-orientated accounting estimates required in terms of IFRS 9, specifically the expected credit loss model to measure financial instruments. The IAASB soon realised, however, that the increasingly complex business environment required a broader revision of the standard. This led to the development of a revised ISA 540 applicable to all audits.
Management and the directors of the auditee should ideally consider how they are likely to be impacted by the changes to the auditor’s responsibilities including preparing for the broad questions that auditors may ask those involved in determining these accounting estimates.
The objective of ISA 540 (Revised) is clear – for the auditor to obtain sufficient appropriate audit evidence about whether accounting estimates and related disclosures in the financial statements are reasonable in the context of the applicable financial reporting framework (ISA 540 (Revised) paragraph 11). For an estimate to be reasonable means it is not only complying with the requirements of the framework, but in doing so, it reflects the judgements that are consistent with the objective of the measurement basis in that framework (most likely IFRS or IFRS for SMEs).
The audit requirements are scalable in order to accommodate more or less complex estimates appropriately. The auditor’s work effort will therefore differ based on the auditor’s assessment of the risk of material misstatement and the complexity of the estimate itself.
Other enhancements include:
- more emphasis on the exercise of professional scepticism,
- more risk assessment procedures,
- new and additional application material with a focus on procedures required to audit the methods, data and assumptions used to determine the estimates, and
- additional requirements when auditing the disclosure of the estimates.
For the majority of auditees, the audits of their December 2020 or February 2021 financial statements will be the first audits where the auditors will apply the new requirements of ISA 540 (Revised).
The ISA 540 (Revised) Implementation Working Group prepared an
Audit Client Briefing to provide an overview of:
- management’s responsibilities in determining when accounting estimates are needed;
- management’s responsibilities regarding the main components of an estimation process; and
- the impact on management because of changes to ISA 540 (Revised).
This very useful guide includes a table that explains the key changes to the auditor’s responsibilities in more detail as well as the likely impact of each of those changes on management. The guide also lists possible questions that the auditor is likely to ask of management.
For more information and guidance on how to prepare for your audit (including the audit of accounting estimates in terms of ISA 540 (Revised)), contact your
local Moore firm.