During March 2016,
the International Auditing and Assurance Standards Board (IAASB) released a
project proposal with the intention to revise ISA 540, Auditing Accounting
Estimates, Including Fair value Accounting Estimates and Related Disclosures. During
April 2017, the IAASB released the proposed Exposure Draft. During October
2018, the IAASB released the revised ISA 540 standard and indicated that the
effective implementation date is set for financial statement audits for periods
beginning on or after December 15, 2019. The revision mainly ensures that the
standard continues to keep pace with the changing market and fosters a more
independent and challenging sceptical mindset in auditors.
The International
Regulatory Board for Auditors (IRBA), acknowledged through their 2018 Public Inspections
Report that the theme of estimates and judgements attracted the most inspection
findings both locally and globally over the past few years and that it will
continue to be a key focus area during inspections due to the inherent
subjective nature of estimates.
The following key
enhancements have been made to ISA 540 by the IAASB[1]:
Explicitly recognised spectrum of
inherent risk;
With respect to external information
sources, conforming and consequential amendments;
New and enhanced application material;
Expanded documentation requirement;
Emphasised requirement when
communicating with those charged with governance;
Enhanced requirements addressing
disclosures;
Introduced concept of inherent risk
factors;
Enhanced risk assessment procedures;
Required separate assessment of
inherent risk and control risk;
Emphasised the importance of the
auditor’s decisions about controls; and
Introduced objectives-based work
effort requirements.
Professional scepticism
plays a significant role in the auditing of estimates. The auditor’s
application of professional scepticism is therefore enhanced by the revised ISA
540. The following has been implemented in order to enhance the auditor’s
professional scepticism[2]:
Requirement to design and perform
further audit procedures in a manner that is not biased towards obtaining audit
evidence that may be corroborated or towards excluding audit evidence that may
be contradictory;
Requirement to stand back and evaluate
the audit evidence obtained regarding the estimates;
Use of stronger language (“challenging”,
“question” and “reconsider”) in application material to reinforce the
importance of exercising professional scepticism; and
Focus on management bias in risk
assessment and work effort.
From the above, it is
evident that estimates will remain a “hot topic” in the audit industry for an
undetermined period due to the nature thereof. It is therefore crucial for
auditors to upskill themselves in obtaining the proper knowledge required in
order to implement the revised ISA 540 in the audits of financial statements.
The
above article only highlights certain aspects of the revised standard and
should not be deemed as a replacement of the revised standard.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)