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.
[1] As per the IAASB’s ISA 540 presentation.
[2] As per the IAASB’s ISA 540 presentation.
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)
