ICAEW.com works better with JavaScript enabled.

Get up to speed on new Accounting Estimates audit standard

With the revision of the auditing standard for accounting estimates, a notoriously weak audit area, due to take effect from 15 December 2019, it would make sense to refresh your understanding of the current requirements, or even to adopt the standard early, says Julia Penny.

"JuliaPenny"
Julia Penny

September 2018

The FRC has issued a proposal to revise ISA 540 Accounting Estimates, to reflect changes made by the IAASB to this standard. The audit of accounting estimates is almost always fraught with difficulty, as by definition these are not exact figures that can just be checked.

The new version of the ISA will:

  • enhance the requirements and application material for risk assessment procedures in respect of estimates;
  • include requirements for more work on one or more of:
     - the events up to the date of the audit report;
     - testing how management made the estimate; or
     - developing an auditor’s point estimate or range (requiring that the range only includes amounts supported by sufficient evidence);
  • have an amended objective so that audit procedures address both whether the accounting estimates and related disclosures are reasonable (rather than just adequate as is currently the case) in the context of the financial reporting framework;
  • reinforce the application of professional scepticism, using wording to drive questioning or challenging management where appropriate and identify any bias;
  • emphasise the importance of the need to consider internal controls;
  • have a new requirement to remind auditors of their responsibilities to communicate certain matters to those charged with governance, and;
  • enhance documentation requirements. 

The new standard is expected to take effect for audits of financial statements for periods beginning on or after 15 December 2019, though it is available for early adoption.

Given that accounting estimates are often an area of weak audit work it would make sense to refresh your understanding of the current requirements, or even to adopt the standard early.

Further changes in ISAs can also be expected as the IAASB, which develops the international version of the standards which the FRC then generally adopt, is working on a revised version of ISA 315 Identifying and Assessing the Risks of Material Misstatement. The closing date for comments on this is 2 November 2018, so you have two months if you wish to feedback on the changes to be made.

Julia Penny FCA is London ICAEW Council Member and Technical Director at SWAT UK @JSPenny

Liked this? Read these:

London Accountant

Go to London Accountant for more features, news and opinion.
Follow us on Twitter @ICAEW_London and join us on LinkedIn: LSCA and Croydon.
Subscribe to ‘regional updates’ to receive more articles.