International Standard on Auditing (ISA) 540 (Revised) Auditing accounting estimates and related disclosures was published in October 2018 and the FRC in the UK followed suit, with ISA (UK) 540 (Revised) in December 2018. Both standards are applicable for audits of accounting periods beginning on or after 15 December 2019.
The revised standard introduces robust requirements, particularly geared towards addressing the audit of complex estimates, but the standard is applicable to all estimates and, as a result, is scalable. Those auditing less complex and/or less risky estimates will need to consider the application material in the revised ISA and think about how the standard can be scaled for this work.
The requirements of ISA 540 (Revised) cover:
- risk assessment procedures and related activities;
- identifying and assessing the risk of material misstatement;
- responses to the assessed risks of material misstatement;
- disclosures relating to accounting estimates;
- indicators of possible management bias;
- overall evaluation based on audit procedures performed;
- written representations;
- communications with those charged with governance; and
- documentation.
As with the other ISAs, the standard is split between objectives, requirements and application material.
Further resources
Webinar - Implementing ISA 540 (revised) in the 2020/21 reporting season includes practical tips for applying the revised standard in the current environment, including the impact of COVID-19 and Brexit.
Webinar - Practical considerations for auditing estimates provides an overview of the new requirements in ISA 540 (revised), including practical examples.