Applicable standards: ISA 540 Auditing accounting estimates, including fair value accounting estimates, and related disclosures and ISA (UK) 540 (Revised June 2016) Auditing accounting estimates, including fair value accounting estimates, and related disclosures.

Requirements

International Standard on Auditing (ISA) 540, Auditing accounting estimates, including fair value accounting estimates, and related disclosures, (in the UK, ISA (UK) 540 (Revised June 2016), Auditing accounting estimates, including fair value accounting estimates, and related disclosures) deals with auditors’ responsibilities in relation to accounting estimates. 

It expands on how relevant ISAs are applied to the audit of accounting estimates. Such standards include: ISA 315 (Revised), Identifying and assessing risks of material misstatement through understanding the entity and its environment (ISA 315), and ISA 330, The auditor’s responses to assessed risks (ISA 330), amongst others. 

ISA 540 explains that the auditor’s objectives are to obtain sufficient appropriate audit evidence about whether accounting estimates in the financial statements are reasonable, and the related disclosures are adequate, in the context of the applicable financial reporting framework. 

The requirements of ISA 540 cover:

• risk assessment procedures and related activities;
• identifying and assessing the risk of material misstatement;
• how to respond to the assessed risks;
• further substantive procedures to respond to significant risks;
• evaluating the reasonableness of estimates, and determining misstatements;
• disclosures;
• indicators of management bias;
• written representations; and
• documentation.

Find out more

• Auditing accounting estimates in an ISA audit 
  Accounting estimates are increasingly common in financial statements and, by their very nature, can be challenging for auditors to audit. This guide looks at the requirements in ISA 540 Auditing accounting estimates, including fair value accounting estimates, and related disclosures and answer questions from auditors about practical challenges.

• Auditing accounting estimates in an ISA (UK) audit 
  Accounting estimates are increasingly common in financial statements and, by their very nature, can be challenging for auditors to audit. This guide looks at the requirements in ISA (UK) 540 (Revised June 2016) Auditing accounting estimates, including fair value accounting estimates, and related disclosures and answer questions from auditors about practical challenges.  

Challenges and practical resources for auditors 

Auditing accounting estimates can be challenging. Here are some helpful reminders, with practical examples, of what to think about. These focus on areas which can cause confusion and where further guidance might be helpful.

• What is an accounting estimate?
  When performing audits of financial statements, it is important that you identify all relevant accounting estimates to which the requirements in ISA 540 apply. Find out more on how to spot accounting estimates and not overlook the more obvious ones in your audit.

• Documenting your audit of estimates
  Documenting the audit of accounting estimates is important because it provides evidence that the audit complies with ISAs. Find out more on what needs to be documented, and when, in your audit of accounting estimates.

• What are the risk factors?
  The risk that an accounting estimate might be materially misstated is influenced by a number of factors. You can find out more below on risk factors and how they may influence your audit of accounting estimates.

• Determining high estimation uncertainty and significant risk
  When performing an audit, you need to use your judgement to determine whether an accounting estimate, identified as having high estimation uncertainty, gives rise to a significant risk. These examples and guidance are designed to help you when considering whether estimates with high estimation uncertainty may give rise to significant risks.