Applicable standards: ISA 540 (Revised) Auditing accounting estimates and related disclosures and ISA (UK) 540 (Revised December 2018) Auditing accounting estimates and related disclosures.

Requirements

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 December 2018).

ISA 540 (Revised) is applicable for audits of accounting periods beginning on or after 15 December 2019.

ISA (UK) 540 (Revised December 2018) is applicable for audits of accounting periods beginning on or after 15 December 2019 (with early adoption to be permitted in the UK).

While the revised ISA isn’t radically different from the existing ISA, there are some changes in approach and the work required in auditing estimates (irrespective of their nature and size) and some of these changes may prove more challenging for auditors to get to grips with.

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.

Find out more

• Preparing for changes to ISA 540 Auditing Accounting Estimates (October 2019)
  This article takes a look at the risk assessment, scepticism and documentation enhancements to the revised standard.

• Auditing accounting estimates in an ISA audit (updated August 2019)
  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 key requirements in ISA 540 (Revised) Auditing accounting estimates and related disclosures and deals with some of the potential challenges. 

• Auditing accounting estimates in an ISA (UK) audit (updated August 2019)
  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 key requirements in ISA (UK) 540 (Revised December 2018) Auditing accounting estimates and related disclosures and deals with some of the potential challenges. 

• Introducing ISA 540 (Revised) on auditing estimates
  The IAASB has issued ISA 540 (Revised) Auditing accounting estimates and related disclosures and the FRC in the UK is expected to follow suit, with ISA (UK) 540 (Revised July 2018) currently out for exposure. There are some changes and new requirements in ISA 540 (Revised) that are likely to prove more challenging for auditors to implement.

• ISA 540 (Revised): the audit of accounting estimates and related disclosures
  In this 20 minute webcast, Louise Sharp, Manager, International Standards covers the key enhancements in, and potential challenges introduced by, ISA 540 (Revised) Auditing accounting estimates and related disclosures. The revised standard is effective for audits of financial statements for periods beginning on or after 15 December 2019.

• Audit and Assurance: Coming up next - blog series
  This quarterly blog series looks at what’s new and what’s coming up in the world of international auditing and assurance. It specifically focuses on IAASB standard setting projects, highlighting the issues being discussed and progress made.

• ISA 540 (Revised) Auditing accounting estimates and related disclosures
  Access the international standard issued by the IAASB.

• ISA (UK) 540 (Revised December 2018) Auditing accounting estimates and related disclosures 
  Access the UK auditing standard issued by the Financial Reporting Council.

Challenges and practical resources for auditors 

Auditing accounting estimates can be challenging. In light of the revised standard, we have updated our four guides which provide helpful reminders, with practical examples, of what to think about when auditing estimates.

• What is an accounting estimate? Considerations for auditors
  This Audit and Assurance guide provides information and guidance on how to spot accounting estimates and not overlook the more obvious ones in your audit.

• Documenting the audit of accounting estimates under ISA 540 (Revised)
  This Audit and Assurance guide provides information and guidance on what needs to be documented, and when, in your audit of accounting estimates.

• Inherent risk factors in auditing accounting estimates
  This Audit and Assurance guide explains what inherent risk factors are and how they may influence your audit of accounting estimates.

• Auditing accounting estimates that give rise to significant risks
  Auditors need to use their judgement to determine whether any risks of material misstatement identified or assessed in relation to accounting estimates give rise to a significant risk. This Audit and Assurance guide provides information and guidance to help auditors.

Additional guidance and support

Auditing estimates and related disclosures: This webinar covers the key enhancements introduced by ISA 540 (Revised), practical implementation challenges and examples and specific areas of focus for auditors when auditing estimates (recorded July 2019).

Practical considerations for auditing estimates: This webinar includes an overview of the new requirements in ISA 540 (Revised), consideration of what scepticism looks like and how corroborating and contradictory audit evidence might be obtained, assessed and documented, practical examples and audit documentation (recorded May 2020).

IAASB ISA 540 (Revised) Implementation Working Group resources: The IAASB has published implementation support for auditors to help them understand the enhancements in ISA 540 (Revised). It has published slide decks and a presentation and its ISA 540 (Revised) Implementation working group has issued flowcharts and a diagram. The IAASB, working with IFAC has also developed a series of video panel discussions focusing on providing an overview of the standard, how firms are planning implementation and sharing practical examples, tips and suggested good practices. It has also published illustrative examples for auditing simple and complex accounting estimates.