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.
The revised standard is intended to be scalable for all types of estimates. 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.
ISA 540 (Revised) also places additional emphasis on scepticism. The exercise of professional scepticism in relation to accounting estimates is affected by consideration of inherent risk factors, with its importance increasing when accounting estimates are subject to a greater degree of estimation uncertainty or are affected to a greater degree by complexity, subjectivity or other inherent risk factors. It is also important when there is greater susceptibility to misstatement due to management bias or fraud. But what practically does this mean for your audit, and in particular, the auditors’ approach to management bias?