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Auditing estimates: ISA 540
The requirements, challenges and practical resources for auditors.

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

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.

Additional guidance and support 

The audit of accounting estimates in SMEs: This webinar covers common issues in the audit of accounting estimates for smaller organisations and includes practical examples.

You be the judge: Estimates, judgements and uncertainty are the most challenging aspects of any audit. This article explores how they offer an opportunity for firms to improve the quality of their audit judgements.

The audit of financial instruments for which audit evidence is hard to obtain: In this article, the Audit & Assurance Faculty considers the problem of auditing financial instruments for which evidence is difficult to obtain. It focuses on the key issue of the availability of ‘sufficient, appropriate audit evidence’, because there is often no market for either type of instrument. In such circumstances, often the only evidence can appear to be the bank’s own valuation.