IAASB revises standard for auditing accounting estimates

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The International Auditing and Assurance Standards Board has released a revised standard for auditing accounting estimates and several related disclosures.

International Standard on Auditing (ISA) 540 (Revised) aims to help auditors of banks, insurance companies and other financial services firm deal with new accounting standards from the International Accounting Standards Board and the Financial Accounting Standards Board for loan provisions and insurance contracts, especially the estimates associated with them.

The revised ISA 540 standard is part of the IAASB’s wider effort to improve audit quality around the world. It’s also the first to be finished in a broader program known as “Addressing the Fundamental Elements of an Audit.” Some of the main changes in the revised standard include:

• An improved risk assessment requires auditors to consider complexity, subjectivity and other factors, along with estimation uncertainty, more thoroughly, thinking more about the risks inherent in accounting estimates.

• There’s a tighter link between the risk assessment and the data, methods and assumptions employed in producing accounting estimates, including the use of complex models.

• Specific material demonstrates how the standard can be applied to all kinds of accounting estimates.

• The standard emphasizes the need to exercise appropriate professional skepticism when auditing accounting estimates, encouraging a more skeptical and independent mindset for auditors.

ISA 540 (Revised) takes effect for financial statement audits for periods starting on or after Dec. 15, 2019.

The IAASB operates with the support of the International Federation of Accountants, Both the IAASB and IFAC have come under pressure in the past year from the Monitoring Group, a group of financial and audit regulators from around the world, to open up the standard-setting process further to people from outside the accounting and auditing profession (see IFAC offers possible solutions to resolve dispute over standard-setting). The IAASB is encouraging other parties in the financial reporting supply chain, especially regulators, national standard-setters and firms, to work together on implementing the revised standard, which could have a far-reaching impact on the audit of financial statements. The IAASB said it would provide implementation support to help auditors navigate and apply the revised standard. See the IAASB website for further information.

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