The International Standard on Auditing (ISA) 540 deals with the auditor's responsibilities relating to accounting estimates and related disclosures in an audit of financial statements. Specifically, it includes requirements and guidance that refer to, or expand on, how ISA 315 (Revised), ISA 330, ISA 450, ISA 500 and other relevant ISAs are to be applied in relation to accounting estimates and related disclosures. It also includes requirements and guidance on the evaluation of misstatements of accounting estimates and related disclosures, and indicators of possible management bias.
In its At a Glance publication in October 2018 prepared by the staff, IAASB announced the revised version of ISA 540 which effective for the audit of financial statements for periods beginning on or after December 15, 2019.
Concerning the requirement to revise ISA 540, the IAASB explains that,
Changes to financial reporting standards have increased the importance and visibility of accounting estimates to users of financial statements. The previous version of ISA 540 was written before recent changes in accounting for expected credit losses and revised standards dealing with insurance contracts, revenue recognition and leases. These changes, along with recurring audit inspection findings criticizing the quality of audits of accounting estimates, led to the need for the IAASB to address this challenging area to improve audit quality.
The increasingly complex business environment and change in accounting practices means that auditors need a more robust approach to identifying, assessing and responding to risks of material misstatement for accounting estimates and related disclosures. The enhancements in ISA 540 (Revised) are aimed at keeping pace with the changing market.
Further, the IAASB assesses that the risk assessment is a critical part of every audit. ISA 540 (Revised) includes an enhanced risk assessment specifically tailored to accounting estimates that builds on the risk assessment required by ISA 315 (Revised). The inherent risk factors of estimation uncertainty, complexity and subjectivity play a central role in the revised risk assessment and throughout ISA 540 (Revised).
ISA 540 (Revised) also notes that there may be other inherent risk factors, including susceptibility to misstatement due to management bias or fraud (HRD) ***
