ISA 540 (Revised) DEALS with the auditor’s responsibilities RELATING to Accounting Estimates and Related Disclosures in an ‘Audit‘ of Financial Statements.
Table of Contents
- ISA 540 (Revised) – Introduction
- ISA 540 – Objective
- ISA 540 – Definitions
- ISA 540 – Requirements
- 1. Risk Assessment Procedures and Related Activities
- 2. Identifying and Assessing the Risks of Material Misstatement
- 3. Responses to the Assessed Risks of Material Misstatement
- 4. Disclosures Related to Accounting Estimate
- 5. Indicators of Possible Management Bias
- 6. Overall Evaluation Based on Audit Procedures Performed
- 7. Written Representations
- 8. Communications with Those Charged With Governance, Management or Other Relevant Parties
- 9. Documentation
- Synopsis
ISA 540 (Revised) – Introduction
1. Scope of this ISA
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‘.
2. Effective Date
This ISA is EFFECTIVE for audits of financial statements for periods beginning on or after December 15, 2019.
ISA 540 – Objective
The Objective of the ‘Auditor’ is to obtain sufficient appropriate audit evidence about whether Accounting Estimates and Related Disclosures in the financial statements are REASONABLE.
ISA 540 – Definitions
1. Accounting Estimate
A ‘Monetary Amount‘ for which the Measurement is Subject to estimation uncertainty.
2. Estimation Uncertainty
Susceptibility to an inherent LACK of precision in Measurement.
3. Management Bias
A lack of Neutrality by Management in the preparation of information.
ISA 540 – Requirements
1. Risk Assessment Procedures and Related Activities
When obtaining an Understanding of the entity and its environment including the entity’s internal control as required by ISA 315 (Revised), the auditor shall OBTAIN an understanding of the following Matters related to the entity’s ‘Accounting Estimates‘:
- The Entity and Its Environment; AND
- The Entity’s Internal Control.
2. Identifying and Assessing the Risks of Material Misstatement
In identifying and assessing the risks of Material Misstatement relating to an accounting estimate and related disclosure at the assertion level as Required by ISA 315 (Revised), the auditor shall SEPARATELY assess inherent risk and control risk.
3. Responses to the Assessed Risks of Material Misstatement
As Required by ISA 330, the auditor’s further audit procedures shall be RESPONSIVE to the assessed risks of Material Misstatement at the assertion level.
4. Disclosures Related to Accounting Estimate
The ‘Auditor’ shall DESIGN and PERFORM ‘Further Audit Procedures’ to obtain sufficient appropriate audit evidence regarding the assessed risks of Material Misstatement at the assertion level for disclosures related to an ‘Accounting Estimate‘.
5. Indicators of Possible Management Bias
When indicators of possible Management bias are identified, the ‘Auditor’ shall EVALUATE the Implications for the audit.
Where there is intention to Mislead, ‘Management Bias’ is FRAUDULENT in Nature.
6. Overall Evaluation Based on Audit Procedures Performed
| In Applying ISA 330 to an Accounting Estimate, the Auditor Shall EVALUATE Whether: |
|---|
| (a) The Assessment of the risks of Material Misstatement at the assertion level Remain appropriate; |
| (b) Management’s decisions relating to the Recognition, Measurement, Presentation and Disclosure are in accordance with applicable ‘Financial Reporting Framework’; AND |
| (c) Sufficient appropriate audit evidence has been obtained. |
6.1 Determining Whether the Accounting Estimates are Reasonable or Misstated
The ‘Auditor’ shall DETERMINE whether the accounting estimates and related disclosures are reasonable in the context of applicable financial reporting framework or Misstated.
7. Written Representations
The ‘Auditor’ shall REQUEST ‘Written Representations’ from Management and where appropriate Those Charged with Governance.
The auditor shall also CONSIDER the Need to obtain representations about specific ‘Accounting Estimates‘ INCLUDING in relation to the Methods, assumptions or data used.
8. Communications with Those Charged With Governance, Management or Other Relevant Parties
In applying ISA 260 (Revised) and ISA 265, the ‘Auditor’ is Required to COMMUNICATE about Certain Matters including SIGNIFICANT DEFICIENCIES in internal control. In doing so, the auditor shall CONSIDER the Matters if any to communicate regarding ‘Accounting Estimates‘.
In addition, in certain circumstances the auditor is Required by law or regulation to COMMUNICATE about certain Matters with other relevant parties, Such as ‘Regulators’ or ‘Prudential Supervisors’.
9. Documentation
| The Auditor Shall INCLUDE in the Audit Documentation: |
|---|
| (a) Key elements of the auditor’s understanding of the entity and its environment; |
| (b) The linkage of the auditor’s further audit procedures with the assessed risks of Material Misstatement at the assertion level; |
| (c) The auditor’s response when Management has not taken appropriate steps; |
| (d) Indicators of possible Management bias; AND |
| (e) Significant Judgments relating to the auditor’s determination. |
Synopsis
ISA 540 ‘Auditing Accounting Estimates and Related Disclosures‘ DEALS with the auditor’s responsibilities relating to accounting estimates and related disclosures in an ‘Audit‘ of Financial Statements.
[500-599] Audit Evidence
Chartered Accountant (Institute of Chartered Accountants of Pakistan)
Bachelor of Accounting Honours (Asia e University, Malaysia)