IAASB Proposes Changes to ISA 540

The International Auditing and Assurance Standards Board (IAASB) recently proposed significant changes to be made to ISA 540.The purpose of this auditing standard is to provide the auditors with techniques and procedures that can be used to evaluate the reasonableness and reliability of the accounting estimates which are used by various entities while accounting for a number of different kinds of transactions and activities.

As per the changes proposed to ISA 540 the auditors will be required to be more focused with regards to the risk that material misstatement could occur as a result of the use of accounting estimates, and the auditors will also be required to address such risks with more detailed and technical audit approach.

 The proposed changes to ISA 540 can also be referred to as a follow up and a response to the change made to IFRS 9 with regards to the reporting of expected losses in banks.

Accounting estimates are used by many companies while preparing their financial statements. The accounting estimates are often complex as they require companies to exercise judgement and also have estimation uncertainty surrounding them. The purpose of these changes is to provide auditors with audit procedures that can be used to ensure the reliability of accounting estimates used by the companies while preparing their financial statements.

The proposed changes to ISA 540 will have a significant impact on many audits but these changes will have a greater impact on audits of financial institutions like insurance companies and banks mainly due to the new requirement put in place in IFRS 9 for accounting of expected credit losses.

 The IAASB has made all the efforts to make sure that the changes proposed in exposure draft for ISA 540 covers all the issues with regards to accounting estimates and related disclosures, recognizing that the standard is applicable with reference to all accounting estimates.

The proposed changes to ISA will going to have impact on the standard in the following manner:

• Enhanced requirements relating to risk assessment procedures are to include some specific factors relating to accounting estimates like judgment, complexity and estimation uncertainty;

• sets a more detailed approach and expectation with regards to how an auditor’s response should be to the risks that have already been identified, including the strengthening of the auditor’s understanding and application of professional scepticism with regards to circumstances in which accounting estimates are used; and

• the standard is set out to be more scalable irrespective of the size of the entity or the sector in which the entity is conducting business.

Many Regulatory bodies around the world are reviewing the proposals made in the exposure draft for ISA 540 so that to provide response and feedback to the IAASB in relation to the changes that IAASB has proposed in ISA 540. The deadline for comments to be submitted to the IAASB is 1 August 2017.