Auditing Accounting Estimates (Amendments to CAS 540) [Completed]

Effective date:	The revised CAS 540 will be effective for audits of financial statements for periods ending on or after December 15, 2019. Earlier application is permitted.
Included in the CPA Canada Handbook – Assurance:	March 2019
Last updated:	March 2019

Overview

Accounting estimates and related disclosures have become more complex. Stakeholders have indicated that clearer or additional guidance is needed to enable auditors to appropriately deal with these complexities.

As a result, the International Auditing and Assurance Standards Board (IAASB) has approved a project to revise ISA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures. Corresponding changes, where appropriate, would be made to CAS 540, Auditing Accounting Estimates, including Fair Value Accounting Estimates, and Related Disclosures.

The amendments to ISA 540 include establishing more robust requirements and appropriately detailed guidance to foster audit quality. They also include addressing the auditing issues arising from the adoption of Expected Credit Loss models under IFRS 9, Financial Instruments, (The final version of IFRS 9 is effective for annual periods beginning on or after January 1, 2018. Earlier application is permitted) and certain other issues related to the audits of financial institutions.

Similar amendments to CAS 540 have been made by the AASB.

Revised ISA 540/CAS 540:

recognizes explicitly the spectrum of inherent risk and introduces the concept of inherent risk factors, including estimation uncertainty, complexity, subjectivity and others;
enhances risk assessment procedures related to obtaining an understanding of the entity and its environment, including the entity's internal control;
introduces a separate assessment of inherent risk and control risk for accounting estimates;
introduces objectives-based work-effort requirements directed to methods (including specifically when complex modelling is involved), data and assumptions, to design and perform further audit procedures to respond to assessed risks of material misstatement;
enhances the "stand-back" requirement by adding an evaluation of the audit evidence obtained regarding the accounting estimates, including both corroborative and contradictory audit evidence;
enhances requirements to obtain audit evidence about whether the related disclosures are "reasonable"; and
includes a requirement to consider matters regarding accounting estimates when communicating with those charged with governance.

Other Developments

March 2019

On March 1, 2019, the AASB issued the amendments to CAS 540 to the CPA Canada Handbook – Assurance and also released the Basis for Conclusions, that summarizes the process the AASB followed in making revisions to CAS 540, Auditing Accounting Estimates and Related Disclosures.

October 2018

On October 3, 2018, the IAASB released International Standard on Auditing (ISA) 540 (Revised), its revised standard for the audit of accounting estimates and related disclosures.

June 2018

In June 2018, the AASB staff updated this project to indicate that the AASB expects to issue the final Handbook material in Q1/2019.

November 2017

In November 2017, the AASB staff updated this project to indicate that the AASB expects to issue the final Handbook material in Q3/2018.

October 2017

On October 26, 2017, the AASB released an overview of the consultation activity focused on field testing the Exposure Draft, Auditing Accounting Estimates and Related Disclosures.

May 2017

On May 9, 2017, the AASB issued an Exposure Draft that proposes to adopt, with appropriate Canadian amendments if any, proposed amendments to ISA 540, and other conforming amendments. Stakeholders are encouraged to submit their comments by July 7, 2017.

April 2017

On April 20, 2017, the International Auditing and Assurance Standards Board (IAASB) issued an Exposure Draft on ISA 540 (Revised). Significant changes in how auditors evaluate accounting estimates and related disclosures have been proposed. Stakeholders are invited to provide comments by August 1, 2017.

In April 2017, the PCAOB staff announced that it is drafting a proposal for Board consideration in the second quarter of 2017.

January 2017

In January 2017, the staff of the AASB updated the information in respect of this project to advise that the AASB expects to issue an Exposure Draft in Q2/2017.

July 2016

On July 1, 2016, the PCAOB posted to its website an updated standard-setting agenda that outlines milestones on various standard-setting projects, including its project on Auditing Accounting Estimates, Including Fair Value Measurements. On August 19, 2014, the PCAOB issued a staff consultation paper to seek public comment on certain issues related to auditing accounting estimates, including fair value measurements. The PCAOB staff is evaluating the responses from commenters in addition to considering feedback received from the discussions at the October 2014 and June 2015 SAG meetings and the September 2015 IAG meeting. In addition, the staff is monitoring developments related to the IAASB’s project on Accounting Estimates (ISA 540) and Special Audit Considerations Relevant to Financial Institutions. The staff anticipates recommending that the Board propose for public comment revisions to its current standards on auditing accounting estimates, including fair value measurements, in the first quarter of 2017. For further information refer to the PCOAB’s Staff Consultation Paper: Auditing Accounting Estimates and Fair Value Measurements.

June 2016

In June 2016, the PCOAB provided an update on the standard governing accounting estimates and their staff is in close contact with the staff of the IAASB to monitor developments and share information. Because of the close link between standards governing fair value and estimates and standards governing the use of specialists (who often provide the information to establish fair values and estimates), the PCAOB is closely coordinating their projects on specialists and on fair value and estimates. They expect to issue proposals in these projects by the end of 2016.

April 2016

In April 2016, the staff of the AASB updated the information in respect of this project to advise that the AASB expects to issue an Exposure Draft in Q1/2017.

February 2016

In February 2016, the AASB staff set up a project in respect of this item.

Related Discussions

Auditing Accounting Estimates – AASB
Oct 15, 2018
At its meeting on October 15-16, 2018, the AASB approved the revised CAS 540, including the related conforming amendments to other standards. The Board concluded that no significant changes were made in finalizing the standards from a Canadian standpoint (i.e., the changes did not require an addition, modification, or deletion of a Canadian amendment); therefore, no re-exposure was necessary. CAS 540 will be effective for audits of financial statements for periods ending on or after December 15, 2019. It is expected to be included in a CPA Canada Handbook – Assurance update in early 2019.

Auditing Accounting Estimates – IAASB
Jun 18, 2018
At its meeting on June 18-23, 2018, the IAASB approved ISA 540 (Revised) as a final standard. The revised ISA will be effective for audits of financial reporting periods beginning on or after December 15, 2019. Early adoption is permitted and encouraged, and the final IAASB-approved text has been posted on the IAASB’s website. Once the Public Interest Oversight Board’s (PIOB) confirmation that due process was followed is received, the Board will formally release the standard. In finalizing ISA 540 (Revised), the Board focused on the scalability of the ISA to very simple accounting estimates as well as the most complex accounting estimates. The Board also clarified the relationship between ISA 540 (Revised) and other ISAs, and using the work of a management’s expert as audit evidence in testing how management made the accounting estimate. The Board recognized that support of the implementation of ISA 540 (Revised) is important and therefore supported the formation of an implementation working group. The Board will monitor implementation challenges as they arise and also committed to a post-implementation review.

Auditing Accounting Estimates – AASB
Jun 11, 2018
At its meeting on June 11-12, 2018, the AASB provided input to the CPA Canada nominee on issues related to the IAASB’s project to revise ISA 540, including the proposed effective date and re-exposure considerations of the final revised ISA. The Board also discussed potential risks to implementation of the revised standard by Canadian practitioners, and how these risks will be addressed through guidance. The IAASB expects to approve ISA 540 (Revised) in June 2018 and issue it in October 2018. The AASB plans to approve the Canadian equivalent standard shortly thereafter.

Auditing Accounting Estimates - IAASB
Mar 12, 2018
At its meeting on March 12-16, 2018, the IAASB discussed a current draft of ISA 540 (Revised). The Board focussed on the need to improve the alignment of ISA 540 (Revised) with extant ISA 315 (Revised), particularly regarding the spectrum of risk and noting that certain provisions in the ISA are intended to only apply to significant accounting estimates. Furthermore, the Board also requested the ISA Task Force to consider ways to reduce the length of the ISA, which resulted in the removal of two appendices. It was also agreed that the term “significant data” should not be used and that the ISA 540 Task Force should clarify the linkage between various work effort requirements and the documentation requirements of the ISA. The Board intends to discuss aspects of the draft ISA at an IAASB teleconference on April 24, 2018 and a final draft of the proposed standard will be presented to the IAASB for approval at its meeting in June 2018.

Auditing Accounting Estimates - AASB
Mar 05, 2018
At its meeting on March 5-6, 2018, the AASB provided input to the CPA Canada nominee on the International Auditing and Assurance Standards Board (IAASB) on issues related to the IAASB’s project to revise ISA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures. Key issues discussed included: (i) scalability of the requirements for simple and complex estimates, including appropriateness of examples; (ii) requirements related to exercising professional skepticism; (iii) requirements related to documentation; and (iv) the proposed effective date for the standard. The IAASB expects to approve revised ISA 540 in June 2018. The AASB plans to approve the Canadian equivalent standard by the end of 2018.

Auditing Accounting Estimates - IAASB
Dec 11, 2017
At its meeting on December 11-15, 2017, the IAASB discussed key issues raised by respondents in relation to the Exposure Draft of ISA 540 (Revised), Auditing Accounting Estimates and Related Disclosures, including the scalability of the ISA, the use of the term “reasonable,” the exercise of professional skepticism and the Task Force’s approach to the application material. The IAASB also discussed the Task Force’s revisions to requirements and application material based on comments received on the Exposure Draft. The IAASB asked the Task Force to focus on redrafting the application material according to the planned approach with a view to conducting a first read of ISA 540 (Revised) in March 2018, ahead of a targeted approval in June 2018.

Auditing Accounting Estimates - AASB
Dec 04, 2017
At its meeting on December 4-5, 2017, the AASB provided input to the CPA Canada nominee on the International Auditing and Assurance Standards Board (IAASB) on issues related to the IAASB’s project to revise ISA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures. Key issues discussed included: (i) using the spectrum of risk to demonstrate scalability and possible other approaches for scalability; (ii) adding wording to enhance the application of professional skepticism; (iii) the appropriateness of possibly elevating certain application material to requirements; and (iv) the disposition of significant issues in the revised draft of ISA 540 resulting from the responses received to the Exposure Draft.

Auditing Accounting Estimates - IAASB
Oct 24, 2017
At its meeting on October 24-26, 2017, the IAASB discussed the respondents’ comments on the Exposure Draft of Proposed ISA 540 (Revised) and the ISA 540 Task Force’s proposed direction regarding the scalability of the ISA. The Board also discussed how the concept of a spectrum of inherent risk could be more clearly reflected in the ISA to support scalability of the auditor’s response, whether inherent risk is low or not low, and the conforming amendments to ISA 500. The Board supported aligning the terms used for the risk factors with those being considered for similar factors in the revision of ISA 315 (Revised) and in the U.S. Public Company Accounting Oversight Board’s proposals on auditing accounting estimates. The Board also supported the proposed direction of the ISA 540 Task Force in restructuring the ISA and discussed the potential implications, for the scalability of the standard, of removing the threshold of low inherent risk.

Auditing Accounting Estimates - AASB
Oct 16, 2017
At its meeting on October 16-18, 2017, the AASB discussed the following key issues: (i) whether the threshold of low inherent risk should be removed; (ii) emphasizing the spectrum of risk to demonstrate scalability; (iii) providing some examples to demonstrate scalability; and (iv) the proposed testing strategies and requirements related to control testing and work effort.

Auditing Accounting Estimates - IAASB
Sep 18, 2017
At its meeting on September 18-22, 2017, the IAASB received an overview of the comment letters received on proposed ISA 540 (Revised). The Board discussed respondents’ concerns about the complexity of the proposed ISA and potential difficulties in understanding and applying it in practice, and asked the ISA 540 Task Force to look at ways to restructure the proposed ISA to improve its clarity and readability. The Board also discussed the scalability of the ISA, how risk factors could be taken into account, and how best to structure the response to the assessed risks of material misstatement. The Board highlighted the importance of achieving the right balance between issuing a high-quality standard and the public interest in finalizing the ISA in a timely fashion. The IAASB is holding an additional meeting in October to progress proposed ISA 540 (Revised).

Auditing Accounting Estimates - AASB
Sep 14, 2017
At its meeting on September 14-15, 2017, the AASB provided input to the CPA Canada nominee on the International Auditing and Assurance Standards Board (IAASB) on issues related to the IAASB’s project to revise ISA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures. Key issues discussed included: (i) whether the threshold of low inherent risk should be retained; (ii) how the auditor should take the risk factors (complexity, judgment and estimation uncertainty) into account when performing the risk assessment; and (iii) how best to structure the requirements related to responding to risks of material misstatement.

Auditing Accounting Estimates - AASB
Jul 19, 2017
At its meeting on July 19, 2017, the AASB reviewed comments received from Canadian stakeholders on the AASB’s Exposure Draft of proposed revisions to CAS 540. Issues raised by respondents and discussed by the Board included: scalability of the standard for application to estimates of all sizes and complexities; linkage of requirements in CAS 540 to CAS 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment; effect of the proposed risk factors on inherent risk assessment for accounting estimates; and challenges identified during field testing of the proposed standard. The Board also discussed its draft response letter to the IAASB’s Exposure Draft with the same title. A final draft of the response will be reviewed by the Board prior to submission in early August.

Auditing Accounting Estimates - AASB
Apr 11, 2017
At its meeting on April 11, 2017, the AASB unanimously approved an exposure draft of revisions to CAS 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures. The exposure draft is based on the IAASB’s exposure draft of proposed changes to ISA 540, and proposes no Canadian amendments. The exposure draft is expected to be issued in early May 2017, with a comment deadline of July 7, 2017.

Auditing Accounting Estimates - IAASB
Mar 13, 2017
At their meeting on March 13-17, 2017, the IAASB discussed the ISA 540 Task Force’s proposals relating to the revision of ISA 540, including proposals related to the threshold for the work effort, referring directly to inherent risk, and the development of auditor’s point estimate and ranges. The IAASB also agreed to include in the proposed ISA two appendices to better explain how accounting standards can give rise to accounting estimates and the implications of complexity, the need for the use of judgment by management, and estimation uncertainty on the auditor’s risk assessment and related responses. The IAASB approved the release of proposed ISA 540 (Revised) for public exposure, including related conforming amendments to other International Standards. The Exposure Draft will be issued in mid-April, for comment by August 1, 2017.

Auditing Accounting Estimates - AASOC
Feb 16, 2017
At its meeting on February 16, 2017, the AASOC and AASB discussed issues related to the IAASB’s project to revise ISA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures. They also discussed the approach for obtaining feedback from Canadian stakeholders; the risks associated with the effective implementation of the standard; and how these risks may be addressed, including potential implementation challenges that may be faced depending on the timing of the release of the final CAS and its effective date.

Auditing Accounting Estimates - AASB
Feb 09, 2017
At its meeting on February 9, 2017, the AASB discussed issues related to an upcoming Canadian exposure draft of CAS 540, including: (i) the anticipated length of the comment period; (ii) how the exposure draft could be distributed; (iii) whether there are issues specific to Canada that should be addressed; and (iv) what, if any, specific questions should be asked of Canadian stakeholders. The IAASB is expected to approve its exposure draft in March 2017. The AASB will approve its exposure draft in April 2017.

Auditing Accounting Estimates - IAASB
Jan 31, 2017
At its teleconference call on January 31, 2017, the IAASB was asked to provide its views on a draft revised “stand back” provision which the Task Force proposes to include in ISA 540. The Task Force’s outreach has indicated that stakeholders are supportive of including a stand back requirement in ISA 540, recognizing that the iterative nature of the audit means that audit quality would be enhanced by requiring the auditor to take stock of the audit evidence obtained in relation to accounting estimates, particularly complex and challenging accounting estimates.

Auditing Accounting Estimates - IAASB
Dec 05, 2016
At its meeting on December 5-9, 2016, the IAASB discussed the ISA 540 Task Force’s (ISA 540 TF) proposals relating to the revision of ISA 540. The IAASB supported the ISA 540 TF’s proposal to focus the work effort on the objectives to be achieved by the auditor. The IAASB also discussed other aspects of the project, including a proposed consequential amendment to ISA 500 related to external information sources and a possible requirement on when testing the operating effectiveness of controls would be required when auditing accounting estimates. While recognizing that the subject matter is complex, the ISA 540 TF was asked to simplify and clarify the material to the extent possible. An Exposure Draft of proposed revised ISA 540 is intended to be presented to the IAASB for approval in March 2017.

Auditing Accounting Estimates - AASB
Nov 28, 2016
At its meeting on November 28-29, 2016, the AASB provided input to the CPA Canada nominee on the IAASB on issues related to the IAASB’s project to revise ISA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures, including: (i) the objective; (ii) responding to the assessed risks of material misstatement; (iii) work effort for each class of risk; (iv) disclosure and stand back requirements; and (v) documentation of the rationale for the auditor’s judgment. The AASB also discussed the Canadian approach for obtaining feedback once the exposure draft is issued in mid-2017.

Auditing Accounting Estimates - IAASB
Nov 01, 2016
At its teleconference call on November 1, 2016, the IAASB discussed the work effort for accounting estimates, including: (i) considerations relative to the use of the word “reasonable”; (ii) the threshold for when further specific procedures are required; (iii) Requirements for accounting estimates that give rise to significant risks; and (iv) the updated requirements related to disclosures.

Auditing Accounting Estimates - IAASB
Sep 19, 2016
At its meeting on September 19-23, 2016, the IAASB (a) was informed about the ISA 540 Task Force’s activities since the July 2016 teleconference call; and (b) provided its views to the Task Force on (i) an issues paper on revisions to ISA 540 and (ii) a draft of proposed amendments to ISA 540. In particular, definitions, risk assessment, work effort and documentation issues were discussed.

Auditing Accounting Estimates - AASB
Sep 12, 2016
At its meeting on September 12-13, 2016, the AASB discussed issues related to the IAASB’s project to revise ISA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures, including: (i) scalability of the standard to both low and high risk estimates; (ii) definitions of key terms; (iii) classes of risk and risk assessment process; (iv) work effort in response to the assessed risks; and (v) implications to other ISAs. The IAASB is expected to approve an exposure draft of revisions to ISA 540 at its December 2016 meeting. The AASB plans to approve its exposure draft in January 2017.

Auditing Accounting Estimates - IAASB
Jul 26, 2016
At its teleconference call on July 26, 2016, the IAASB discussed the audit implications of external assistance in making an accounting estimate, including: (i) scope; (ii) the difference between a management’s expert and an external data source; (iii) work effort over data from external data sources; (iv) management’s use of external models; and (v) auditor’s use of an expert.

Auditing Accounting Estimates - AASOC
Jul 07, 2016
At the AASOC meeting on July 7-8, 2016, it was noted that the IAASB has started a project to consider revisions to ISA 540. The AASB discussed key issues raised by the IAASB’s task force including: (i) how to address scalability within the standard; and (ii) risk assessment, including how to identify and assess risks and the work effort in responding to risks. In response to a question from AASOC as to why scalability is an issue, Mr. Jensen stated that the AASB is concerned that the required work effort included in the standard may be overly focused on addressing highly complex accounting estimates, and not flexible for dealing with a broad range of accounting estimates

Auditing Accounting Estimates - IAASB
Jun 21, 2016
At its meeting on June 21-24, 2016, the IAASB focused its discussions on the risk assessment section (i.e., the need for greater granularity), the definitions, and scalability and had an initial discussion on work effort. The Board will discuss the project again at its teleconference meeting in July 2016. It is intended that the Task Force will present an initial draft of the proposed Exposure Draft to the September 2016 meeting of the Board.

All Related

© 2024. See Legal for more information. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited ("DTTL"), its global network of member firms and their related entities. DTTL (also referred to as "Deloitte Global") and each of its member firms are legally separate and independent entities. DTTL does not provide services to clients. Please see www.deloitte.com/about to learn more.

Centre for Financial Reporting