This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice (http://www2.deloitte.com/ca/en/legal/cookies.html) for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

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.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.