International audit standard addresses estimates

By Ken Tysiac

A newly released international auditing standard for auditing accounting estimates and related disclosures is designed to help auditors keep pace with changes in accounting standards for loan provisions and insurance contracts.

The International Auditing and Assurance Standards Board (IAASB) issued International Standard on Auditing (ISA) 540 (Revised), Auditing Accounting Estimates and Related Disclosures.

Revisions in the standard include:

  • An enhanced risk assessment that requires auditors to consider complexity, subjectivity, and other inherent risk factors in addition to estimation uncertainty. The purpose of this change is to encourage auditors to think more deeply about the risks inherent in accounting estimates.
  • A closer link between the enhanced risk assessment and the methods, data, and assumptions used in making accounting estimates, including the use of complex models.
  • Specific material to show how the standard is scalable to all types of accounting estimates.
  • Emphasis on the importance of applying appropriate professional skepticism when auditing accounting estimates to foster a more independent and challenging skeptical mindset in auditors.

ISA 540 is the first standard that has been issued under the IAASB’s broader program to address the fundamental elements of the audit. The standard takes effect for financial statement audits for periods beginning on or after Dec. 15, 2019.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA editorial director.

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