This document provides an overview and summary of the key requirements of ISA 540 (Revised) regarding auditing accounting estimates. It discusses procedures for risk assessment and identifying risks of material misstatement relating to estimates. It outlines responses to assessed risks, including testing management's process, developing independent estimates, and obtaining audit evidence. It also covers evaluation of estimates and disclosures, management bias, obtaining representations, and communication with those charged with governance. The presentation provides examples of when different audit approaches would be appropriate for various types of accounting estimates.

1. ISA 540 Revised
Session 1
Presented by Tarina Els

2. Tarina Els
Tarina is a Chartered Accountant (South
Africa), Registered Auditor and a SAICA
Registered Assessor. She has 20 years’
experience in public and private sector
auditing and financial reporting, audit
regulation, investigations, audit quality
reviews, training office compliance and
training.
She is the Technical & Training director at
LEAF

3. Agenda
Key requirements of ISA 540 (Revised)
• Risk assessment procedures, identifying and
assessing RoMM
• Responses to the assessed RoMM
• Disclosures
• Management bias
• Overall evaluation based on audit procedures
performed
• Written representations and communication with
TCWG

7. Obtain an
understanding
of
• The entity and its
environment
• The entity’s internal
control
Risk assessment procedures and
related activities
ISA 540 (Revised) para 13

8. Retrospective review
• Outcomes or re-estimation of previous accounting estimate
in current period
• To identify and assess RoMM in current period
• Not intended to call into question judgements
in the prior period
Consider if team needs specialised skills or
knowledge
• Involvement of experts or individuals with specialised skills
or knowledge may vary throughout the audit
ISA 540 (Revised) para 14 – 15
Risk assessment procedures and
related activities

9. Separately assess inherent risk and control risk
Assessment of inherent risk
• Evaluate the degree of estimation uncertainty
• Degree to which complexity, subjectivity and other
inherent risk factors affect
• Selection and application of methods, assumptions, data
• Selection of management’s point estimate and related disclosures
ISA 540 (Revised) para 16
Identify and assess risks of
material misstatement (RoMM)

10. Determine whether any of the identified and assessed RoMM
are a significant risk
If significant risk: obtain an understanding of the entity’s
controls, including control activities, relevant to that risk
ISA 540 (Revised) para 17
Identify and assess risks of
material misstatement (RoMM)

11. Design and perform tests of controls if:
• The auditor’s assessment of risks of material
misstatement at the assertion level includes an
expectation that the controls are operating effectively;
or
• Substantive procedures alone cannot provide sufficient
appropriate audit evidence at the assertion level
ISA 540 (Revised) para 19
Responses to assessed RoMM

12. Significant risk requirements
• If planned control reliance: perform tests of controls
• If only performing substantive procedures, shall include tests of
detail, e.g.
• Examining contracts to corroborate terms or assumptions
• Recalculation, such as verifying the mathematical accuracy of a
model
• Agreeing assumptions to third-party published information
ISA 540 (Revised) para 20
Responses to assessed RoMM

13. Respond with 1 or more of the following approaches
1.
Obtain evidence from
events occurring up to
the date of the
auditor’s report
2.
Test how management
made the estimate and
the data on which it is
based
3.
Develop an auditor’s
point estimate or a
range
ISA 540 (Revised) para 18, 21 – 29
Responses to assessed RoMM

14. Examples of when each approach /
combination thereof would be appropriate
1. Evidence from events occurring up to date of audit
report: When events expected to occur & evidence
required to confirm / contradict accounting estimate
Examples
Revenue from
contracts
recognised @
stage-of-
completion
Receipts from
debtors after
year-end
NRV of inventory
– confirm /
contradict
Unlikely
Events /
conditions
develop over long
period – provision
for rehabilitation
FV estimates – not
reflecting events /
conditions @ B/S
date

15. Examples of when each approach /
combination thereof would be appropriate
2. Test how management made
estimate & data used:
Appropriate when
estimate
Developed on
model with
observable &
unobservable
inputs
Similar
estimates in PY
suggests CY
process likely
to be effective
Derived from
routine data
processing by
accounting
system
Based on large
population of
similar items
that are not
significant
Examples
FV estimate
developed on
model
Share based
payments

16. Examples of when each approach /
combination thereof would be appropriate
3. Develop point estimate / range of
estimates:
Appropriate when
Not derived
from routine
data
processing
by
accounting
system
Similar
estimates in
PY suggests
CY process
unlikely to
be effective
Controls
over process
NOT well
designed,
implemente
d,
maintained
Managemen
t’s point
estimate
contradicted
by
subsequent
events
Alternative
relevant
data sources
available to
auditor
Examples
Assessment
of PPE
useful lives
& residual
values
Impairment
of goodwill

17. The auditor shall also
• Comply with relevant requirements of ISA 500
(audit evidence)
• Management expert used
• Certain requirements of ISA 540 (R) may assist
the auditor in evaluating the appropriateness of
the expert’s work
• Service organisations – ISA 402 can assist in
complying with the requirements of ISA 540(R).
ISA 540 (Revised) para 30
Responses to assessed RoMM

18. Obtain sufficient appropriate audit evidence about
disclosures, to address RoMM at assertion level,
other than those relating to estimation uncertainty
Consider the requirements of the applicable FRF and
• If fair presentation is achieved
• That disclosure is not misleading (compliance framework)
• May need more disclosure than required by the framework
ISA 540 (Revised) para 31
Disclosures

19. Evaluate whether there are indicators of
possible management bias
Consider the requirements of the
applicable FRF
If there are indicators of possible bias,
consider the implications for the audit
ISA 540 (Revised) para 32
Management bias

20. Evaluate whether
• The assessments of RoMMs at the assertion level remain
appropriate.
• Management’s decisions relating to the recognition,
measurement, presentation and disclosure are in
accordance with the applicable framework
• Sufficient appropriate audit evidence has been obtained.
• If unable to obtain sufficient appropriate audit evidence,
evaluate the implications for the audit or the auditor’s
opinion
ISA 540 (Revised) para 33 – 34
Overall evaluation

21. Determine whether the accounting estimates and related
disclosures are reasonable in the context of the applicable
framework or misstated
Fair presentation framework: disclosures included
necessary to achieve fair presentation?
Compliance framework: disclosures necessary for
financial statements not to be misleading?
ISA 540 (Revised) para 35 – 36
Overall evaluation

22. Whether methods, significant assumptions, and
data used in making the accounting estimates are
appropriate to achieve the following in accordance with the
applicable FRF
• Recognition
• Measurement
• Disclosure
Consider obtaining representations about specific
accounting estimates
ISA 540 (Revised) para 37
Obtain written representations

23. TCWG (Appendix 2),
Management, and
Other relevant parties as appropriate
Significant deficiencies
Reasons for RoMM
Estimation uncertainty
Complexity
Subjectivity
ISA 540 (Revised) para 38
Communication with those
charged with governance (TCWG)

24. Key elements of understanding of the entity, environment, internal control relating
to estimates
Linking audit response to the assessed RoMMs
Auditor’s response when management has not taken appropriate steps re
estimation uncertainty
Indicators of possible management bias and the auditor’s evaluation of the
implications for the audit
Significant judgements in determining whether estimates (and their disclosures) are
reasonable in the context of the framework
ISA 230 also applicable
ISA 540 (Revised) para 39
Documentation

25. Questions?