Auditing Accounting Estimates

Current Status Next Steps

AASB is deliberating comments on its Exposure Draft.

First half of 2018 – Final Handbook material to be approved.

OBJECTIVE AND SCOPE OF THIS PROJECT

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.

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The International Auditing and Assurance Standards Board (IAASB) is proposing revisions to ISA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures.

The IAASB proposals include establishing more robust requirements and appropriately detailed guidance to foster audit quality. This would be done by driving auditors to perform appropriate procedures in relation to accounting estimates and related disclosures.

It is anticipated that these revisions would also seek to emphasize the importance of the appropriate application of professional skepticism.

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PROJECT NEWS & DECISION SUMMARIES

AASB Decision Summary – 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:

  • whether the threshold of low inherent risk should be retained;
  • how the auditor should take the risk factors (complexity, judgment and estimation uncertainty) into account when performing the risk assessment; and
  • how best to structure the requirements related to responding to risks of material misstatement.

AASB Response – Auditing Accounting Estimates and Related Disclosures
August 17, 2017. The AASB has submitted a comment letter responding to the IAASB’s Exposure Draft.

AASB Decision Summary – July 19, 2017
The Board reviewed comments received from Canadian stakeholders on the AASB’s Exposure Draft of proposed revisions to CAS 540, Auditing Accounting Estimates and Related Disclosures. 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.

AASB Decision Summary – April 11, 2017
The Board 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.

The Board also discussed the communication and outreach plan related to the exposure draft.  A webinar will be conducted, in English and French, to build awareness of the exposure draft.

Video Conference Discussions – Stakeholders’ Views Sought on the Proposed Revisions to CAS 540
May 10, 2017. Participate in a video conference session to provide your views on the proposals to update Canadian Auditing Standard (CAS) 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures. The Exposure Draft, “Auditing Accounting Estimates and Related Disclosures”, needs your feedback!

AASB Exposure Draft – Auditing Accounting Estimates and Related Disclosures
May 9, 2017. The AASB has 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.

IAASB Exposure Draft – Auditing Accounting Estimates and Related Disclosures (Proposed amendments to ISA 540).
May 1, 2017. The International Auditing and Assurance Standards Board (IAASB) has 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 comment by August 1, 2017.

AASB Decision Summary – March 6-7, 2017
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:

  • the description of the nature of accounting estimates;
  • key concepts and terms defined in the standard;
  • scalability implications of the requirements; and
  • responses to the assessed risks of material misstatement.

The IAASB is expected to approve its exposure draft at its March 2017 meeting.  The AASB anticipates approval of its exposure draft in April 2017.

AASB Decision Summary – February 9, 2017
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 proposed revisions addressing:

  • how an auditor would respond to the assessed risk of material misstatement; and
  • the overall evaluation of whether sufficient appropriate audit evidence has been obtained about the accounting estimates.

The AASB also discussed issues related to an upcoming Canadian exposure draft of CAS 540, including:

  • the anticipated length of the comment period;
  • how the exposure draft could be distributed;
  • whether there are issues specific to Canada that should be addressed; and
  • 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.

AASB Decision Summary – 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:

  • the objective;
  • responding to the assessed risks of material misstatement;
  • work effort for each class of risk;
  • disclosure and stand back requirements; and
  • 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.

AASB Decision Summary – 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:

  • scalability of the standard to both low and high risk estimates;
  • definitions of key terms;
  • classes of risk and risk assessment process;
  • work effort in response to the assessed risks; and
  • 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.

AASB Decision Summary – June 13-14, 2016
The AASB considered the views of its Auditing Accounting Estimates Advisory Group in providing 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:

  • scalability of the standard to both low and high risk estimates;
  • definition of key terms used;
  • risk assessment procedures;
  • identifying and assessing risks of material misstatement; and
  • work effort requirements in response to the assessed risks.  

The Advisory Group concluded that issues identified in Canada are consistent with the issues identified by the IAASB. The AASB agreed with this conclusion.

IAASB Publication – Auditing Challenges Arising from the Adoption of Expected Credit Loss Models
March 17, 2016 – Have you considered what audit issues may arise from the adoption of IFRS 9 Financial Instruments? The IAASB’s publication highlights how expected credit loss models will affect auditors. It also sets out initial thinking on how auditors may address these challenges under ISA 540.

AASB Decision Summary – March 7- 8, 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:

  • whether the scope of ISA 540 should be clarified;
  • whether professional skepticism could be strengthened by changing the wording of ISA 540; and
  • how the auditor performs risk assessment procedures related to accounting estimates.  

The AASB agreed the composition of the advisory group being formed to provide insights to the AASB on the project.

AASB Decision Summary – January 18-19, 2016
The AASB received a presentation on audit matters arising from IFRS 9 Financial Instruments including implications for:

  • auditing significant management assumptions and estimates;
  • how the auditor obtains sufficient appropriate audit evidence;
  • the use of experts on the audit; and
  • testing of internal controls.

These and other implications are being explored in the IAASB’s project to revise ISA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures. The AASB decided that two advisory groups would be established to assist staff and the AASB by providing input on issues related to the project.

AASB Decision Summary – November 30–December 1, 2015
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 objectives and scope of, and significant issues to be addressed by, the IAASB’s project proposal. The AASB tentatively concluded that a Canadian working group should be established to consider Canadian implications of, and provide input to the AASB on, proposed revisions to ISA 540.

 

Disclaimer: This project summary has been prepared for information purposes only. Decisions reported are tentative and reflect only the current status of discussions on this project, which may change after further Board deliberations. Decisions to publish Handbook material are final only after a formal ballot process.