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ANALYSIS: Auditing accounting estimates


On 20 April 2017, the International Auditing and Assurance Standards Board (IAASB) issued the Exposure Draft: Proposed ISA 540 (Revised), Auditing Accounting Estimates and Related Disclosures (ED), for comment until 1 August 2017. This is an overview of the proposed changes


The main reasons provided by the IAASB in their project proposal1 include:

  • Audit difficulties identified through the IAASB’s ISA Implementation Monitoring Project and consultations on its strategy and future work plans
  • Inspection findings published by regulators, and
  • Changes in accounting standards resulting in more complex accounting estimates


Identifying and assessing risks of material misstatement

The extant ISA 540,2 Audit of Accounting Estimates (ISA 540), requires the auditor, as part of identifying and assessing risks of material misstatement (RoMM), to evaluate the degree of estimation uncertainty associated with an accounting estimate and where the estimation uncertainty is high; the auditor is required to determine whether this gives rise to a significant risk.

The ED3 requires the auditor, as part of identifying and assessing RoMM (and in applying ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment4), to take into account the extent to which the accounting estimate is subject to/ affected by one or more of the following three factors:

  • Complexity in making the accounting estimate
  • The need for management to use judgement and the potential for management bias, and/or
  • Estimation uncertainty

These three factors in essence determine the level of assessed risk and the reason for the assessment in the circumstances.

Responses to the assessed risks of material misstatement

The extant ISA 5405 includes requirements that the auditor is required to undertake in response to the assessed RoMM, with additional requirements where risks are assessed as significant.

In the ED, the applicability of the requirements that the auditor is required to undertake in response to the assessed RoMM depends on the level of assessed risk and the reason for the assessment (refer to the three factors identified above).

This links with the requirements in ISA 330, The Auditor’s Responses to Assessed Risks,6 to consider the reasons for the assessment given to the RoMM when designing further audit procedures and to obtain more persuasive audit evidence the higher the auditor’s assessment of risk.

The ED distinguishes between inherent risk assessed as ‘low’ and ‘not low’ but does not define or describe their meaning.

The auditor therefore has to apply professional judgement in this determination.

If the assessment is not low,7 the requirements relating to the three factors above are applicable. As the ED recognises that the three factors are interrelated, any combination, or all of the requirements could be applicable, as determined by the auditor’s reasons for the assessment.

If the assessment is low,8 the auditor’s procedures are limited to one or more of the following to obtain sufficient appropriate audit evidence:

  • Obtain audit evidence about events occurring up to the date of the auditor’s report
  • Test how management made the accounting estimate and the data on which it is based, and/or
  • Develop a point estimate or range based on available audit evidence to evaluate management’s point estimate

The proposed requirements contained in the ED in relation to responses to the assessed RoMM are illustrated in the diagram.

Overall evaluation

The extant ISA 5409 requires the auditor to evaluate whether the accounting estimates are reasonable in the context of the applicable financial reporting framework, or are misstated.

In addition, the ED10 requires the auditor, for each accounting estimate with an assessed risk of ‘not low’ to evaluate, before concluding, whether the RoMM remains appropriate; sufficient appropriate audit evidence has been obtained; and management’s decisions relating to recognition, measurement, presentation and disclosure of the accounting estimate are in accordance with the applicable financial reporting framework.


The documentation requirements of the ED have not changed significantly, but the explanatory material11 reminds the auditor of the general documentation requirements in ISA 230, Audit Documentation. The explanatory material describes that ISA 23012 requires the audit documentation to be sufficient to enable an experienced auditor to understand, among other things, the significant professional judgements made in reaching conclusions. These professional judgements include the basis for the auditor’s evaluation of whether the accounting estimates are reasonable.

Application and other explanatory material

The guidance in the ED relating to risk assessment procedures, identifying and assessing RoMM and responding to the assessed RoMM has been significantly expanded. The ED further includes two appendices, one describes a range of different types of measurement bases and valuation techniques that are commonly used in making current value measurements and the other provides further background information in relation to complexity, judgement and estimation uncertainty.


SAICA members will be invited to participate in an online survey which will be used to comment on the ED. In addition, SAICA members have also been invited, through the Standards and Legislation newsletter, to pilot the requirements and guidance at audit clients to provide feedback on the significant changes to the IAASB.

All feedback received from SAICA’s outreach activities will be collated and considered in informing the comment letter on the ED to be submitted to the IAASB. The deadline for comment is 1 August 2017.


  • 1 Refer to project publication: http://www.iaasb.org/projects/accounting-estimates-isa-540.
  • 2 Extant ISA 540.10, 11.
  • 3 ED-ISA 540.13,
  • 4 ISA 315(R).25, 26,
  • 5 Extant ISA 540.12–17.
  • 6 ISA 330.7.
  • 7 ED-ISA 540.15(b).
  • 8 ED-ISA 540.15(a).
  • 9 Extant ISA 540.18.
  • 10 ED-ISA 540.22.
  • 11 ED-ISA 540.A158.
  • 12 ISA 230.8(c).

Author: Thinus Peyper CA(SA) is Project Director: Assurance at SAICA