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Key changes introduced in the revised ISA 540

Author: ICAEW

Published: 29 Oct 2021

The revised ISA 540 includes numerous new and enhanced requirements. We highlight some of these key changes in the table below.

Key change

Description

Enhanced risk assessment procedures

Including understanding the entity, its environment and internal controls to ensure auditors have gained a good knowledge of the business.

How are accounting estimates picked up in risk assessments

Separate inherent risk and control risk assessments and a spectrum of inherent risk

The need for separate inherent and control risk assessments when assessing the risk of material misstatements at the assertion level.

The introduction of the concept of a spectrum of inherent risk reflecting both the likelihood and magnitude of misstatement.

Spectrum of inherent risk

New inherent risk factors

Including estimation uncertainty, subjectivity, and complexity.

Inherent risk factors

Enhanced emphasis on auditor’s decisions about controls

Assessing the effectiveness of the design of control activities around estimates.

How are accounting estimates picked up in risk assessments 

The need for further audit procedures to be responsive to the assessed risks of material misstatement and the higher the assessed risk the more persuasive the audit evidence needs to be

A more prescriptive approach for the procedures to be performed in response to the assessed risk of material misstatement including designing procedures which are not biased towards obtaining corroborative evidence and ignoring contradictory evidence.

Responding to assessed risks 

Work effort structured around testing methods, data and assumptions

Relating to testing management’s process for making the estimate and developing the auditor’s own point estimate or range.

Responding to assessed risks  

Enhanced documentation requirements

Documenting the audit of accounting estimates under ISA 540 (Revised)

 Enhanced scepticism requirements Demonstrating professional scepticism when auditing estimates

New overall stand-back requirement

To ensure that once the auditor has completed the required audit procedures, they assess whether the accounting estimates and related disclosures are reasonable in the context of the applicable financial reporting framework and conclude whether they have obtained sufficient appropriate audit evidence.

Demonstrating professional scepticism when auditing estimates 

Enhanced audit requirements for disclosures

Obtaining sufficient appropriate audit evidence to ensure disclosures are reasonable.

Responding to assessed risks  

A new requirement to consider matters relating to estimates when communicating with those charged with governance

In accordance with ISA 260 and ISA 265 the auditor needs to communicate significant qualitative aspects of the entity’s accounting practices and significant deficiencies in internal control relating to estimates and related disclosures.

See Appendix 2 of ISA 540 (Revised) for examples of matters the auditor might want to communicate here.

Further information

 The IAASB has published implementation support for auditors to help them understand the enhancements in ISA 540 (Revised), including a presentation and slide decks along with a series of video panel discussions working with IFAC. The IAASB has also published an audit client briefing document to help inform those directly involved in determining accounting estimates of matters to consider in preparing for auditor’s requests relating to ISA 540 (Revised).

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