ISA 540 Revised
Session 1
Presented by Tarina Els
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
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
Risk assessment procedures and
related activities
ISA 540 (Revised) para 13
Obtain an
understanding
of
• The entity and its
environment
• The entity’s internal
control
Risk assessment procedures and
related activities
ISA 540 (Revised) para 14 – 15
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
Identify and assess risks of
material misstatement (RoMM)
ISA 540 (Revised) para 16
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
Identify and assess risks of
material misstatement (RoMM)
ISA 540 (Revised) para 17
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
Responses to assessed RoMM
ISA 540 (Revised) para 19
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
Responses to assessed RoMM
ISA 540 (Revised) para 20
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
Responses to assessed RoMM
ISA 540 (Revised) para 18, 21 – 29
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
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-ofcompletion
Receipts from
debtors after
year-end
Unlikely
NRV of inventory
– confirm /
contradict
Events /
conditions
develop over long
period – provision
for rehabilitation
FV estimates – not
reflecting events /
conditions @ B/S
date
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
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
Examples
Alternative
relevant
data sources
available to
auditor
Assessment
of PPE
useful lives
& residual
values
Impairment
of goodwill
Responses to assessed RoMM
ISA 540 (Revised) para 30
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).
Disclosures
ISA 540 (Revised) para 31
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
Management bias
ISA 540 (Revised) para 32
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
Overall evaluation
ISA 540 (Revised) para 33 – 34
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
Overall evaluation
ISA 540 (Revised) para 35 – 36
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?
Obtain written representations
ISA 540 (Revised) para 37
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
Communication with those
charged with governance (TCWG)
ISA 540 (Revised) para 38
TCWG (Appendix 2),
Management, and
Other relevant parties as appropriate
Subjectivity
Estimation uncertainty
Reasons for RoMM
Significant deficiencies
Complexity
Documentation
ISA 540 (Revised) para 39
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
Questions?