(a) ED-540 Auditing Accounting Estimates and Related Disclosures

Generally 1 mark per point.

Accounting estimates are source of high audit risk:
– Inherent risk:
– Subjectivity/uncertainty
– Deliberate manipulation
– Complexity
– Control risk:
– Non-routine transactions
– Detection risk:
– Audit team may lack knowledge/experience; and
– May over rely on auditor’s or expert

Reasons for ED-540:
– Lack of consistency in extent to which auditors obtained understanding of accounting estimates
– Insufficient and inappropriate work effort by auditors
– Lack of professional scepticism exercised by auditors
– Need for more specific risk assessment requirements and more granular requirements regarding obtaining audit evidence
– Need to modernise ISA 540 for evolving financial reporting frameworks
– Increasingly complex business environment and increased complexity in IFRS Standards
– Increased emphasis on use of fair value in IFRS Standards (related need for IFRS 13)
– IFRS 9’s expected losses impairment model and related disclosures
– Need to enhance communication between auditors and TCWG about accounting estimates
– Professional scepticism is key in the audit of accounting estimates; ED-540 contains provisions designed to enhance auditor’s application of professional scepticism and consideration of potential for management bias
– Given increased use of external sources in making accounting estimates, ED-540 aims to improve and clarify requirements on use of such information as it is in public interest to do so

Maximum marks 8