ICAS responds to IAASB Exposure Draft

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By Anne Adrain, ICAS Head of Sustainability & Assurance

2 August 2017

The ICAS Audit and Assurance Panel has responded to the IAASB's Exposure Draft on proposed changes to International Standard on Auditing (ISA) 540: Auditing accounting estimates and related disclosures (ED-540).

The revisions proposed by the International Auditing and Assurance Standards Board (IAASB) are intended to address some key issues including:

  • The auditor’s response to new reporting standards most notably IFRS 9, Financial Instruments, which has specific implications for audits of financial institutions.
  • Ensuring that the revised ISA 540 remains scalable for application to smaller and less complex entities.
  • Emphasising the importance of the application of professional scepticism in relation to accounting estimates.

Whilst the Panel’s response acknowledged the attempts by the IAASB to introduce a more granular approach to the risk assessment process for accounting estimates, it highlighted concerns over some of the proposed changes.

The key messages in the Panel’s response were as follows:


The Panel welcomed the IAASB’s recognition of the need to make ED-540 scalable to ensure that its requirements are proportionate for all audits.

However, the Panel suggested that there is a need for some clarification over the relationship between the assessment of the level of significant risk and the level of inherent risk - the latter introducing new classifications of ‘low’ or ‘not low’ - and the implications on the work effort of the auditor as a result. In addition, the interaction between ISA 540 and ISAs 315 and 330 with respect to the audit of accounting estimates could be re-emphasised.

The Panel also highlighted that the new UK financial reporting regime has resulted in some less complex entities having to deal with more subjective valuations and, as a result, additional work is required by the auditors to verify these valuations.

However, it is not clear as to the extent of work effort that is required by the auditor to fulfil the standard’s requirements in respect of these valuations and the Panel has requested more guidance in this area.

Factors to consider

The Panel supported the introduction of the three factors of estimation uncertainty, complexity and the need for the use of management judgement when considering accounting estimates.

However, the Panel believe that it is difficult to completely distinguish between these three factors and that there is inevitably some overlap and duplication between the three definitions.

Furthermore, estimation uncertainty is the key factor when considering accounting estimates whereby complexity and the use of judgement by management may be subsets of this overriding factor, with the possibility that one, both or none of these additional two factors might also exist.

Therefore, the Panel would prefer to see estimation uncertainty listed as the key factor and the other two factors presented as possible additional factors. This might also help address the issue of duplication and overlap within the definitions.

Professional scepticism

The Panel was supportive of the substantive approach that the IAASB has adopted in relation to the way that the auditor applies professional scepticism. This approach was preferred to that of merely referring to the need for auditors to exercise professional scepticism at various parts of the proposed revised standard.

One area where the Panel considered that further enhancement could be made was to include additional guidance in relation to how the auditor should evaluate qualitative disclosures to emphasise the need for the application of an appropriate level of professional scepticism. Such disclosures can be extremely important to allow the user to properly assess the uncertainty surrounding the recognition and measurement of certain elements of the financial statements.

View the full ICAS response.


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