14 September 2017

EBA: Comment letter on proposed ISA 540 (Revised) Auditing Accounting Estimates and Related Disclosures

The EBA welcomes the IAASB efforts at enhancing the requirements for the audit of accounting estimates. Accounting estimates affect most of the components of the financial statements of financial institutions and their importance will increase further in the context of the implementation of the expected credit losses (ECL) requirements of IFRS 9, Financial Instruments (IFRS 9), where accounting estimates are likely to become more complex, require the use of more judgement and be more uncertain compared to the current accounting estimates under incurred loss frameworks.

Understanding that the final standard will not be available at the time of initial application of IFRS 9, the EBA encourages the IAASB to promote early adoption of the standard where it believes it to be practicable for auditors. Timely publication of the revised ISA 540 will help to enable early adoption.

The EBA supports the principles-based approach of the ED, which focuses on the requirements of the audit approach in order to address the risks of material misstatements arising from accounting estimates. This principles-based approach should ensure that the auditor’s responses to the risk of material misstatement are effective, avoiding any so called ‘bright lines’ when audit procedures are prescribed for each reason underlying the assessed risk of material misstatement. However, the EBA believes that the enforceability of the standard could be further improved, among others by improving the application guidance and thus helping auditors to meet the objectives of the ED and by including some of the application guidance of the ED as requirement at standard’s-level.

The EBA welcomes also the increase in the references in the ED to the audit of internal controls. An appropriate internal control framework will be key to ensuring the reliability and correctness of accounting estimates in general. Having said that, the ED could benefit from placing more emphasis on the importance of the audit of internal controls and making it clear that in the context of the audit of ECL, in most cases, these controls will need to be tested and that substantive procedures alone will not be sufficient.

Full comment letter

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