Significant changes in how auditors evaluate accounting estimates and related disclosures have been proposed by the IAASB. The changes will require auditors to sharpen their focus on risks of material misstatements arising from accounting estimates.
“Accounting estimates are used in many financial statements—often they are complex, and require judgement or have estimation uncertainty. It is especially important that auditors are required to design and perform procedures to ensure estimates’ reliability,” said Prof. Arnold Schilder, IAASB Chairman. “The proposed standard will bring significant changes to many audits, but particularly to audits of financial institutions, such as banks and insurers, given the recent shift to accounting for expected credit losses.”
The proposed standard continues the evolution of audit to meet the challenges of an increasingly complex global economy. It was developed following extensive consultation with regulators and practitioners, including those who audit small, medium, and large businesses.
The proposed standard:
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enhances requirements for risk assessment procedures to include specific factors related to accounting estimates, namely complexity, judgment, and estimation uncertainty;
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sets a more detailed expectation for the auditor’s response to identified risks, including augmenting the auditor’s application of professional skepticism; and
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is scalable regardless of the size or sector of the business or audit firm.
International Standard on Auditing 540 (Revised), Auditing Accounting Estimates and Related Disclosures, is open for public comment until August 1, 2017.
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