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Accountancy Europe welcomed a specific standard dedicated to accounting estimates and fair value measurement. It is important to combine the risk assessment aspect with the substantive testing one. However, this task should be undertaken cautiously keeping in mind that:
- The standard covering the whole subject matter needs to include high level principles and allow practitioners to use a level of judgement to adapt their work depending on the nature of the estimates and fair value measurements to be audited. There is also a danger that if the standard becomes over-engineered, the public expectations may become unrealistic in relation to the auditor's ability to obtain evidence for what remain subjective estimates.
- In some cases, it is important to include a level of ‘conditionality’ in those requirements which are not applicable in all circumstances. As demonstrated by the revision of ISA 540 Auditing Accounting Estimates, including Fair Value Estimates, and Related Disclosures, it is possible to bring these two areas together: a high-level principles-based standard in which guidance is developed in a sufficient level of detail as needed.
- The concept of ‘challenging management’ when auditing accounting estimates and fair value measurements should appear more thoroughly in the proposal. This aspect is essential in dealing with this topic and this is why we encourage the PCAOB to emphasise more the due process to be applied to correctly apply professional judgment to support third-party evidence.