Significant changes in how auditors evaluate accounting estimates and related disclosures have been proposed by the International Auditing and Assurance Standards Board (IAASB). The changes will require auditors to sharpen their focus on risks of material misstatements arising from accounting estimates, and to address those risks with more granular audit requirements.

“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:

• enhances requirements for risk assessment procedures to include specific factors related to accounting estimates, namely complexity, judgment, and estimation uncertainty;
• sets a more detailed expectation for the auditor’s response to identified risks, including augmenting the auditor’s application of professional skepticism; and
• 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. The IAASB invites all stakeholders to comment on the Exposure Draft via the IAASB website. 

About the IAASB
The IAASB develops auditing and assurance standards and guidance for use by all professional accountants under a shared standard-setting process involving the Public Interest Oversight Board, which oversees the activities of the IAASB, and the IAASB Consultative Advisory Group, which provides public interest input into the development of the standards and guidance. The structures and processes that support the operations of the IAASB are facilitated by the International Federation of Accountants (IFAC). For copyright, trademark, and permissions information, please go to permissions or contact permissions@ifac.org.