The FRC says its proposals will ensure the quality of auditing of management estimates and disclosures in the UK keeps pace with developments in financial reporting. This has evolved to be more forward looking, leading to an increase in the volume and complexity of accounting judgements and related disclosures.

The revised standard requires better risk assessment and greater work effort on the part of auditors who will also need to apply a higher benchmark in assessing the adequacy of disclosures. The FRC says this will not only be important to financial services audits, when auditing expected credit losses, but also in dealing with new accounting standards for revenue recognition and insurance contracts, where applicable.

Other enhancements to the standard are designed to reinforce the application of professional scepticism. These include using wording to drive questioning or challenging management where appropriate; more focus on identifying indicators of possible management bias; requiring further audit procedures to be designed and performed in a manner that is not biased toward obtaining audit evidence that may be corroborative or towards excluding audit evidence that may be contradictory; and an enhanced retrospective review and an overall evaluation based on procedures performed.

There is also a new requirement to remind auditors of their responsibilities to communicate certain matters to those charged with governance and to consider the matters to communicate regarding accounting estimates, taking into account the reasons given to the risks of material misstatement.

When finalised, the revised UK standard is proposed to be effective, in line with the international standard, for audits of financial statements for periods beginning on or after 15 December 2019. Early of adoption of the revised standard will be permitted and is encouraged.

In issuing the revised ISA (UK) 540 for consultation, the FRC is not proposing to add any new UK requirements, reporting that the IAASB has addressed concerns it raised in its comment letter on the IAASB’s exposure draft. However, the FRC has carried over additional material added to ISA (UK) 540 in June 2016, to comply with requirements in the EU Audit Regulation and Directive.

Melanie Hind, the FRC’s executive director of audit and actuarial regulation said: ‘Changes to accounting standards have increased the significance of estimates in financial statements. This standard provides a comprehensive and principles-based approach to delivering audits of estimates and related disclosures to a standard that meets the needs of users, and protects the public interest.

The FRC is at the same time consulting on conforming amendments to other UK standards. The consultation runs until 21 September.

Consultation and Impact Assessment: Proposal to revise ISA (UK) 540 is here.

FRC’s comment letter to IAASB is here.

Report by Pat Sweet