The changes to the standard, ISA 540 (Revised) Auditing Accounting Estimates and Related Disclosures, will affect UK preparers as they will have to be reflected in the UK's ISA 540 and 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.

The 91-page exposure draft is also a response to the new accounting requirement to report expected credit losses in banks thrown up by IFRS 9 Financial Instruments.

‘Accounting estimates are used in many financial statements - often they are complex and require judgment or have estimation uncertainty. It is especially important that auditors are required to design and perform procedures to ensure estimates’ reliability,’ said professor 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 was developed following extensive consultation with regulators and practitioners, including those who audit small, medium and large businesses.

The IAASB has tried to make the proposals in exposure draft 540 scalable, recognising that the standard applies to all accounting estimates. The ED-540 requires the auditor, when dealing with accounting estimates with low inherent risk, to determine whether one or more specific further audit procedures that may provide sufficient appropriate audit evidence in the circumstances.

The proposed standard includes the following:

• 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 strengthening the auditor’s application of professional scepticism; and
• is scalable regardless of the size or sector of the business or audit firm.

In the UK, the Financial Reporting Council (FRC) has confirmed that it will review the proposals and provide feedback to the IAASB, before implementing changes to UK ISA 540 standard.

The FRC will hold a series of roundtable meetings to gather stakeholder views. Anyone who would like to be invited should email Paula Cooke on [email protected]  The FRC will also receive written comments sent to [email protected]

The IAASB exposure draft, International Standard on Auditing 540 (Revised), Auditing Accounting Estimates and Related Disclosures, is available here

The closing date for comment is 1 August 2017.