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on Auditing (UK) 540 (Revised) International Standard

Financial Reporting CouncilDecember 2018 International Standardon Auditing (UK) 540 ( revised ) Auditing Accounting Estimates and Related DisclosuresAudit and AssuranceStandardFurther copies, ???.00 (post-free) can be obtainedfrom:FRC PublicationsLexis House30 Farringdon StreetLondonEC4A 4 HHTel: 0845 370 1234 Email: order online at: 11/26/2018 2:00 PM Page 1 The FRC's mission is to promote transparency and integrity in business. The FRC sets the UK Corporate Governance and Stewardship Codes and UK standards for accounting and actuarial work; monitors and takes action to promote the quality of corporate reporting; and operates independent enforcement arrangements for accountants and actuaries. As the Competent Authority for audit in the UK the FRC sets Auditing and ethical standards and monitors and enforces audit FRC does not accept any liability to any party for any loss, damage or costs howsoever arising, whether directly or indirectly, whether in contract, tort or otherwise from any action or decision taken (or not taken) as a result of any person relying on or otherwise using this document or arising from any omission from (UK) 540 ( revised December 2018) Auditing Accounting Estimates andRelated Disclosurescontains copyright material of the Financial ReportingCouncil Ltd (FRC) which is based on ISA 540 ( revised ) Auditing AccountingEstimates and Related Disclosuresof the International Auditing andAssurance standards Boar

when accounting estimates are subject to a greater degree of estimation uncertainty or 5 ISA (UK) 200 (Revised June 2016), Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing (UK), paragraph A40. 6 ISA (UK) 530, Audit Sampling, Appendix 3. 4 ISA (UK) 540 (Revised ...

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Transcription of on Auditing (UK) 540 (Revised) International Standard

1 Financial Reporting CouncilDecember 2018 International Standardon Auditing (UK) 540 ( revised ) Auditing Accounting Estimates and Related DisclosuresAudit and AssuranceStandardFurther copies, ???.00 (post-free) can be obtainedfrom:FRC PublicationsLexis House30 Farringdon StreetLondonEC4A 4 HHTel: 0845 370 1234 Email: order online at: 11/26/2018 2:00 PM Page 1 The FRC's mission is to promote transparency and integrity in business. The FRC sets the UK Corporate Governance and Stewardship Codes and UK standards for accounting and actuarial work; monitors and takes action to promote the quality of corporate reporting; and operates independent enforcement arrangements for accountants and actuaries. As the Competent Authority for audit in the UK the FRC sets Auditing and ethical standards and monitors and enforces audit FRC does not accept any liability to any party for any loss, damage or costs howsoever arising, whether directly or indirectly, whether in contract, tort or otherwise from any action or decision taken (or not taken) as a result of any person relying on or otherwise using this document or arising from any omission from (UK) 540 ( revised December 2018) Auditing Accounting Estimates andRelated Disclosurescontains copyright material of the Financial ReportingCouncil Ltd (FRC) which is based on ISA 540 ( revised ) Auditing AccountingEstimates and Related Disclosuresof the International Auditing andAssurance standards Board (IAASB), published by the InternationalFederation of Accountants (IFAC) in October 2018 and used with permission of IFAC.

2 ISA (UK) 540 ( revised December 2018) Auditing Accounting Estimates andRelated Disclosures December 2018 by the Financial Reporting Council Ltd (FRC). Contact for permission to reproduce, store or transmit, or to make other similar uses of this 540 ( revised ) Auditing Accounting Estimates and Related Disclosures October 2018 by the International Federation of Accountants (IFAC).Contact for permission to reproduce, store or transmit,or to make other similar uses of this 12/11/2018 8:12 AM Page 2 International Standardon Auditing (UK) 540 ( revised ) Auditing Accounting Estimates andRelated DisclosuresFinancial Reporting CouncilDecember 2018 International Standard ON Auditing (UK) 540( revised DECEMBER 2018) Auditing ACCOUNTING ESTIMATES ANDRELATED DISCLOSURES(Effective for audits of financial statements for periods beginning on or after15 December 2019)CONTENTSP aragraphIntroductionScope of this ISA (UK) ..1 Nature of Accounting 3 Key Concepts of This ISA (UK).

3 4 9 Effective Date .. Assessment Procedures and Related Activities ..13 15 Identifying and Assessing the Risks of Material Misstatement ..16 17 Responses to the Assessed Risks of Material Misstatement ..18 30 Disclosures Related to Accounting Estimates ..31 Indicators of Possible Management Bias .. 32 32D-1 Overall Evaluation Based on Audit Procedures Performed ..33 36 Written Representations ..37 Communication with Those Charged With Governance, Management, orOther Relevant Parties ..38 Documentation ..39 Application and Other Explanatory MaterialNature of Accounting A7 Key Concepts of This ISA (UK) ..A8 A13 Definitions ..A14 A181 Risk Assessment Procedures and Related Activities ..A19 A63 Identifying and Assessing the Risks of Material Misstatement ..A64 A80 Responses to the Assessed Risks of Material Misstatement ..A81 A132 Indicators of Possible Management Bias ..A133 A136 Overall Evaluation Based on Audit Procedures Performed ..A137 A144 Written Representations.

4 A145 Communication with Those Charged With Governance, Management, orOther Relevant Parties ..A146 A148 Documentation ..A149 A152 Appendix 1: Inherent Risk FactorsAppendix 2: Communications with Those Charged With GovernanceAnnexure: Conforming and Consequential Amendments to Other ISAs (UK) International Standard on Auditing (UK) (ISA (UK)) 540 ( revised December 2018),AuditingAccounting Estimates and Related Disclosures, should be read in conjunction withISA (UK) 200 ( revised June 2016),Overall Objectives of the Independent Auditor and theConduct of an Audit in Accordance with International standards on Auditing (UK).2 ISA (UK) 540 ( revised December 2018)IntroductionScope of this ISA (UK) International Standard on Auditing (UK) (ISA (UK)) deals with the auditor sresponsibilities relating to accounting estimates and related disclosures in an audit offinancial statements. Specifically, it includes requirements and guidance that refer to,or expand on, how ISA (UK) 315 ( revised June 2016),1 ISA (UK) 330 ( revised July2017),2 ISA (UK) 450 ( revised June 2016),3 ISA (UK) 5004and other relevant ISAs (UK)are to be applied in relation to accounting estimates and related disclosures.

5 It alsoincludes requirements and guidance on the evaluation of misstatements of accountingestimates and related disclosures, and indicators of possible management of Accounting estimates vary widely in nature and are required to be made bymanagement when the monetary amounts cannot be directly observed. Themeasurement of these monetary amounts is subject to estimation uncertainty , whichreflects inherent limitations in knowledge or data. These limitations give rise to inherentsubjectivity and variation in the measurement outcomes. The process of makingaccounting estimates involves selecting and applying a method using assumptionsand data, which requires judgment by management and can give rise to complexity inmeasurement. The effects of complexity, subjectivity or other inherent risk factors onthe measurement of these monetary amounts affects their susceptibility tomisstatement. (Ref: Para. A1 A6, Appendix 1) this ISA (UK) applies to all accounting estimates, the degree to which anaccounting estimate is subject to estimation uncertainty will vary substantially.

6 Thenature, timing and extent of the risk assessment and further audit procedures requiredby this ISA (UK) will vary in relation to the estimation uncertainty and the assessment ofthe related risks of material misstatement. For certain accounting estimates, estimationuncertainty may be very low, based on their nature, and the complexity and subjectivityinvolved in making them may also be very low. For such accounting estimates, the riskassessment procedures and further audit procedures required by this ISA (UK) wouldnot be expected to be extensive. When estimation uncertainty , complexity orsubjectivity are very high, such procedures would be expected to be much moreextensive. This ISA (UK) contains guidance on how the requirements of this ISA (UK)can be scaled. (Ref: Para. A7)1 ISA (UK) 315 ( revised June 2016),Identifying and Assessing the Risks of Material Misstatement throughUnderstanding the Entity and Its (UK) 330 ( revised July 2017),The Auditor s Responses to Assessed (UK) 450 ( revised June 2016),Evaluation of Misstatements Identified during the (UK) 500,Audit (UK) 540 ( revised December 2018)Key Concepts of This ISA (UK) ISA (UK) requires a separate assessment of inherent risk for purposes ofassessing the risks of material misstatement at the assertion level for accountingestimates.

7 Depending on the nature of a particular accounting estimate, thesusceptibility of an assertion to a misstatement that could be material may besubject to or affected by estimation uncertainty , complexity, subjectivity or otherinherent risk factors, and the interrelationship among them. As explained in ISA (UK)200 ( revised June 2016),5inherent risk is higher for some assertions and relatedclasses of transactions, account balances and disclosures than for , the assessment of inherent risk depends on the degree to which theinherent risk factors affect the likelihood or magnitude of misstatement, and varies on ascale that is referred to in this ISA (UK) as the spectrum of inherent risk. (Ref: Para. A8 A9,A65 A66, Appendix 1) ISA (UK) refers to relevant requirements in ISA (UK) 315 ( revised June 2016) andISA (UK) 330 ( revised July 2017), and provides related guidance, to emphasize theimportance of the auditor s decisions about controls relating to accounting estimates,including decisions about whether: There are controls relevant to the audit, for which the auditor is required to evaluatetheir design and determine whether they have been implemented.

8 To test the operating effectiveness of relevant ISA (UK) also requires a separate assessment of control risk when assessing therisks of material misstatement at the assertion level for accounting estimates. Inassessing control risk, the auditor takes into account whether the auditor s further auditprocedures contemplate planned reliance on the operating effectiveness of controls. Ifthe auditor does not perform tests of controls, the auditor s assessment of the risk ofmaterial misstatement at the assertion level cannot be reduced for the effectiveoperation of controls with respect to the particular (Ref: Para. A10) ISA (UK) emphasizes that the auditor s further audit procedures (including, whereappropriate, tests of controls) need to be responsive to the reasons for the assessedrisks of material misstatement at the assertion level, taking into account the effect ofone or more inherent risk factors and the auditor s assessment of control exercise of professional skepticism in relation to accounting estimates is affectedby the auditor s consideration of inherent risk factors, and its importance increaseswhen accounting estimates are subject to a greater degree of estimation uncertainty or5 ISA (UK) 200 ( revised June 2016), Overall Objectives of the Independent Auditor and the Conduct of anAudit in Accordance with International standards on Auditing (UK), paragraph (UK) 530,Audit sampling , Appendix (UK) 540 ( revised December 2018)are affected to a greater degree by complexity, subjectivity or other inherent riskfactors.

9 Similarly, the exercise of professional skepticism is important when there isgreater susceptibility to misstatement due to management bias or fraud.(Ref: Para. A11) ISA (UK) requires the auditor to evaluate, based on the audit proceduresperformed and the audit evidence obtained, whether the accounting estimates andrelated disclosures are reasonable7in the context of the applicable financial reportingframework, or are misstated. For purposes of this ISA (UK), reasonable in the contextof the applicable financial reporting framework means that the relevant requirements ofthe applicable financial reporting framework have been applied appropriately,including those that address: (Ref: Para. A12 A13, A139 A144) The making of the accounting estimate, including the selection of the method,assumptions and data in view of the nature of the accounting estimate and thefacts and circumstances of the entity; The selection of management s point estimate; and The disclosures about the accounting estimate, including disclosures about howthe accounting estimate was developed and that explain the nature, extent, andsources of estimation Date10.

10 This ISA (UK) is effective for audits of financial statements for periods beginning on orafter 15 December adoption is The objective of the auditor is to obtain sufficient appropriate audit evidence aboutwhether accounting estimates and related disclosures in the financial statements arereasonable in the context of the applicable financial reporting For purposes of the ISAs (UK), the following terms have the meanings attributed below:(a) Accounting estimate A monetary amount for which the measurement, inaccordance with the requirements of the applicable financial reporting framework,is subject to estimation uncertainty . (Ref: Para. A14)7 See also ISA (UK) 700 ( revised June 2016),Forming an Opinion and Reporting on Financial Statements,paragraph 13(c).5 ISA (UK) 540 ( revised December 2018)(b) Auditor s point estimate or auditor s range An amount, or range of amounts,respectively, developed by the auditor in evaluating management s pointestimate.


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