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International Standard on Auditing (ISA) 540 (Revised)

Insights audit

Written by: Jonathan Millar, Product Manager (Audit)

On 3rd October 2018 the International Auditing and Assurance Board (IAASB) released International Standard on Auditing (ISA) 540 (Revised) for the audit of accounting estimates and related disclosures. Although the UK version is still at the exposure draft stage it is expected that the revised ISA will be effective in the UK for audit of financial reporting periods beginning on or after 15th December 2019. Early adoption will be permitted and encouraged.

According to the IFAC website1 the revision was prompted by the rapidly evolving business environment faced by banks, insurers and other financial services firms to ensure that the standard continues to keep pace with the changing market.

In particular, IFRS 9 brings changes to accounting practices in these industries, as they have to change the way they deal with loan provisions and insurance contracts.

Fall out for smaller entities
Although it is the more complex financial instrument end of the market that has driven the proposed changes, they will be applicable to all audits regardless of the size of the business involved. Caroline Biebuyck wrote a helpful article considering some if the implications of this for the Economia website back in 20172 in response to the original IAASB exposure draft.

Some of the significant revisions that are highlighted on the IFAC website include:

  • An enhanced risk assessment that requires auditors to consider complexity, subjectivity and other inherent risks in addition to estimation uncertainty.
  • A closer link between the enhanced risk assessment and the methods, data and assumptions used in making accounting estimates, including the use of complex models.
  • Specific material to show how the standard is scalable to all types of accounting estimates.
  • Emphasis on the importance of applying appropriate professional scepticism when auditing accounting estimates to foster a more independent and challenging sceptical mind-set in auditors.


The UK exposure draft also includes guidance on how the requirements of the ISA can be scaled for smaller entities in the following areas:

  • Obtaining an Understanding of the Entity and its Environment
  • Specialised Skills
  • Identifying and Assessing Risks of Material Misstatement at the Assertion level
  • Response to the Assessed Risks of Material Misstatement


CaseWare AuditAdvanced templates and ISA (UK) 540 (Revised)
Both the Mercia and HAT methodologies included in our AuditAdvanced templates already contain documentation which specifically address the assessment of accounting estimates and these will be updated during the next year in preparation for implementation and early adoption as and when the ISA (UK) 540 (Revised) is finalised.

Where there is an assessed risk of material misstatement, AuditAdvanced enables these risks to be linked directly to where further audit procedures are carried out. This ensures that the auditor has a full audit trail of how any such risks have been assessed and addressed.

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*These are the opinions of CaseWare Product Managers to provide information and insight to our products and should not be considered as a replacement to statutory guidance.