ISA 540 Revised

ISA 540 Revised Auditing Accounting Estimates and Related Disclosures

The International Standard on Auditing (ISA) 540 (Revised): Auditing Accounting Estimates and Related Disclosures was approved by the International Audit and Assurance Standards Board (IAASB) during their June 2018 meeting and is effective for audits of financial statements beginning on or after 15 December 2019.

Why did the IAASB revise the standard?

The developing reporting environment – specifically with the introduction of the expected credit loss model of accounting, revised standards dealing with insurance contracts, revenue recognition and leases – means that there will be more complex and subjective accounting estimates in the financial statements.
In addition to the above, the IAASB is in the process of enhancing audit quality and making standards more scaleable. The revised ISA 540 addresses the challenges the auditor faces when auditing estimates.

What has changed?

  • A separate assessment of inherent risk and control risk is required during the identification and assessment of risk of material misstatements (RoMM).
  • Inherent risk factors have been introduced, such as, complexity, subjectivity and susceptibility to misstatement due to management bias or fraud.
  • Recognising a spectrum of inherent risk has been included. The degree of the likelihood and magnitude of a possible misstatement is used to determine where on the spectrum the risk of misstatement is assessed.
  • The risk assessment procedures have been enhanced, with specific focus on obtaining an understanding of the entity, its environment and the entity’s internal control.
  • More emphasis has been included on the controls relating to accounting estimates.
  • An objective-based work effort is required specifically for responding to assessed risks. Examples and application guidance has now been included in the ISA to assist the auditor in evaluating how different circumstances affect the nature, timing and extent of audit work that needs to be performed.
  • Provisions are now also seen as an accounting estimate to enhance professional skepticism of the auditor in this regard.
  • Additional requirements have been included to obtain sufficient appropriate audit evidence, and testing of controls is not a separate approach anymore but a method of obtaining evidence along with the other approaches.
  • The ‘Stand back’ requirement has been improved through adding an evaluation of the evidence obtained, including corroborative and contradictory evidence.
  • The requirements relating to the reasonableness of related disclosures have been reworded.
  • The documentation requirements were expanded to clarify what must be included in the audit file.


The revised standard will affect the audit methodology of all firms and the way that the auditor approaches the audit of accounting estimates. The revised standard is more robust and will foster a more independent and challenging skeptical mindset in auditors.


• SAICA: Accountancy South Africa September 2018: ISA 540 (Revised) – Key concepts and changes, 2018.
• IAASB: At a glance: ISA 540 (Revised), 2018.
• ICAS: Revised ISA 540 – Uncertainty prevails, 2018. Available online:

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