ISA 540 – Estimates

ISA 540 – Estimates

Even though the standard has been revised, the latest revision will only be effective for periods commencing from 15 December 2019. This means that the current version is still valid and warrants consideration when auditing estimates.

The auditing of estimates has been the downfall of many an auditor during regulatory inspections, as the requirements are often overlooked when auditing fair value valuations, impairment considerations, bad debt provisions and depreciation considerations. Very often, these are the areas in question when a business fails unexpectedly.

Required Steps for Auditing Accounting Estimates

The following is a summary of the required steps to be followed. The nature, timing and extent of risk assessment procedures, and further audit procedures will vary according to the estimation uncertainty, and the risk of material misstatement. Note that the steps that are deemed flexible are only from point 3 onwards.

The following procedures must be performed, regardless of estimation uncertainty or the risk of material misstatement. They are in point form and reference should be made to the standards when the level of attention needed is unclear, especially in the guidance paragraphs. These points do not need to be documented in one working paper, as most aspects only need proper elaboration in their respective sections of the audit working papers.

1. Overall evaluation of inherent risk and control risk

  • Adherence to requirements of accounting framework (para 8[a])
  • How management identifies transactions, events and conditions giving rise to estimates (para 8[b])
  • How management makes estimates (para 8[c])
    – Method
    – Controls
    – Experts
    – Assumptions
    – Proposed changes
    – Level of uncertainty
    – Data used.

2. Prior year estimate (para 9)

  • Review of outcome of prior estimate
  • Subsequent re-estimation
  • Assessment of the effect on current year’s risk of material misstatement. (Not intended to question judgment of prior year)

3. Risk assessment

  • Degree of estimation uncertainty (para 10)
  • Justification for determining as significant risk or not (para 11) (Significant risk, if high estimation uncertainty)
  • Risk assessment.

4. Further audit procedures

  • Proper application of accounting framework requirements (para 12 [a])
  • Methodology appropriate, or applied consistently, or changes justified (para 12 [b])
  • Evidence from subsequent events (para 13[a])
  • Test calculation and data (para 13[b]) – care should be taken to identify controls relied upon warranting tests of operating effectiveness (Method and assumptions)
  • Effectiveness of controls and substantive tests (para 13[c])
  • Development of point estimate or range (para 13 [d])
  • Necessity for expert (Y/N) (para 14).

5. Further audit procedures with significant risks

  • Estimation uncertainty addressed appropriately by considering alternatives (para 15[a])
  • Significant assumptions reasonable (para 15 [b])
  • Courses of action to be taken and ability to do so (para 15 [c])
  • If inadequately addressed by management, the range developed to evaluate estimate (para 16)
  • Evidence obtained on recognition and measurement, in terms of framework (para 17).

6. Final analysis

  • Conclude on reasonableness (para 18)
  • Conclude on disclosure, including estimation uncertainty (when significant risk) (para 19 & 20)
  • Describe indicators of management bias (para 21)
  • Obtain representation from management on significant assumptions used (para 22).

7. Conclusion (para 23)

  • Basis for conclusion
  • Reasonableness of estimate and its disclosure.

In summary

They only way for an auditor to reach an appropriate conclusion would be by following all the required steps for auditing accounting estimates and related disclosures. If you have any questions, or need an independent professional to review and assess your audit work on estimates, you are welcome to contact LEAF for expert technical advice, thorough file reviews and practical guidance.


  1. IRBA: Public Inspections Report, 2018
  2. IAASB: ISA 540 Auditing accounting estimates, including fair value accounting estimates, and related disclosures, effective for audits of financial statements for periods beginning on or after 15 December 2009.

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