SSA 540 (Revised) deals with the auditor’s responsibilities relating to accounting estimates and related disclosures in an audit of financial statements. The revised standard is based on the International Standard on Auditing (ISA) 540 (Revised) issued by the International Auditing and Assurance Standards Board (IAASB).
Key changes made to the extant SSA 540 (Revised) include:
Enhanced risk assessment requirements that provide a better basis for identifying and assessing the risks of material misstatement related to accounting estimates, including requirements to:
i) Obtain an understanding of the entity and its environment as part of the risk assessment procedures. ii) Separately assess inherent and control risk when identifying and assessing the risks of material misstatement. iii) Apply judgement to determine if any identified and assessed risk is a significant risk and respond accordingly.
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. Objective-based requirements introduced allow for scalability in the nature, timing and extent of the procedures performed in relation to the degree of estimation uncertainty and the assessed risks of material misstatement.
Specific paragraphs in the Application and Other Explanatory Material section to show how the standard is scalable to all types of accounting estimates.
Emphasis on the application of professional scepticism when auditing accounting estimates to foster a more independent and challenging mindset in auditors.
The revised standard is effective for audits of financial statements for periods beginning on or after 15 December 2019.