Isa 540

ISA 540 (Revised) Auditing Accounting Estimates and Related Disclosures
ISA 540 (Revised) Auditing

Accounting Estimates and Related
Disclosures
(Effective for audits of financial statements for periods beginning on or after December 15, 2019)
Contents
Contents
Paragraph
Introduction
Scope of this ISA 1
Nature of Accounting Estimates 2–3
Key Concepts of This ISA 4–9
Effective Date 10
Objective 11
Definitions 12
Requirements
Risk 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

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This is page 1 of 100
Overall Evaluation Based on Audit Procedures Performed 33–36
Written Representations 37
Communication with Those Charged With Governance, Management, or Other

Relevant Parties 38
Documentation 39
Application and Other Explanatory Material
Nature of Accounting Estimates A1–A7
Key Concepts of This ISA A8–A13
Definitions A14–A18
Risk Assessment Procedures and Related Activities A19–A63
Identifying and Assessing the Risks of Material Misstatement A64–A80
A81–
Responses to the Assessed Risks of Material Misstatement A132
A133–
Indicators of Possible Management Bias A136
A137–
Overall Evaluation Based on Audit Procedures Performed A144
Written Representations A145
Communication with Those Charged With Governance, Management or Other A146–

Relevant Parties A148
A149–
Documentation A152
Appendix 1: Inherent Risk Factors
Appendix 2: Communications with Those Charged with Governance

Conforming and Consequential Amendments to Other International Standards
Basis for Conclusions Prepared by the Staff of the IAASB
International Standard on Auditing (ISA) 540 (Revised), Auditing Accounting Estimates and
Related Disclosures, should be read in conjunction with ISA 200, Overall Objectives of the
Independent Auditor and the Conduct of an Audit in Accordance with International
Standards on Auditing.
ISA 540 (Revised) has received the approval of the Public Interest Oversight Board (PIOB),
which concluded that due process was followed in the development of the standard and that
proper regard was paid to the public interest.
Introduction
Introduction
Scope of this ISA
1. This International Standard on Auditing (ISA) deals with the auditor's responsibilities relating to
accounting estimates and related disclosures in an audit of financial statements. Specifically, it
includes requirements and guidance that refer to, or expand on, how ISA 315 (Revised),[1] ISA
330,[2] ISA 450,[3] ISA 500[4] and other relevant ISAs are to be applied in relation to accounting
estimates and related disclosures. It also includes requirements and guidance on the evaluation
of misstatements of accounting estimates and related disclosures, and indicators of possible
management bias.
Nature of Accounting Estimates

2. Accounting estimates vary widely in nature and are required to be made by management when
the monetary amounts cannot be directly observed. The measurement of these monetary amounts
is subject to estimation uncertainty, which reflects inherent limitations in knowledge or data. These
limitations give rise to inherent subjectivity and variation in the measurement outcomes. The
process of making accounting estimates involves selecting and applying a method using
assumptions and data, which requires judgment by management and can give rise to complexity
in measurement. The effects of complexity, subjectivity or other inherent risk factors on the
measurement of these monetary amounts affects their susceptibility to misstatement. (Ref: Para.
A1–A6, Appendix 1)
3. Although this ISA applies to all accounting estimates, the degree to which an accounting estimate
is subject to estimation uncertainty will vary substantially. The nature, timing and extent of the risk
assessment and further audit procedures required by this ISA will vary in relation to the estimation
uncertainty and the assessment of the related risks of material misstatement. For certain
accounting estimates, estimation uncertainty may be very low, based on their nature, and the
complexity and subjectivity involved in making them may also be very low. For such accounting
estimates, the risk assessment procedures and further audit procedures required by this ISA
would not be expected to be extensive. When estimation uncertainty, complexity or subjectivity are
very high, such procedures would be expected to be much more extensive. This ISA contains
guidance on how the requirements of this ISA can be scaled. (Ref: Para. A7)
Key Concepts of This ISA

4. This ISA requires a separate assessment of inherent risk for purposes of assessing the risks of
material misstatement at the assertion level for accounting estimates. Depending on the nature of
a particular accounting estimate, the susceptibility of an assertion to a misstatement that could be
material may be subject to or affected by estimation uncertainty, complexity, subjectivity or other
inherent risk factors, and the interrelationship among them. As explained in ISA 200,[5] inherent
risk is higher for some assertions and related classes of transactions, account balances and
disclosures than for others. Accordingly, the assessment of inherent risk depends on the degree
to which the inherent risk factors affect the likelihood or magnitude of misstatement, and varies on
a scale that is referred to in this ISA as the spectrum of inherent risk. (Ref: Para. A8–A9, A65–
A66, Appendix 1)
5. This ISA refers to relevant requirements in ISA 315 (Revised) and ISA 330, and provides related
guidance, to emphasize the importance 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 evaluate their
design and determine whether they have been implemented.
• To test the operating effectiveness of relevant controls.
6. This ISA also requires a separate assessment of control risk when assessing the risks of material
misstatement at the assertion level for accounting estimates. In assessing control risk, the auditor
takes into account whether the auditor's further audit procedures contemplate planned reliance on
the operating effectiveness of controls. If the auditor does not perform tests of controls, the
auditor's assessment of the risk of material misstatement at the assertion level cannot be reduced
for the effective operation of controls with respect to the particular assertion.[6] (Ref: Para. A10)
7. This ISA emphasizes that the auditor's further audit procedures (including, where appropriate,
tests of controls) need to be responsive to the reasons for the assessed risks of material
misstatement at the assertion level, taking into account the effect of one or more inherent risk
factors and the auditor's assessment of control risk.
8. The exercise of professional skepticism in relation to accounting estimates is affected by the

auditor's consideration of inherent risk factors, and its importance increases when accounting
estimates are subject to a greater degree of estimation uncertainty or are affected to a greater
degree by complexity, subjectivity or other inherent risk factors. Similarly, the exercise of
professional skepticism is important when there is greater susceptibility to misstatement due to
management bias or fraud. (Ref: Para. A11)
9. This ISA requires the auditor to evaluate, based on the audit procedures performed and the audit
evidence obtained, whether the accounting estimates and related disclosures are reasonable[7] in
the context of the applicable financial reporting framework, or are misstated. For purposes of this
ISA, reasonable in the context of the applicable financial reporting framework means that the
relevant requirements of the 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 the facts and circumstances of
the entity;
• The selection of management's point estimate; and
• The disclosures about the accounting estimate, including disclosures about how the
accounting estimate was developed and that explain the nature, extent, and sources of
estimation uncertainty.
Effective Date
10. This ISA is effective for audits of financial statements for periods beginning on or after December
15, 2019.
1 ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its
Environment
2 ISA 330, The Auditor's Responses to Assessed Risks
3 ISA 450, Evaluation of Misstatements Identified during the Audit
4 ISA 500, Audit Evidence
5 ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards
on Auditing, paragraph A40
6 ISA 530, Audit Sampling, Appendix 3
7 See also ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements, paragraph 13(c).
Objective
Objective
11. The objective of the auditor is to obtain sufficient appropriate audit evidence about whether
accounting estimates and related disclosures in the financial statements are reasonable in the
context of the applicable financial reporting framework.
Definitions
Definitions
12. For purposes of the ISAs, the following terms have the meanings attributed below:
(a) Accounting estimate – A monetary amount for which the measurement, in accordance with the
requirements of the applicable financial reporting framework, is subject to estimation
uncertainty. (Ref: Para. A14)
(b) Auditor's point estimate or auditor's range – An amount, or range of amounts, respectively,
developed by the auditor in evaluating management's point estimate. (Ref: Para. A15)
(c) Estimation uncertainty – Susceptibility to an inherent lack of precision in measurement. (Ref:
Para. A16, Appendix 1)
(d) Management bias – A lack of neutrality by management in the preparation of information. (Ref:
Para. A17)
(e) Management's point estimate – The amount selected by management for recognition or
disclosure in the financial statements as an accounting estimate.
(f) Outcome of an accounting estimate – The actual monetary amount that results from the
resolution of the transaction(s), event(s) or condition(s) addressed by an accounting estimate.
(Ref: Para. A18)
Requirements
Requirements
Risk Assessment Procedures and Related Activities

13. When obtaining an understanding of the entity and its environment, including the entity's internal
control, as required by ISA 315 (Revised),[8] the auditor shall obtain an understanding of the
following matters related to the entity's accounting estimates. The auditor's procedures to obtain
the understanding shall be performed to the extent necessary to provide an appropriate basis for
the identification and assessment of risks of material misstatement at the financial statement and
assertion levels. (Ref: Para. A19–A22)
The Entity and Its Environment

(a) The entity's transactions and other events and conditions that may give rise to the need for, or
changes in, accounting estimates to be recognized or disclosed in the financial statements.
(Ref: Para. A23)
(b) The requirements of the applicable financial reporting framework related to accounting
estimates (including the recognition criteria, measurement bases, and the related presentation
and disclosure requirements); and how they apply in the context of the nature and
circumstances of the entity and its environment, including how transactions and other events or
conditions are subject to, or affected by, inherent risk factors. (Ref: Para. A24–A25)
(c) Regulatory factors relevant to the entity's accounting estimates, including, when applicable,
regulatory frameworks related to prudential supervision. (Ref: Para. A26)
(d) The nature of the accounting estimates and related disclosures that the auditor expects to be
included in the entity's financial statements, based on the auditor's understanding of the
matters in 13(a)–(c) above. (Ref: Para. A27)
The Entity's Internal Control

(e) The nature and extent of oversight and governance that the entity has in place over
management's financial reporting process relevant to accounting estimates. (Ref: Para. A28–
A30).
(f) How management identifies the need for, and applies, specialized skills or knowledge related
to accounting estimates, including with respect to the use of a management's expert. (Ref:
Para. A31)
(g) How the entity's risk assessment process identifies and addresses risks relating to accounting
estimates. (Ref: Para. A32–A33)
(h) The entity's information system as it relates to accounting estimates, including:
(i) The classes of transactions, events and conditions that are significant to the financial
statements and that give rise to the need for, or changes in, accounting estimates and
related disclosures; and (Ref: Para. A34–A35)
(ii) For such accounting estimates and related disclosures, how management:
a. Identifies the relevant methods, assumptions or sources of data, and the need for
changes in them, that are appropriate in the context of the applicable financial reporting
framework, including how management: (Ref: Para. A36–A37)
i. Selects or designs, and applies, the methods used, including the use of models;
(Ref: Para. A38–A39)
ii. Selects the assumptions to be used, including consideration of alternatives, and
identifies significant assumptions; and (Ref: Para. A40–A43)
iii. Selects the data to be used; (Ref: Para. A44)
b. Understands the degree of estimation uncertainty, including through considering the
range of possible measurement outcomes; and (Ref: Para. A45)
c. Addresses the estimation uncertainty, including selecting a point estimate and related
disclosures for inclusion in the financial statements. (Ref: Para. A46–A49)
(i) Control activities relevant to the audit over management's process for making accounting
estimates as described in paragraph 13(h)(ii). (Ref: Para. A50–A54)
(j) How management reviews the outcome(s) of previous accounting estimates and responds to
the results of that review.
14. The auditor shall review the outcome of previous accounting estimates, or, where applicable, their
subsequent re-estimation to assist in identifying and assessing the risks of material misstatement
in the current period. The auditor shall take into account the characteristics of the accounting
estimates in determining the nature and extent of that review. The review is not intended to call
into question judgments about previous period accounting estimates that were appropriate based
on the information available at the time they were made. (Ref: Para. A55–A60)
15. With respect to accounting estimates, the auditor shall determine whether the engagement team
requires specialized skills or knowledge to perform the risk assessment procedures, to identify
and assess the risks of material misstatement, to design and perform audit procedures to
respond to those risks, or to evaluate the audit evidence obtained. (Ref: Para. A61–A63)
Identifying and Assessing the Risks of Material

Misstatement
16. In identifying and assessing the risks of material misstatement relating to an accounting estimate
and related disclosures at the assertion level, as required by ISA 315 (Revised),[9] the auditor
shall separately assess inherent risk and control risk. The auditor shall take the following into
account in identifying the risks of material misstatement and in assessing inherent risk: (Ref:
Para. A64–A71)
(a) The degree to which the accounting estimate is subject to estimation uncertainty; and (Ref:
Para. A72–A75)
(b) The degree to which the following are affected by complexity, subjectivity, or other inherent risk
factors: (Ref: Para. A76–A79)
(i) The selection and application of the method, assumptions and data in making the
accounting estimate; or
(ii) The selection of management's point estimate and related disclosures for inclusion in the
financial statements.
17. The auditor shall determine whether any of the risks of material misstatement identified and
assessed in accordance with paragraph 16 are, in the auditor's judgment, a significant risk.[10] If
the auditor has determined that a significant risk exists, the auditor shall obtain an understanding
of the entity's controls, including control activities, relevant to that risk.[11] (Ref: Para. A80)
Responses to the Assessed Risks of Material

Misstatement
18. As required by ISA 330,[12] the auditor's further audit procedures shall be responsive to the
assessed risks of material misstatement at the assertion level,[13] considering the reasons for the
assessment given to those risks. The auditor's further audit procedures shall include one or more
of the following approaches:
(a) Obtaining audit evidence from events occurring up to the date of the auditor's report (see
paragraph 21);
(b) Testing how management made the accounting estimate (see paragraphs 22–27); or
(c) Developing an auditor's point estimate or range (see paragraphs 28–29).
The auditor's further audit procedures shall take into account that the higher the assessed risk of
material misstatement, the more persuasive the audit evidence needs to be. [14] The auditor shall
design and perform further audit procedures in a manner that is not biased towards obtaining
audit evidence that may be corroborative or towards excluding audit evidence that may be
contradictory. (Ref: Para. A81–A84)
19. As required by ISA 330,[15] the auditor shall design and perform tests to obtain sufficient
appropriate audit evidence as to the operating effectiveness of relevant controls, if:
(a) The auditor's assessment of risks of material misstatement at the assertion level includes an
expectation that the controls are operating effectively; or
(b) Substantive procedures alone cannot provide sufficient appropriate audit evidence at the
assertion level.
In relation to accounting estimates, the auditor's tests of such controls shall be responsive to the
reasons for the assessment given to the risks of material misstatement. In designing and
performing tests of controls, the auditor shall obtain more persuasive audit evidence the greater
the reliance the auditor places on the effectiveness of a control. [16] (Ref: Para. A85–A89)
20. For a significant risk relating to an accounting estimate, the auditor's further audit procedures shall
include tests of controls in the current period if the auditor plans to rely on those controls. When the
approach to a significant risk consists only of substantive procedures, those procedures shall
include tests of details.[17] (Ref: Para. A90)
Obtaining Audit Evidence from Events Occurring up to the

Date of the Auditor's Report
21. When the auditor's further audit procedures include obtaining audit evidence from events
occurring up to the date of the auditor's report, the auditor shall evaluate whether such audit
evidence is sufficient and appropriate to address the risks of material misstatement relating to the
accounting estimate, taking into account that changes in circumstances and other relevant
conditions between the event and the measurement date may affect the relevance of such audit
evidence in the context of the applicable financial reporting framework. (Ref: Para. A91–A93)
Testing How Management Made the Accounting Estimate

22. When testing how management made the accounting estimate, the auditor's further audit
procedures shall include procedures, designed and performed in accordance with paragraphs
23–26, to obtain sufficient appropriate audit evidence regarding the risks of material
misstatement relating to: (Ref: Para. A94)
(a) The selection and application of the methods, significant assumptions and the data used by
management in making the accounting estimate; and
(b) How management selected the point estimate and developed related disclosures about
Methods
23. In applying the requirements of paragraph 22, with respect to methods, the auditor's further audit
procedures shall address:
(a) Whether the method selected is appropriate in the context of the applicable financial reporting
framework, and, if applicable, changes from the method used in prior periods are appropriate;
(Ref: Para. A95, A97)
(b) Whether judgments made in selecting the method give rise to indicators of possible
management bias; (Ref: Para. A96)
(c) Whether the calculations are applied in accordance with the method and are mathematically
accurate;
(d) When management's application of the method involves complex modelling, whether
judgments have been applied consistently and whether, when applicable: (Ref: Para. A98–
A100)
(i) The design of the model meets the measurement objective of the applicable financial
reporting framework, is appropriate in the circumstances, and, if applicable, changes from
the prior period's model are appropriate in the circumstances; and
(ii) Adjustments to the output of the model are consistent with the measurement objective of
the applicable financial reporting framework and are appropriate in the circumstances; and
(e) Whether the integrity of the significant assumptions and the data has been maintained in
applying the method. (Ref: Para. A101)
Significant Assumptions
24. In applying the requirements of paragraph 22, with respect to significant assumptions, the
auditor's further audit procedures shall address:
(a) Whether the significant assumptions are appropriate in the context of the applicable financial
reporting framework, and, if applicable, changes from prior periods are appropriate; (Ref:
Para. A95, A102–A103)
(b) Whether judgments made in selecting the significant assumptions give rise to indicators of
possible management bias; (Ref: Para. A96)
(c) Whether the significant assumptions are consistent with each other and with those used in
other accounting estimates, or with related assumptions used in other areas of the entity's
business activities, based on the auditor's knowledge obtained in the audit; and (Ref: Para.
A104)
(d) When applicable, whether management has the intent to carry out specific courses of action
and has the ability to do so. (Ref: Para. A105)
Data
25. In applying the requirements of paragraph 22, with respect to data, the auditor's further audit
procedures shall address:
(a) Whether the data is appropriate in the context of the applicable financial reporting framework,
and, if applicable, changes from prior periods are appropriate (Ref: Para. A95, A106);
(b) Whether judgments made in selecting the data give rise to indicators of possible management
bias; (Ref: Para. A96)
(c) Whether the data is relevant and reliable in the circumstances; and (Ref: Para. A107)
(d) Whether the data has been appropriately understood or interpreted by management, including
with respect to contractual terms. (Ref: Para. A108)
Management's Selection of a Point Estimate and Related Disclosures

about Estimation Uncertainty
26. In applying the requirements of paragraph 22, the auditor's further audit procedures shall address
whether, in the context of the applicable financial reporting framework, management has taken
appropriate steps to:
(a) Understand estimation uncertainty; and (Ref: Para. A109)
(b) Address estimation uncertainty by selecting an appropriate point estimate and by developing
related disclosures about estimation uncertainty. (Ref: Para. A110–A114)
27. When, in the auditor's judgment based on the audit evidence obtained, management has not
taken appropriate steps to understand or address estimation uncertainty, the auditor shall: (Ref:
Para. A115–A117)
(a) Request management to perform additional procedures to understand estimation uncertainty
or to address it by reconsidering the selection of management's point estimate or considering
providing additional disclosures relating to the estimation uncertainty, and evaluate
management's response(s) in accordance with paragraph 26;
(b) If the auditor determines that management's response to the auditor's request does not
sufficiently address estimation uncertainty, to the extent practicable, develop an auditor's point
estimate or range in accordance with paragraphs 28–29; and
(c) Evaluate whether a deficiency in internal control exists and, if so, communicate in accordance
with ISA 265.[18]
Developing an Auditor's Point Estimate or Range

28. When the auditor develops a point estimate or range to evaluate management's point estimate
and related disclosures about estimation uncertainty, including when required by paragraph 27(b),
the auditor's further audit procedures shall include procedures to evaluate whether the methods,
assumptions or data used are appropriate in the context of the applicable financial reporting
framework. Regardless of whether the auditor uses management's or the auditor's own methods,
assumptions or data, these further audit procedures shall be designed and performed to address
the matters in paragraphs 23–25. (Ref: Para. A118–A123)
29. If the auditor develops an auditor's range, the auditor shall:

(a) Determine that the range includes only amounts that are supported by sufficient appropriate
audit evidence and have been evaluated by the auditor to be reasonable in the context of the
measurement objectives and other requirements of the applicable financial reporting
framework; and (Ref: Para. A124–A125)
(b) Design and perform further audit procedures to obtain sufficient appropriate audit evidence
regarding the assessed risks of material misstatement relating to the disclosures in the
financial statements that describe the estimation uncertainty.
Other Considerations Relating to Audit Evidence

30. In obtaining audit evidence regarding the risks of material misstatement relating to accounting
estimates, irrespective of the sources of information to be used as audit evidence, the auditor
shall comply with the relevant requirements in ISA 500.
When using the work of a management's expert, the requirements in paragraphs 21–29 of this
ISA may assist the auditor in evaluating the appropriateness of the expert's work as audit
evidence for a relevant assertion in accordance with paragraph 8(c) of ISA 500. In evaluating the
work of the management's expert, the nature, timing and extent of the further audit procedures are
affected by the auditor's evaluation of the expert's competence, capabilities and objectivity, the
auditor's understanding of the nature of the work performed by the expert, and the auditor's
familiarity with the expert's field of expertise. (Ref: Para. A126–A132)
Disclosures Related to Accounting Estimates

31. The auditor shall design and perform further audit procedures to obtain sufficient appropriate
audit evidence regarding the assessed risks of material misstatement at the assertion level for
disclosures related to an accounting estimate, other than those related to estimation uncertainty
addressed in paragraphs 26(b) and 29(b).
Indicators of Possible Management Bias

32. The auditor shall evaluate whether judgments and decisions made by management in making the
accounting estimates included in the financial statements, even if they are individually reasonable,
are indicators of possible management bias. When indicators of possible management bias are
identified, the auditor shall evaluate the implications for the audit. Where there is intention to
mislead, management bias is fraudulent in nature. (Ref: Para. A133–A136)
Overall Evaluation Based on Audit Procedures Performed
33. In applying ISA 330 to accounting estimates,[19] the auditor shall evaluate, based on the audit
procedures performed and audit evidence obtained, whether: (Ref: Para A137–A138)
(a) The assessments of the risks of material misstatement at the assertion level remain
appropriate, including when indicators of possible management bias have been identified;
(b) Management's decisions relating to the recognition, measurement, presentation and
disclosure of these accounting estimates in the financial statements are in accordance with
the applicable financial reporting framework; and
(c) Sufficient appropriate audit evidence has been obtained.
34. In making the evaluation required by paragraph 33(c), the auditor shall take into account all
relevant audit evidence obtained, whether corroborative or contradictory.[20] If the auditor is unable
to obtain sufficient appropriate audit evidence, the auditor shall evaluate the implications for the
audit or the auditor's opinion on the financial statements in accordance with ISA 705 (Revised).[21]
Determining Whether the Accounting Estimates are

Reasonable or Misstated
35. The auditor shall determine whether the accounting estimates and related disclosures are
reasonable in the context of the applicable financial reporting framework, or are misstated. ISA
450[22] provides guidance on how the auditor may distinguish misstatements (whether factual,
judgmental, or projected) for the auditor's evaluation of the effect of uncorrected misstatements on
the financial statements. (Ref: Para. A12–A13, A139–A144)
36. In relation to accounting estimates, the auditor shall evaluate:

(a) In the case of a fair presentation framework, whether management has included disclosures,
beyond those specifically required by the framework, that are necessary to achieve the fair
presentation of the financial statements as a whole;[23] or
(b) In the case of a compliance framework, whether the disclosures are those that are necessary
for the financial statements not to be misleading.[24]
Written Representations
37. The auditor shall request written representations from management[25] and, when appropriate,
those charged with governance about whether the methods, significant assumptions and the data
used in making the accounting estimates and the related disclosures are appropriate to achieve
recognition, measurement or disclosure that is in accordance with the applicable financial
reporting framework. The auditor shall also consider the need to obtain representations about
specific accounting estimates, including in relation to the methods, assumptions, or data used.
(Ref: Para. A145)
Communication with Those Charged With Governance,

Management, or Other Relevant Parties
38. In applying ISA 260 (Revised)[26] and ISA 265,[27] the auditor is required to communicate with
those charged with governance or management about certain matters, including significant
qualitative aspects of the entity's accounting practices and significant deficiencies in internal
control, respectively. In doing so, the auditor shall consider the matters, if any, to communicate
regarding accounting estimates and take into account whether the reasons given to the risks of
material misstatement relate to estimation uncertainty, or the effects of complexity, subjectivity or
other inherent risk factors in making accounting estimates and related disclosures. In addition, in
certain circumstances, the auditor is required by law or regulation to communicate about certain
matters with other relevant parties, such as regulators or prudential supervisors. (Ref: Para.
A146–A148)
Documentation
39. The auditor shall include in the audit documentation:[28] (Ref: Para. A149–A152)
(a) Key elements of the auditor's understanding of the entity and its environment, including the
entity's internal control related to the entity's accounting estimates;
(b) The linkage of the auditor's further audit procedures with the assessed risks of material
misstatement at the assertion level,[29] taking into account the reasons (whether related to
inherent risk or control risk) given to the assessment of those risks;

(c) The auditor's response(s) when management has not taken appropriate steps to understand
and address estimation uncertainty;
(d) Indicators of possible management bias related to accounting estimates, if any, and the
auditor's evaluation of the implications for the audit, as required by paragraph 32; and
(e) Significant judgments relating to the auditor's determination of whether the accounting
estimates and related disclosures are reasonable in the context of the applicable financial
reporting framework, or are misstated.
***
8 ISA 315 (Revised), paragraphs 3, 5–6, 9, 11–12, 15–17, and 20–21
9 ISA 315 (Revised), paragraphs 25 and 26
10 ISA 315 (Revised), paragraph 27
12 ISA 330, paragraphs 6–15 and 18
13 ISA 330, paragraphs 6–7 and 21
14 ISA 330, paragraph 7(b)
15 ISA 330, paragraph 8
17 ISA 330, paragraphs 15 and 21
18 ISA 265, Communicating Deficiencies in Internal Control to Those Charged with Governance and Management
19 ISA 330, paragraphs 25–26
21 ISA 705 (Revised), Modifications to the Opinion in the Independent Auditor's Report
22 ISA 450, paragraph A6
23 See also ISA 700 (Revised), paragraph 14.
25 ISA 580, Written Representations
26 ISA 260 (Revised), Communication with Those Charged with Governance, paragraph 16(a)
28 ISA 230, Audit Documentation, paragraphs 8–11, A6, A7 and A10
Application and Other Explanatory

Material
Nature of Accounting Estimates (Ref: Para. 2)
Examples of Accounting Estimates

A1. Examples of accounting estimates related to classes of transactions, account balances and
disclosures include:
• Inventory obsolescence.
• Depreciation of property and equipment.
• Valuation of infrastructure assets.
• Valuation of financial instruments.
• Outcome of pending litigation.
• Provision for expected credit losses.
• Valuation of insurance contract liabilities.
• Warranty obligations.
• Employee retirement benefits liabilities.
• Share-based payments.
• Fair value of assets or liabilities acquired in a business combination, including the
determination of goodwill and intangible assets.
• Impairment of long-lived assets or property or equipment held for disposal.
• Non-monetary exchanges of assets or liabilities between independent parties.
• Revenue recognized for long-term contracts.
Methods
A2. A method is a measurement technique used by management to make an accounting estimate in
accordance with the required measurement basis. For example, one recognized method used to
make accounting estimates relating to share-based payment transactions is to determine a
theoretical option call price using the Black-Scholes option pricing formula. A method is applied
using a computational tool or process, sometimes referred to as a model, and involves applying
assumptions and data and taking into account a set of relationships between them.
Assumptions and Data

A3. Assumptions involve judgments based on available information about matters such as the choice
of an interest rate, a discount rate, or judgments about future conditions or events. An assumption
may be selected by management from a range of appropriate alternatives. Assumptions that may
be made or identified by a management's expert become management's assumptions when
used by management in making an accounting estimate.
A4. For purposes of this ISA, data is information that can be obtained through direct observation or
from a party external to the entity. Information obtained by applying analytical or interpretive
techniques to data is referred to as derived data when such techniques have a well-established
theoretical basis and therefore less need for management judgment. Otherwise, such information
is an assumption.
A5. Examples of data include:

• Prices agreed in market transactions;
• Operating times or quantities of output from a production machine;
• Historical prices or other terms included in contracts, such as a contracted interest rate, a
payment schedule, and term included in a loan agreement;
• Forward-looking information such as economic or earnings forecasts obtained from an
external information source, or
• A future interest rate determined using interpolation techniques from forward interest rates
(derived data).
A6. Data can come from a wide range of sources. For example, data can be:
• Generated within the organization or externally;

• Obtained from a system that is either within or outside the general or subsidiary ledgers;
• Observable in contracts; or
• Observable in legislative or regulatory pronouncements.
Scalability (Ref: Para. 3)

A7. Examples of paragraphs that include guidance on how the requirements of this ISA can be scaled
include paragraphs A20–A22, A63, A67, and A84.
Key Concepts of This ISA
Inherent Risk Factors (Ref: Para. 4)

A8. Inherent risk factors are characteristics of conditions and events that may affect the susceptibility
of an assertion to misstatement, before consideration of controls. Appendix 1 further explains the
nature of these inherent risk factors, and their inter-relationships, in the context of making
accounting estimates and their presentation in the financial statements.
A9. In addition to the inherent risk factors of estimation uncertainty, complexity or subjectivity, other
inherent risk factors that the auditor may consider in identifying and assessing the risks of
material misstatement may include the extent to which the accounting estimate is subject to, or
affected by:
• Change in the nature or circumstances of the relevant financial statement items, or
requirements of the applicable financial reporting framework which may give rise to the need
for changes in the method, assumptions or data used to make the accounting estimate.
• Susceptibility to misstatement due to management bias or fraud in making the accounting
estimate.
Control Risk (Ref: Para. 6)

A10.An important consideration for the auditor in assessing control risk at the assertion level is the
effectiveness of the design of the controls that the auditor intends to rely on and the extent to
which the controls address the assessed inherent risks at the assertion level. The auditor's
evaluation that controls are effectively designed and have been implemented supports an
expectation about the operating effectiveness of the controls in determining whether to test them.
Professional Skepticism (Ref: Para. 8)

A11.Paragraphs A60, A95, A96, A137 and A139 are examples of paragraphs that describe ways in
which the auditor can exercise professional skepticism. Paragraph A152 provides guidance on
ways in which the auditor's exercise of professional skepticism may be documented, and
includes examples of specific paragraphs in this ISA for which documentation may provide
evidence of the exercise of professional skepticism.
Concept of "Reasonable" (Ref: Para. 9, 35)

A12.Other considerations that may be relevant to the auditor's consideration of whether the
accounting estimates and related disclosures are reasonable in the context of the applicable
financial reporting framework include whether:
• The data and assumptions used in making the accounting estimate are consistent with each
other and with those used in other accounting estimates or areas of the entity's business
activities; and
• The accounting estimate takes into account appropriate information as required by the
applicable financial reporting framework.
A13.The term "applied appropriately" as used in paragraph 9 means in a manner that not only
complies with the requirements of the applicable financial reporting framework but, in doing so,
reflects judgments that are consistent with the objective of the measurement basis in that
framework.
Definitions
Accounting Estimate (Ref: Para. 12(a))

A14.Accounting estimates are monetary amounts that may be related to classes of transactions or
account balances recognized or disclosed in the financial statements. Accounting estimates also
include monetary amounts included in disclosures or used to make judgments about recognition
or disclosure relating to a class of transactions or account balance.
Auditor's Point Estimate or Auditor's Range (Ref: Para. 12(b))

A15.An auditor's point estimate or range may be used to evaluate an accounting estimate directly (for
example, an impairment provision or the fair value of different types of financial instruments), or
indirectly (for example, an amount to be used as a significant assumption for an accounting
estimate). A similar approach may be taken by the auditor in developing an amount or range of
amounts in evaluating a non-monetary item of data or an assumption (for example, an estimated
useful life of an asset).
Estimation Uncertainty (Ref: Para. 12(c))

A16.Not all accounting estimates are subject to a high degree of estimation uncertainty. For example,
some financial statement items may have an active and open market that provides readily
available and reliable information on the prices at which actual exchanges occur. However,
estimation uncertainty may exist even when the valuation method and data are well defined. For
example, valuation of securities quoted on an active and open market at the listed market price
may require adjustment if the holding is significant or is subject to restrictions in marketability. In
addition, general economic circumstances prevailing at the time, for example, illiquidity in a
particular market, may impact estimation uncertainty.
Management Bias (Ref: Para. 12(d))

A17.Financial reporting frameworks often call for neutrality, that is, freedom from bias. Estimation
uncertainty gives rise to subjectivity in making an accounting estimate. The presence of
subjectivity gives rise to the need for judgment by management and the susceptibility to
unintentional or intentional management bias (for example, as a result of motivation to achieve a
desired profit target or capital ratio). The susceptibility of an accounting estimate to management
bias increases with the extent to which there is subjectivity in making the accounting estimate.
Outcome of an Accounting Estimate (Ref: Para. 12(f))

A18.Some accounting estimates, by their nature, do not have an outcome that is relevant for the
auditor's work performed in accordance with this ISA. For example, an accounting estimate may
be based on perceptions of market participants at a point in time. Accordingly, the price realized
when an asset is sold or a liability is transferred may differ from the related accounting estimate
made at the reporting date because, with the passage of time, the market participants'
perceptions of value have changed.
Risk Assessment Procedures and Related Activities

Obtaining an Understanding of the Entity and Its Environment

(Ref: Para. 13)
A19.Paragraphs 11–24 of ISA 315 (Revised) require the auditor to obtain an understanding of certain
matters about the entity and its environment, including the entity's internal control. The
requirements in paragraph 13 of this ISA relate more specifically to accounting estimates and
build on the broader requirements in ISA 315 (Revised).
Scalability
A20.The nature, timing and extent of the auditor's procedures to obtain the understanding of the entity
and its environment, including the entity's internal control, related to the entity's accounting
estimates, may depend, to a greater or lesser degree, on the extent to which the individual
matter(s) apply in the circumstances. For example, the entity may have few transactions or other
events and conditions that give rise to the need for accounting estimates, the applicable financial
reporting requirements may be simple to apply, and there may be no relevant regulatory factors.
Further, the accounting estimates may not require significant judgments, and the process for
making the accounting estimates may be less complex. In these circumstances, the accounting
estimates may be subject to or affected by estimation uncertainty, complexity, subjectivity, or other
inherent risk factors to a lesser degree and there may be fewer controls relevant to the audit. If so,
the auditor's risk assessment procedures are likely to be less extensive and may be obtained
primarily through inquiries of management with appropriate responsibilities for the financial
statements and simple walk-throughs of management's process for making the accounting
estimate.
A21.By contrast, the accounting estimates may require significant judgments by management, and
the process for making the accounting estimates may be complex and involve the use of complex
models. In addition, the entity may have a more sophisticated information system, and more
extensive controls over accounting estimates. In these circumstances, the accounting estimates
may be subject to or affected by estimation uncertainty, subjectivity, complexity or other inherent
risk factors to a greater degree. If so, the nature or timing of the auditor's risk assessment
procedures are likely to be different, or be more extensive, than in the circumstances in
paragraph A20.
A22.The following considerations may be relevant for entities with only simple businesses, which may
include many smaller entities:
• Processes relevant to accounting estimates may be uncomplicated because the business
activities are simple or the required estimates may have a lesser degree of estimation
uncertainty.
• Accounting estimates may be generated outside of the general and subsidiary ledgers,
controls over their development may be limited, and an owner-manager may have significant
influence over their determination. The owner-manager's role in making the accounting
estimates may need to be taken into account by the auditor both when identifying the risks of
material misstatement and when considering the risk of management bias.
The Entity and Its Environment
The entity's transactions and other events and conditions (Ref: Para.
13(a))
A23.Changes in circumstances that may give rise to the need for, or changes in, accounting
estimates may include, for example, whether:
• The entity has engaged in new types of transactions;
• Terms of transactions have changed; or
• New events or conditions have occurred.
The requirements of the applicable financial reporting framework (Ref:

Para. 13(b))
A24.Obtaining an understanding of the requirements of the applicable financial reporting framework
provides the auditor with a basis for discussion with management and, where applicable, those
charged with governance about how management has applied those requirements relevant to the
accounting estimates, and about the auditor's determination of whether they have been applied
appropriately. This understanding also may assist the auditor in communicating with those
charged with governance when the auditor considers a significant accounting practice that is
acceptable under the applicable financial reporting framework not to be the most appropriate in
the circumstances of the entity.[30]
A25.In obtaining this understanding, the auditor may seek to understand whether:
• The applicable financial reporting framework:
○ Prescribes certain criteria for the recognition, or methods for the measurement of
accounting estimates;
○ Specifies certain criteria that permit or require measurement at a fair value, for example,
by referring to management's intentions to carry out certain courses of action with respect
to an asset or liability; or
○ Specifies required or suggested disclosures, including disclosures concerning
judgments, assumptions, or other sources of estimation uncertainty relating to accounting
estimates; and
• Changes in the applicable financial reporting framework require changes to the entity's
accounting policies relating to accounting estimates.
Regulatory factors (Ref: Para. 13(c))

A26.Obtaining an understanding of regulatory factors, if any, that are relevant to accounting estimates
may assist the auditor in identifying applicable regulatory frameworks (for example, regulatory
frameworks established by prudential supervisors in the banking or insurance industries) and in
determining whether such regulatory framework(s):
• Addresses conditions for the recognition, or methods for the measurement, of accounting
estimates, or provides related guidance thereon;
• Specifies, or provides guidance about, disclosures in addition to the requirements of the
applicable financial reporting framework;
• Provides an indication of areas for which there may be a potential for management bias to
meet regulatory requirements; or
• Contains requirements for regulatory purposes that are not consistent with requirements of
the applicable financial reporting framework, which may indicate potential risks of material
misstatement. For example, some regulators may seek to influence minimum levels for
expected credit loss provisions that exceed those required by the applicable financial
reporting framework.
The nature of the accounting estimates and related disclosures that the auditor expects to be
included in the financial statements (Ref: Para. 13(d))
A27.Obtaining an understanding of the nature of accounting estimates and related disclosures that
the auditor expects to be included in the entity's financial statements assists the auditor in
understanding the measurement basis of such accounting estimates and the nature and extent of
disclosures that may be relevant. Such an understanding provides the auditor with a basis for
discussion with management about how management makes the accounting estimates.
The Entity's Internal Control Relevant to the Audit
The nature and extent of oversight and governance (Ref: Para. 13(e))
A28.In applying ISA 315 (Revised),[31] the auditor's understanding of the nature and extent of
oversight and governance that the entity has in place over management's process for making
accounting estimates may be important to the auditor's required evaluation as it relates to
whether:
• Management, with the oversight of those charged with governance, has created and
maintained a culture of honesty and ethical behavior; and
• The strengths in the control environment elements collectively provide an appropriate
foundation for the other components of internal control and whether those other components
are undermined by deficiencies in the control environment.
A29.The auditor may obtain an understanding of whether those charged with governance:
• Have the skills or knowledge to understand the characteristics of a particular method or
model to make accounting estimates, or the risks related to the accounting estimate, for
example, risks related to the method or information technology used in making the
accounting estimates;
• Have the skills and knowledge to understand whether management made the accounting
estimates in accordance with the applicable financial reporting framework;
• Are independent from management, have the information required to evaluate on a timely
basis how management made the accounting estimates, and the authority to call into
question management's actions when those actions appear to be inadequate or
inappropriate;
• Oversee management's process for making the accounting estimates, including the use of
models; or
• Oversee the monitoring activities undertaken by management. This may include supervision
and review procedures designed to detect and correct any deficiencies in the design or
operating effectiveness of controls over the accounting estimates.
A30.Obtaining an understanding of the oversight by those charged with governance may be important
when there are accounting estimates that:
• Require significant judgment by management to address subjectivity;
• Have high estimation uncertainty;
• Are complex to make, for example, because of the extensive use of information technology,
large volumes of data or the use of multiple data sources or assumptions with complex
interrelationships;
• Had, or ought to have had, a change in the method, assumptions or data compared to
previous periods; or
• Involve significant assumptions.
Management's application of specialized skills or knowledge, including the

use of management's experts (Ref: Para. 13(f))
A31.The auditor may consider whether the following circumstances increase the likelihood that
management needs to engage an expert:[32]
• The specialized nature of the matter requiring estimation, for example, the accounting
estimate may involve measurement of mineral or hydrocarbon reserves in extractive
industries or the evaluation of the likely outcome of applying complex contractual terms.
• The complex nature of the models required to apply the relevant requirements of the
applicable financial reporting framework, as may be the case in certain measurements, such
as level 3 fair values.[33]
• The unusual or infrequent nature of the condition, transaction or event requiring an accounting
estimate.
The entity's risk assessment process (Ref: Para. 13(g))

A32.Understanding how the entity's risk assessment process identifies and addresses risks relating
to accounting estimates may assist the auditor in considering changes in:

• The requirements of the applicable financial reporting framework related to the accounting
estimates;
• The availability or nature of data sources that are relevant to making the accounting
estimates or that may affect the reliability of the data used;
• The entity's information system or IT environment; and
• Key personnel.
A33.Matters that the auditor may consider in obtaining an understanding of how management
identified and addresses the susceptibility to misstatement due to management bias or fraud in
making accounting estimates, include whether and, if so, how management:
• Pays particular attention to selecting or applying the methods, assumptions and data used in
making accounting estimates.
• Monitors key performance indicators that may indicate unexpected or inconsistent
performance compared with historical or budgeted performance or with other known factors.
• Identifies financial or other incentives that may be a motivation for bias.
• Monitors the need for changes in the methods, significant assumptions or the data used in
making accounting estimates.
• Establishes appropriate oversight and review of models used in making accounting
estimates.
• Requires documentation of the rationale for, or an independent review of, significant
judgments made in making accounting estimates.
The entity's information system relating to accounting estimates (Ref: Para.

13(h)(i))
A34.The classes of transactions, events and conditions within the scope of paragraph 13(h) are the
same as the classes of transactions, events and conditions relating to accounting estimates and
related disclosures that are subject to paragraphs 18(a) and (d) of ISA 315 (Revised). In
obtaining the understanding of the entity's information system as it relates to accounting
estimates, the auditor may consider:
• Whether the accounting estimates arise from the recording of routine and recurring
transactions or whether they arise from non-recurring or unusual transactions.
• How the information system addresses the completeness of accounting estimates and
related disclosures, in particular for accounting estimates related to liabilities.
A35.During the audit, the auditor may identify classes of transactions, events and conditions that give
rise to the need for accounting estimates and related disclosures that management failed to
identify. ISA 315 (Revised) deals with circumstances where the auditor identifies risks of material
misstatement that management failed to identify, including determining whether there is a
significant deficiency in internal control with regard to the entity's risk assessment process.[34]
Management's identification of the relevant methods, assumptions and

sources of data (Ref: Para. 13(h)(ii)(a))
A36.If management has changed the method for making an accounting estimate, considerations may
include whether the new method is, for example, more appropriate, is itself a response to
changes in the environment or circumstances affecting the entity, or to changes in the
requirements of the applicable financial reporting framework or regulatory environment, or
whether management has another valid reason.
A37.If management has not changed the method for making an accounting estimate, considerations
may include whether the continued use of the previous methods, assumptions and data is
appropriate in view of the current environment or circumstances.
Methods (Ref: Para. 13(h)(ii)(a)(i))

A38.The applicable financial reporting framework may prescribe the method to be used in making an
accounting estimate. In many cases, however, the applicable financial reporting framework does
not prescribe a single method, or the required measurement basis prescribes, or allows, the use
of alternative methods.
Models
A39.Management may design and implement specific controls around models used for making
accounting estimates, whether management's own model or an external model. When the model
itself has an increased level of complexity or subjectivity, such as an expected credit loss model
or a fair value model using level 3 inputs, controls that address such complexity or subjectivity
may be more likely to be identified as relevant to the audit. When complexity in relation to models
is present, controls over data integrity are also more likely to be relevant to the audit. Factors that
may be appropriate for the auditor to consider in obtaining an understanding of the model and of
control activities relevant to the audit include the following:
• How management determines the relevance and accuracy of the model;
• The validation or back testing of the model, including whether the model is validated prior to
use and revalidated at regular intervals to determine whether it remains suitable for its
intended use. The entity's validation of the model may include evaluation of:
○ The model's theoretical soundness;
○ The model's mathematical integrity; and
○ The accuracy and completeness of the data and the appropriateness of data and
assumptions used in the model;
• How the model is appropriately changed or adjusted on a timely basis for changes in market
or other conditions and whether there are appropriate change control policies over the
model;
• Whether adjustments, also referred to as overlays in certain industries, are made to the
output of the model and whether such adjustments are appropriate in the circumstances in
accordance with the requirements of the applicable financial reporting framework. When the
adjustments are not appropriate, such adjustments may be indicators of possible
management bias; and
• Whether the model is adequately documented, including its intended applications, limitations,
key parameters, required data and assumptions, the results of any validation performed on it
and the nature of, and basis for, any adjustments made to its output.
Assumptions (Ref: Para. 13(h)(ii)(a)(ii))

A40.Matters that the auditor may consider in obtaining an understanding of how management
selected the assumptions used in making the accounting estimates include, for example:
• The basis for management's selection and the documentation supporting the selection of the
assumption. The applicable financial reporting framework may provide criteria or guidance to
be used in the selection of an assumption.
• How management assesses whether the assumptions are relevant and complete.
• When applicable, how management determines that the assumptions are consistent with
each other, with those used in other accounting estimates or areas of the entity's business
activities, or with other matters that are:
○ Within the control of management (for example, assumptions about the maintenance
programs that may affect the estimation of an asset's useful life), and whether they are
consistent with the entity's business plans and the external environment; and
○ Outside the control of management (for example, assumptions about interest rates,
mortality rates or potential judicial or regulatory actions).
• The requirements of the applicable financial reporting framework related to the disclosure of
assumptions.
A41.With respect to fair value accounting estimates, assumptions vary in terms of the sources of the
data and the basis for the judgments to support them, as follows:
(a) Those that reflect what marketplace participants would use in pricing an asset or liability,
developed based on market data obtained from sources independent of the reporting entity.
(b) Those that reflect the entity's own judgments about what assumptions marketplace
participants would use in pricing the asset or liability, developed based on the best data
available in the circumstances.
In practice, however, the distinction between (a) and (b) may not always be apparent and
distinguishing between them depends on understanding the sources of data and the basis for the
judgments that support the assumption. Further, it may be necessary for management to select
from a number of different assumptions used by different marketplace participants.
A42.Assumptions used in making an accounting estimate are referred to as significant assumptions

in this ISA if a reasonable variation in the assumption would materially affect the measurement of
the accounting estimate. A sensitivity analysis may be useful in demonstrating the degree to
which the measurement varies based on one or more assumptions used in making the
accounting estimate.
Inactive or illiquid markets

A43.When markets are inactive or illiquid, the auditor's understanding of how management selects
assumptions may include understanding whether management has:
• Implemented appropriate policies for adapting the application of the method in such
circumstances. Such adaptation may include making model adjustments or developing new
models that are appropriate in the circumstances;
• Resources with the necessary skills or knowledge to adapt or develop a model, if necessary
on an urgent basis, including selecting the valuation technique that is appropriate in such
circumstances;
• The resources to determine the range of outcomes, given the uncertainties involved, for
example by performing a sensitivity analysis;
• The means to assess how, when applicable, the deterioration in market conditions has
affected the entity's operations, environment and relevant business risks and the implications
for the entity's accounting estimates, in such circumstances; and
• An appropriate understanding of how the price data, and the relevance thereof, from
particular external information sources may vary in such circumstances.
Data (Ref: Para. 13(h)(ii)(a)(iii))

A44.Matters that the auditor may consider in obtaining an understanding of how management selects
the data on which the accounting estimates are based include:
• The nature and source of the data, including information obtained from an external
information source.
• How management evaluates whether the data is appropriate.
• The accuracy and completeness of the data.
• The consistency of the data used with data used in previous periods.
• The complexity of the information technology systems used to obtain and process the data,
including when this involves handling large volumes of data.
• How the data is obtained, transmitted and processed and how its integrity is maintained.
How management understands and addresses estimation uncertainty (Ref:

Para. 13(h)(ii)(b)–13(h)(ii)(c))
A45.Matters that may be appropriate for the auditor to consider relating to whether and how
management understands the degree of estimation uncertainty include, for example:
• Whether and, if so, how management identified alternative methods, significant assumptions
or sources of data that are appropriate in the context of the applicable financial reporting
framework.
• Whether and, if so, how management considered alternative outcomes by, for example,
performing a sensitivity analysis to determine the effect of changes in the significant
assumptions or the data used in making the accounting estimate.
A46.The requirements of the applicable financial reporting framework may specify the approach to
selecting management's point estimate from the reasonably possible measurement outcomes.
Financial reporting frameworks may recognize that the appropriate amount is one that is
appropriately selected from the reasonably possible measurement outcomes and, in some
cases, may indicate that the most relevant amount may be in the central part of that range.
A47.For example, with respect to fair value estimates, IFRS 13[35] indicates that, if multiple valuation
techniques are used to measure fair value, the results (i.e., respective indications of fair value)
shall be evaluated considering the reasonableness of the range of values indicated by those
results. A fair value measurement is the point within that range that is most representative of fair
value in the circumstances. In other cases, the applicable financial reporting framework may
specify the use of a probability-weighted average of the reasonably possible measurement
outcomes, or of the measurement amount that is most likely or that is more likely than not.
A48.The applicable financial reporting framework may prescribe disclosures or disclosure objectives
related to accounting estimates, and some entities may choose to disclose additional
information. These disclosures or disclosure objectives may address, for example:
• The method of estimation used, including any applicable model and the basis for its
selection.
• Information that has been obtained from models, or from other calculations used to determine
estimates recognized or disclosed in the financial statements, including information relating
to the underlying data and assumptions used in those models, such as:
○ Assumptions developed internally; or
○ Data, such as interest rates, that are affected by factors outside the control of the entity.
• The effect of any changes to the method of estimation from the prior period.
• The sources of estimation uncertainty.
• Fair value information.
• Information about sensitivity analyses derived from financial models that demonstrates that
management has considered alternative assumptions.
A49.In some cases, the applicable financial reporting framework may require specific disclosures
regarding estimation uncertainty, for example:
• The disclosure of information about the assumptions made about the future and other major
sources of estimation uncertainty that give rise to a higher likelihood or magnitude of material
adjustment to the carrying amounts of assets and liabilities after the period end. Such
requirements may be described using terms such as "Key Sources of Estimation
Uncertainty" or "Critical Accounting Estimates." They may relate to accounting estimates that
require management's most difficult, subjective or complex judgments. Such judgments may
be more subjective and complex, and accordingly the potential for a consequential material
adjustment to the carrying amounts of assets and liabilities may increase, with the number of
items of data and assumptions affecting the possible future resolution of the estimation
uncertainty. Information that may be disclosed includes:
○ The nature of the assumption or other source of estimation uncertainty;
○ The sensitivity of carrying amounts to the methods and assumptions used, including the
reasons for the sensitivity;
○ The expected resolution of an uncertainty and the range of reasonably possible
outcomes in respect of the carrying amounts of the assets and liabilities affected; and
○ An explanation of changes made to past assumptions concerning those assets and
liabilities, if the uncertainty remains unresolved.
• The disclosure of the range of possible outcomes, and the assumptions used in determining
the range.
• The disclosure of specific information, such as:
○ Information regarding the significance of fair value accounting estimates to the entity's
financial position and performance; and
○ Disclosures regarding market inactivity or illiquidity.
• Qualitative disclosures such as the exposures to risk and how they arise, the entity's
objectives, policies and procedures for managing the risk and the methods used to measure
the risk and any changes from the previous period of these qualitative concepts.
• Quantitative disclosures such as the extent to which the entity is exposed to risk, based on
information provided internally to the entity's key management personnel, including credit risk,
liquidity risk and market risk.
Control activities relevant to the audit over management's process for

making accounting estimates (Ref: Para 13(i))
A50.The auditor's judgment in identifying controls relevant to the audit, and therefore the need to
evaluate the design of those controls and determine whether they have been implemented,
relates to management's process described in paragraph 13(h)(ii). The auditor may not identify
relevant control activities in relation to all the elements of paragraph 13(h)(ii), depending on the
complexity associated with the accounting estimate.
A51.As part of obtaining an understanding of the control activities relevant to the audit, the auditor
may consider:
• How management determines the appropriateness of the data used to develop the
accounting estimates, including when management uses an external information source or
data from outside the general and subsidiary ledgers.
• The review and approval of accounting estimates, including the assumptions or data used in
their development, by appropriate levels of management and, where appropriate, those
charged with governance.
• The segregation of duties between those responsible for making the accounting estimates
and those committing the entity to the related transactions, including whether the assignment
of responsibilities appropriately takes account of the nature of the entity and its products or
services. For example, in the case of a large financial institution, relevant segregation of
duties may consist of an independent function responsible for estimation and validation of fair
value pricing of the entity's financial products staffed by individuals whose remuneration is not
tied to such products.
• The effectiveness of the design of the control activities. Generally, it may be more difficult for
management to design controls that address subjectivity and estimation uncertainty in a
manner that effectively prevents, or detects and corrects, material misstatements, than it is to
design controls that address complexity. Controls that address subjectivity and estimation
uncertainty may need to include more manual elements, which may be less reliable than
automated controls as they can be more easily bypassed, ignored or overridden by
management. The design effectiveness of controls addressing complexity may vary
depending on the reason for, and the nature of, the complexity. For example, it may be easier
to design more effective controls related to a method that is routinely used or over the
integrity of data.
A52.When management makes extensive use of information technology in making an accounting

estimate, controls relevant to the audit are likely to include general IT controls and application
controls. Such controls may address risks related to:
• Whether the information technology system has the capability and is appropriately configured
to process large volumes of data;
• Complex calculations in applying a method. When diverse systems are required to process
complex transactions, regular reconciliations between the systems are made, in particular
when the systems do not have automated interfaces or may be subject to manual
intervention;
• Whether the design and calibration of models is periodically evaluated;
• The complete and accurate extraction of data regarding accounting estimates from the
entity's records or from external information sources;
• Data, including the complete and accurate flow of data through the entity's information
system, the appropriateness of any modification to the data used in making accounting
estimates, the maintenance of the integrity and security of the data;
• When using external information sources, risks related to processing or recording the data;
• Whether management has controls around access, change and maintenance of individual
models to maintain a strong audit trail of the accredited versions of models and to prevent
unauthorized access or amendments to those models; and
• Whether there are appropriate controls over the transfer of information relating to accounting
estimates into the general ledger, including appropriate controls over journal entries.
A53.In some industries, such as banking or insurance, the term governance may be used to describe
activities within the control environment, monitoring of controls, and other components of internal
control, as described in ISA 315 (Revised).[36]
A54.For entities with an internal audit function, its work may be particularly helpful to the auditor in
obtaining an understanding of:
• The nature and extent of management's use of accounting estimates;

• The design and implementation of control activities that address the risks related to the data,
assumptions and models used to make the accounting estimates;
• The aspects of the entity's information system that generate the data on which the accounting
estimates are based; and
• How new risks relating to accounting estimates are identified, assessed and managed.
Reviewing the Outcome or Re-Estimation of Previous

Accounting Estimates (Ref: Para. 14)
A55.A review of the outcome or re-estimation of previous accounting estimates (retrospective review)
assists in identifying and assessing the risks of material misstatement when previous accounting
estimates have an outcome through transfer or realization of the asset or liability in the current
period, or are re-estimated for the purpose of the current period. Through performing a
retrospective review, the auditor may obtain:
• Information regarding the effectiveness of management's previous estimation process, from
which the auditor can obtain audit evidence about the likely effectiveness of management's
current process.
• Audit evidence of matters, such as the reasons for changes that may be required to be
disclosed in the financial statements.
• Information regarding the complexity or estimation uncertainty pertaining to the accounting
estimates.
• Information regarding the susceptibility of accounting estimates to, or that may be an
indicator of, possible management bias. The auditor's professional skepticism assists in
identifying such circumstances or conditions and in determining the nature, timing and extent
of further audit procedures.
A56.A retrospective review may provide audit evidence that supports the identification and
assessment of the risks of material misstatement in the current period. Such a retrospective
review may be performed for accounting estimates made for the prior period's financial
statements, or may be performed over several periods or a shorter period (such as half-yearly or
quarterly). In some cases, a retrospective review over several periods may be appropriate when
the outcome of an accounting estimate is resolved over a longer period.
A57.A retrospective review of management judgments and assumptions related to significant

accounting estimates is required by ISA 240.[37] As a practical matter, the auditor's review of
previous accounting estimates as a risk assessment procedure in accordance with this ISA may
be carried out in conjunction with the review required by ISA 240.
A58.Based on the auditor's previous assessment of the risks of material misstatement, for example,
if inherent risk is assessed as higher for one or more risks of material misstatement, the auditor
may judge that a more detailed retrospective review is required. As part of the detailed
retrospective review, the auditor may pay particular attention, when practicable, to the effect of
data and significant assumptions used in making the previous accounting estimates. On the other
hand, for example, for accounting estimates that arise from the recording of routine and recurring
transactions, the auditor may judge that the application of analytical procedures as risk
assessment procedures is sufficient for purposes of the review.
A59.The measurement objective for fair value accounting estimates and other accounting estimates,
based on current conditions at the measurement date, deals with perceptions about value at a
point in time, which may change significantly and rapidly as the environment in which the entity
operates changes. The auditor may therefore focus the review on obtaining information that may
be relevant to identifying and assessing risks of material misstatement. For example, in some
cases, obtaining an understanding of changes in marketplace participant assumptions that
affected the outcome of a previous period's fair value accounting estimates may be unlikely to
provide relevant audit evidence. In this case, audit evidence may be obtained by understanding
the outcomes of assumptions (such as a cash flow projections) and understanding the
effectiveness of management's prior estimation process that supports the identification and
assessment of the risk of material misstatement in the current period.
A60.A difference between the outcome of an accounting estimate and the amount recognized in the
previous period's financial statements does not necessarily represent a misstatement of the
previous period's financial statements. However, such a difference may represent a misstatement
if, for example, the difference arises from information that was available to management when the
previous period's financial statements were finalized, or that could reasonably be expected to
have been obtained and taken into account in the context of the applicable financial reporting
framework.[38] Such a difference may call into question management's process for taking
information into account in making the accounting estimate. As a result, the auditor may reassess
control risk and may determine that more persuasive audit evidence needs to be obtained about
the matter. Many financial reporting frameworks contain guidance on distinguishing between
changes in accounting estimates that constitute misstatements and changes that do not, and the
accounting treatment required to be followed in each case.
Specialized Skills or Knowledge (Ref: Para. 15)

A61.Matters that may affect the auditor's determination of whether the engagement team requires
specialized skills or knowledge, include, for example:[39]
• The nature of the accounting estimates for a particular business or industry (for example,
mineral deposits, agricultural assets, complex financial instruments, insurance contract
liabilities).
• The degree of estimation uncertainty.
• The complexity of the method or model used.
• The complexity of the requirements of the applicable financial reporting framework relevant to
accounting estimates, including whether there are areas known to be subject to differing
interpretation or practice or areas where there are inconsistencies in how accounting
estimates are made.
• The procedures the auditor intends to undertake in responding to assessed risks of material
misstatement.
• The need for judgment about matters not specified by the applicable financial reporting
framework.
• The degree of judgment needed to select data and assumptions.
• The complexity and extent of the entity's use of information technology in making accounting
estimates.
The nature, timing and extent of the involvement of individuals with specialized skills and
knowledge may vary throughout the audit.
A62.The auditor may not possess the specialized skills or knowledge necessary when the matter
involved is in a field other than accounting or auditing (for example, valuation skills) and may need
to use an auditor's expert.[40]
A63.Many accounting estimates do not require the application of specialized skills or knowledge. For
example, specialized skills or knowledge may not be needed for a simple inventory
obsolescence calculation. However, for example, for expected credit losses of a banking
institution or an insurance contract liability for an insurance entity, the auditor is likely to conclude
that it is necessary to apply specialized skills or knowledge.
Identifying and Assessing the Risks of Material

Misstatement (Ref: Para. 4, 16)
A64.Identifying and assessing risks of material misstatement at the assertion level relating to
accounting estimates is important for all accounting estimates, including not only those that are
recognized in the financial statements, but also those that are included in the notes to the financial
statements.
A65.Paragraph A42 of ISA 200 states that the ISAs do not ordinarily refer to inherent risk and control
risk separately. However, this ISA requires a separate assessment of inherent risk and control
risk to provide a basis for designing and performing further audit procedures to respond to the
risks of material misstatement, including significant risks, at the assertion level for accounting
estimates in accordance with ISA 330.[41]
A66.In identifying the risks of material misstatement and in assessing inherent risk, the auditor is
required to take into account the degree to which the accounting estimate is subject to, or
affected by, estimation uncertainty, complexity, subjectivity, or other inherent risk factors. The
auditor's consideration of the inherent risk factors may also provide information to be used in
determining:
• Where inherent risk is assessed on the spectrum of inherent risk; and
• The reasons for the assessment given to the risks of material misstatement at the assertion
level, and that the auditor's further audit procedures in accordance with paragraph 18 are
responsive to those reasons.
The interrelationships between the inherent risk factors are further explained in Appendix 1.
A67.The reasons for the auditor's assessment of inherent risk at the assertion level may result from
one or more of the inherent risk factors of estimation uncertainty, complexity, subjectivity or other
inherent risk factors. For example:
(a) Accounting estimates of expected credit losses are likely to be complex because the
expected credit losses cannot be directly observed and may require the use of a complex
model. The model may use a complex set of historical data and assumptions about future
developments in a variety of entity specific scenarios that may be difficult to predict.
Accounting estimates for expected credit losses are also likely to be subject to high
estimation uncertainty and significant subjectivity in making judgments about future events or
conditions. Similar considerations apply to insurance contract liabilities.
(b) An accounting estimate for an obsolescence provision for an entity with a wide range of
different inventory types may require complex systems and processes, but may involve little
subjectivity and the degree of estimation uncertainty may be low, depending on the nature of
the inventory.
(c) Other accounting estimates may not be complex to make but may have high estimation
uncertainty and require significant judgment, for example, an accounting estimate that
requires a single critical judgment about a liability, the amount of which is contingent on the
outcome of the litigation.
A68.The relevance and significance of inherent risk factors may vary from one estimate to another.
Accordingly, the inherent risk factors may, either individually or in combination, affect simple
accounting estimates to a lesser degree and the auditor may identify fewer risks or assess
inherent risk at the lower end of the spectrum of inherent risk.
A69.Conversely, the inherent risk factors may, either individually or in combination, affect complex
accounting estimates to a greater degree, and may lead the auditor to assess inherent risk at the
higher end of the spectrum of inherent risk. For these accounting estimates, the auditor's
consideration of the effects of the inherent risk factors is likely to directly affect the number and
nature of identified risks of material misstatement, the assessment of such risks, and ultimately
the persuasiveness of the audit evidence needed in responding to the assessed risks. Also, for
these accounting estimates the auditor's application of professional skepticism may be
particularly important.
A70.Events occurring after the date of the financial statements may provide additional information
relevant to the auditor's assessment of the risks of material misstatement at the assertion level.
For example, the outcome of an accounting estimate may become known during the audit. In
such cases, the auditor may assess or revise the assessment of the risks of material
misstatement at the assertion level,[42] regardless of the degree to which the accounting estimate
was subject to, or affected by estimation uncertainty, complexity, subjectivity or other inherent risk
factors. Events occurring after the date of the financial statements also may influence the auditor's
selection of the approach to testing the accounting estimate in accordance with paragraph 18.
For example, for a simple bonus accrual that is based on a straightforward percentage of
compensation for selected employees, the auditor may conclude that there is relatively little
complexity or subjectivity in making the accounting estimate, and therefore may assess inherent
risk at the assertion level at the lower end of the spectrum of inherent risk. The payment of the
bonuses subsequent to period end may provide sufficient appropriate audit evidence regarding
the assessed risks of material misstatement at the assertion level.
A71.The auditor's assessment of control risk may be done in different ways depending on preferred
audit techniques or methodologies. The control risk assessment may be expressed using
qualitative categories (for example, control risk assessed as maximum, moderate, minimum) or
in terms of the auditor's expectation of how effective the control(s) is in addressing the identified
risk, that is, the planned reliance on the effective operation of controls. For example, if control risk
is assessed as maximum, the auditor contemplates no reliance on the effective operation of
controls. If control risk is assessed at less than maximum, the auditor contemplates reliance on
the effective operation of controls.
Estimation Uncertainty (Ref: Para. 16(a))

A72.In taking into account the degree to which the accounting estimate is subject to estimation
uncertainty, the auditor may consider:
• Whether the applicable financial reporting framework requires:
○ The use of a method to make the accounting estimate that inherently has a high level of
estimation uncertainty. For example, the financial reporting framework may require the
use of unobservable inputs.
○ The use of assumptions that inherently have a high level of estimation uncertainty, such as
assumptions with a long forecast period, assumptions that are based on data that is
unobservable and are therefore difficult for management to develop, or the use of various
assumptions that are interrelated.
○ Disclosures about estimation uncertainty.

• The business environment. An entity may be active in a market that experiences turmoil or
possible disruption (for example, from major currency movements or inactive markets) and
the accounting estimate may therefore be dependent on data that is not readily observable.
• Whether it is possible (or practicable, insofar as permitted by the applicable financial
reporting framework) for management:
○ To make a precise and reliable prediction about the future realization of a past
transaction (for example, the amount that will be paid under a contingent contractual
term), or about the incidence and impact of future events or conditions (for example, the
amount of a future credit loss or the amount at which an insurance claim will be settled
and the timing of its settlement); or
○ To obtain precise and complete information about a present condition (for example,
information about valuation attributes that would reflect the perspective of market
participants at the date of the financial statements, to develop a fair value estimate).
A73.The size of the amount recognized or disclosed in the financial statements for an accounting
estimate is not, in itself, an indicator of its susceptibility to misstatement because, for example,
the accounting estimate may be understated.
A74.In some circumstances, the estimation uncertainty may be so high that a reasonable accounting
estimate cannot be made. The applicable financial reporting framework may preclude
recognition of an item in the financial statements, or its measurement at fair value. In such cases,
there may be risks of material misstatement that relate not only to whether an accounting
estimate should be recognized, or whether it should be measured at fair value, but also to the
reasonableness of the disclosures. With respect to such accounting estimates, the applicable
financial reporting framework may require disclosure of the accounting estimates and the
estimation uncertainty associated with them (see paragraphs A112–A113, A143–A144).
A75.In some cases, the estimation uncertainty relating to an accounting estimate may cast significant
doubt about the entity's ability to continue as a going concern. ISA 570 (Revised)[43] establishes
requirements and provides guidance in such circumstances.
Complexity or Subjectivity (Ref: Para. 16(b))
The Degree to Which Complexity Affects the Selection and

Application of the Method
A76.In taking into account the degree to which the selection and application of the method used in
making the accounting estimate are affected by complexity, the auditor may consider:
• The need for specialized skills or knowledge by management which may indicate that the
method used to make an accounting estimate is inherently complex and therefore the
accounting estimate may have a greater susceptibility to material misstatement. There may
be a greater susceptibility to material misstatement when management has developed a
model internally and has relatively little experience in doing so, or uses a model that applies a
method that is not established or commonly used in a particular industry or environment.
• The nature of the measurement basis required by the applicable financial reporting
framework, which may result in the need for a complex method that requires multiple sources
of historical and forward-looking data or assumptions, with multiple interrelationships
between them. For example, an expected credit loss provision may require judgments about
future credit repayments and other cash flows, based on consideration of historical
experience data and the application of forward looking assumptions. Similarly, the valuation
of an insurance contract liability may require judgments about future insurance contract
payments to be projected based on historical experience and current and assumed future
trends.
The Degree to Which Complexity Affects the Selection and

Application of the Data
A77.In taking into account the degree to which the selection and application of the data used in
making the accounting estimate are affected by complexity, the auditor may consider:
• The complexity of the process to derive the data, taking into account the relevance and
reliability of the data source. Data from certain sources may be more reliable than from
others. Also, for confidentiality or proprietary reasons, some external information sources will
not (or not fully) disclose information that may be relevant in considering the reliability of the
data they provide, such as the sources of the underlying data they used or how it was
accumulated and processed.
• The inherent complexity in maintaining the integrity of the data. When there is a high volume
of data and multiple sources of data, there may be inherent complexity in maintaining the
integrity of data that is used to make an accounting estimate.
• The need to interpret complex contractual terms. For example, the determination of cash
inflows or outflows arising from a commercial supplier or customer rebates may depend on
very complex contractual terms that require specific experience or competence to understand
or interpret.
The Degree to Which Subjectivity Affects the Selection and

Application of the Method, Assumptions or Data
A78.In taking into account the degree to which the selection and application of method, assumptions
or data are affected by subjectivity, the auditor may consider:
• The degree to which the applicable financial reporting framework does not specify the
valuation approaches, concepts, techniques and factors to use in the estimation method.
• The uncertainty regarding the amount or timing, including the length of the forecast period.
The amount and timing are a source of inherent estimation uncertainty, and give rise to the
need for management judgment in selecting a point estimate, which in turn creates an
opportunity for management bias. For example, an accounting estimate that incorporates
forward looking assumptions may have a high degree of subjectivity which may be
susceptible to management bias.
Other Inherent Risk Factors (Ref: Para. 16(b))

A79.The degree of subjectivity associated with an accounting estimate influences the susceptibility of
the accounting estimate to misstatement due to management bias or fraud. For example, when
an accounting estimate is subject to a high degree of subjectivity, the accounting estimate is likely
to be more susceptible to misstatement due to management bias or fraud and this may result in a
wide range of possible measurement outcomes. Management may select a point estimate from
that range that is inappropriate in the circumstances, or that is inappropriately influenced by
unintentional or intentional management bias, and that is therefore misstated. For continuing
audits, indicators of possible management bias identified during the audit of preceding periods
may influence the planning and risk assessment procedures in the current period.
Significant Risks (Ref: Para. 17)

A80.The auditor's assessment of inherent risk, which takes into account the degree to which an
accounting estimate is subject to, or affected by estimation uncertainty, complexity, subjectivity or
other inherent risk factors, assists the auditor in determining whether any of the risks of material
misstatement identified and assessed are a significant risk.
Responses to the Assessed Risks of Material

Misstatement
The Auditor's Further Audit Procedures (Ref: Para. 18)

A81.In designing and performing further audit procedures the auditor may use any of the three testing
approaches (individually or in combination) listed in paragraph 18. For example, when several
assumptions are used to make an accounting estimate, the auditor may decide to use a different
testing approach for each assumption tested.
Obtaining Relevant Audit Evidence Whether Corroborative or

Contradictory
A82.Audit evidence comprises both information that supports and corroborates management's
assertions, and any information that contradicts such assertions.[44] Obtaining audit evidence in
an unbiased manner may involve obtaining evidence from multiple sources within and outside the
entity. However, the auditor is not required to perform an exhaustive search to identify all possible
sources of audit evidence.
A83.ISA 330 requires the auditor to obtain more persuasive audit evidence the higher the auditor's
assessment of the risk.[45] Therefore, the consideration of the nature or quantity of the audit
evidence may be more important when inherent risks relating to an accounting estimate is
assessed at the higher end of the spectrum of inherent risk.
Scalability
A84.The nature, timing and extent of the auditor's further audit procedures are affected by, for
example:
• The assessed risks of material misstatement, which affect the persuasiveness of the audit
evidence needed and influence the approach the auditor selects to audit an accounting
estimate. For example, the assessed risks of material misstatement relating to the existence
or valuation assertions may be lower for a straightforward accrual for bonuses that are paid
to employees shortly after period end. In this situation, it may be more practical for the auditor
to obtain sufficient appropriate audit evidence by evaluating events occurring up to the date
of the auditor's report, rather than through other testing approaches.
• The reasons for the assessed risks of material misstatement.
When the Auditor Intends to Rely on the Operating

Effectiveness of Relevant Controls (Ref: Para: 19)
A85.Testing the operating effectiveness of relevant controls may be appropriate when inherent risk is
assessed as higher on the spectrum of inherent risk, including for significant risks. This may be
the case when the accounting estimate is subject to or affected by a high degree of complexity.
When the accounting estimate is affected by a high degree of subjectivity, and therefore requires
significant judgment by management, inherent limitations in the effectiveness of the design of
controls may lead the auditor to focus more on substantive procedures than on testing the
operating effectiveness of controls.
A86.In determining the nature, timing and extent of testing of the operating effectiveness of controls
relating to accounting estimates, the auditor may consider factors such as:
• The nature, frequency and volume of transactions;
• The effectiveness of the design of the controls, including whether controls are appropriately
designed to respond to the assessed inherent risk, and the strength of governance;
• The importance of particular controls to the overall control objectives and processes in place
at the entity, including the sophistication of the information system to support transactions;
• The monitoring of controls and identified deficiencies in internal control;
• The nature of the risks the controls are intended to address, for example, controls related to
the exercise of judgment compared with controls over supporting data;
• The competency of those involved in the control activities;

• The frequency of performance of the control activities; and
• The evidence of performance of control activities.
Substantive Procedures Alone Cannot Provide Sufficient Appropriate

Audit Evidence
A87.In some industries, such as the financial services industry, management makes extensive use of
IT to conduct business. It may therefore be more likely that there are risks related to certain
accounting estimates for which substantive procedures alone cannot provide sufficient
appropriate audit evidence.
A88.Circumstances when risks for which substantive procedures alone cannot provide sufficient
appropriate audit evidence at the assertion level may exist include:
• When controls are necessary to mitigate risks relating to the initiation, recording, processing,
or reporting of information obtained from outside of the general and subsidiary ledgers.
• Information supporting one or more assertions is electronically initiated, recorded,
processed, or reported. This is likely to be the case when there is a high volume of
transactions or data, or a complex model is used, requiring the extensive use of information
technology to ensure the accuracy and completeness of the information. A complex expected
credit loss provision may be required for a financial institution or utility entity. For example, in
the case of a utility entity, the data used in developing the expected credit loss provision may
comprise many small balances resulting from a high volume of transactions. In these
circumstances, the auditor may conclude that sufficient appropriate audit evidence cannot be
obtained without testing controls around the model used to develop the expected credit loss
provision.
In such cases, the sufficiency and appropriateness of the audit evidence may depend on the
effectiveness of controls over the accuracy and completeness of the information.
A89.As part of the audit of the financial statements for certain entities (such as a bank or insurer), the
auditor also may be required by law or regulation to undertake additional procedures in relation
to, or to provide an assurance conclusion on, internal control. In these and other similar
circumstances, the auditor may be able to use information obtained in performing such
procedures as audit evidence, subject to determining whether subsequent changes have
occurred that may affect its relevance to the audit.
Significant Risks (Ref: Para. 20)

A90.When the auditor's further audit procedures in response to a significant risk consist only of
substantive procedures, ISA 330[46] requires that those procedures include tests of details. Such
tests of details may be designed and performed under each of the approaches described in
paragraph 18 of this ISA based on the auditor's professional judgment in the circumstances.
Examples of tests of details for significant risks related to accounting estimates include:
• Examination, for example, examining contracts to corroborate terms or assumptions.
• Recalculation, for example, verifying the mathematical accuracy of a model.
• Agreeing assumptions used to supporting documentation, such as third-party published
information.
Obtaining Audit Evidence from Events Occurring up to the

Date of the Auditor's Report (Ref: Para. 21)
A91.In some circumstances, obtaining audit evidence from events occurring up to the date of the
auditor's report may provide sufficient appropriate audit evidence to address the risks of material
misstatement. For example, sale of the complete inventory of a discontinued product shortly after
the period end may provide sufficient appropriate audit evidence relating to the estimate of its net
realizable value at the period end. In other cases, it may be necessary to use this testing
approach in connection with another approach in paragraph 18.
A92.For some accounting estimates, events occurring up to the date of the auditor's report are
unlikely to provide sufficient appropriate audit evidence regarding the accounting estimate. For
example, the conditions or events relating to some accounting estimates develop only over an
extended period. Also, because of the measurement objective of fair value accounting estimates,
information after the period-end may not reflect the events or conditions existing at the balance
sheet date and therefore may not be relevant to the measurement of the fair value accounting
estimate.
A93.Even if the auditor decides not to undertake this testing approach in respect of specific
accounting estimates, the auditor is required to comply with ISA 560. ISA 560 requires the auditor
to perform audit procedures designed to obtain sufficient appropriate audit evidence that all
events occurring between the date of the financial statements and the date of the auditor's report
that require adjustment of, or disclosure in, the financial statements have been identified[47] and
appropriately reflected in the financial statements.[48] Because the measurement of many
accounting estimates, other than fair value accounting estimates, usually depends on the
outcome of future conditions, transactions or events, the auditor's work under ISA 560 is
particularly relevant.
Testing How Management Made the Accounting Estimate

(Ref. Para. 22)
A94.Testing how management made the accounting estimate may be an appropriate approach
when, for example:
• The auditor's review of similar accounting estimates made in the prior period financial
statements suggests that management's current period process is appropriate.
• The accounting estimate is based on a large population of items of a similar nature that
individually are not significant.
• The applicable financial reporting framework specifies how management is expected to
make the accounting estimate. For example, this may be the case for an expected credit loss
provision.
• The accounting estimate is derived from the routine processing of data.
Testing how management made the accounting estimate may also be an appropriate approach
when neither of the other testing approaches is practical to perform, or may be an appropriate
approach in combination with one of the other testing approaches.
Changes in Methods, Significant Assumptions and the Data from Prior

Periods (Ref: Para. 23(a), 24(a), 25(a))
A95.When a change from prior periods in a method, significant assumption, or the data is not based
on new circumstances or new information, or when significant assumptions are inconsistent with
each other and with those used in other accounting estimates, or with related assumptions used
in other areas of the entity's business activities, the auditor may need to have further discussions
with management about the circumstances and, in doing so, challenge management regarding
the appropriateness of the assumptions used.
Indicators of Management Bias (Ref: Para. 23(b), 24(b), 25(b))

A96.When the auditor identifies indicators of possible management bias, the auditor may need a
further discussion with management and may need to reconsider whether sufficient appropriate
audit evidence has been obtained that the method, assumptions and data used were appropriate
and supportable in the circumstances. An example of an indicator of management bias for a
particular accounting estimate may be when management has developed an appropriate range
for several different assumptions, and in each case the assumption used was from the end of the
range that resulted in the most favorable measurement outcome.
Methods
The selection of the method (Ref: Para. 23(a))

A97.Relevant considerations for the auditor regarding the appropriateness of the method selected in
the context of the applicable financial reporting framework, and, if applicable, the
appropriateness of changes from the prior period may include:
• Whether management's rationale for the method selected is appropriate;
• Whether the method is appropriate in the circumstances given the nature of the accounting
estimate, the requirements of the applicable financial reporting framework, other available
valuation concepts or techniques, regulatory requirements, and the business, industry and
environment in which the entity operates;
• When management has determined that different methods result in a range of significantly
different estimates, how management has investigated the reasons for these differences;
and
• Whether the change is based on new circumstances or new information. When this is not the
case, the change may not be reasonable or in compliance with the applicable financial
reporting framework. Arbitrary changes result in inconsistent financial statements over time
and may give rise to financial statement misstatements or may be an indicator of possible
management bias. (see also paragraphs A133–A136)
These matters are important when the applicable financial reporting framework does not
prescribe the method of measurement or allows multiple methods.
Complex modelling (Ref: Para. 23(d))

A98.A model, and the related method, is more likely to be complex when:
• Understanding and applying the method, including designing the model and selecting and
using appropriate data and assumptions, requires specialized skills or knowledge;
• It is difficult to obtain data needed for use in the model because there are restrictions on the
availability or observability of, or access to, data; or
• It is difficult to maintain the integrity (e.g., accuracy, consistency, or completeness) of the data
and assumptions in using the model due to multiple valuation attributes, multiple relationships
between them, or multiple iterations of the calculation.
A99.Matters that the auditor may consider when management uses a complex model include, for
example, whether:
• The model is validated prior to usage or when there has been a change to the model, with
periodic reviews to ensure it is still suitable for its intended use. The entity's validation
process may include evaluation of:
○ The model's theoretical soundness;
○ The model's mathematical integrity;
○ The accuracy and completeness of the model's data and assumptions; and
○ The model's output as compared to actual transactions.
• Appropriate change control policies and procedures exist.
• Management uses appropriate skills and knowledge in using the model.
These considerations may also be useful for a method that does not involve complex modelling.
A100.Management may make adjustments to the output of the model to meet the requirements of the
applicable financial reporting framework. In some industries these adjustments are referred to as
overlays. In the case of fair value accounting estimates, it may be relevant to consider whether
adjustments to the output of the model, if any, reflect the assumptions marketplace participants
would use in similar circumstances.
Maintenance of integrity of significant assumptions and the data used in

applying the method (Ref: Para. 23(e))
A101.Maintaining the integrity of significant assumptions and the data in applying the method refers
to the maintenance of the accuracy and completeness of the data and assumptions through all
stages of information processing. A failure to maintain such integrity may result in corruption of
the data and assumptions and may give rise to misstatements. In this regard, relevant
considerations for the auditor may include whether the data and assumptions are subject to all
changes intended by management, and not subject to any unintended changes, during activities
such as input, storage, retrieval, transmission or processing.
Significant Assumptions (Ref: Para. 24)

A102.Relevant considerations for the auditor regarding the appropriateness of the significant
assumptions in the context of the applicable financial reporting framework, and, if applicable, the
appropriateness of changes from the prior period may include:
• Management's rationale for the selection of the assumption;
• Whether the assumption is appropriate in the circumstances given the nature of the
accounting estimate, the requirements of the applicable financial reporting framework, and
the business, industry and environment in which the entity operates; and
• Whether a change from prior periods in selecting an assumption is based on new
circumstances or new information. When it is not, the change may not be reasonable nor in
compliance with the applicable financial reporting framework. Arbitrary changes in an
accounting estimate may give rise to material misstatements of the financial statements or
may be an indicator of possible management bias (see paragraphs A133–A136).
A103.Management may evaluate alternative assumptions or outcomes of accounting estimates,

which may be accomplished through a number of approaches depending on the circumstances.
One possible approach is a sensitivity analysis. This might involve determining how the monetary
amount of an accounting estimate varies with different assumptions. Even for accounting
estimates measured at fair value, there may be variation because different market participants
will use different assumptions. A sensitivity analysis may lead to the development of a number of
outcome scenarios, sometimes characterized as a range of outcomes by management, and
including 'pessimistic' and 'optimistic' scenarios.
A104.Through the knowledge obtained in performing the audit, the auditor may become aware of or
may have obtained an understanding of assumptions used in other areas of the entity's business.
Such matters may include, for example, business prospects, assumptions in strategy documents
and future cash flows. Also, if the engagement partner has performed other engagements for the
entity, ISA 315 (Revised)[49] requires the engagement partner to consider whether information
obtained from those other engagements is relevant to identifying risks of material misstatement.
This information may also be useful to consider in addressing whether significant assumptions
are consistent with each other and with those used in other accounting estimates.
A105.The appropriateness of the significant assumptions in the context of the requirements of the
applicable financial reporting framework may depend on management's intent and ability to carry
out certain courses of action. Management often documents plans and intentions relevant to
specific assets or liabilities and the applicable financial reporting framework may require
management to do so. The nature and extent of audit evidence to be obtained about
management's intent and ability is a matter of professional judgment. When applicable, the
auditor's procedures may include the following:
• Review of management's history of carrying out its stated intentions.
• Inspection of written plans and other documentation, including, when applicable, formally
approved budgets, authorizations or minutes.
• Inquiry of management about its reasons for a particular course of action.
• Review of events occurring subsequent to the date of the financial statements and up to the
date of the auditor's report.

• Evaluation of the entity's ability to carry out a particular course of action given the entity's
economic circumstances, including the implications of its existing commitments and legal,
regulatory, or contractual restrictions that could affect the feasibility of management's actions.
• Consideration of whether management has met the applicable documentation requirements,
if any, of the applicable financial reporting framework.
Certain financial reporting frameworks, however, may not permit management's intentions or
plans to be taken into account when making an accounting estimate. This is often the case for fair
value accounting estimates because their measurement objective requires that significant
assumptions reflect those used by marketplace participants.
Data (Ref: Para. 25(a))

A106.Relevant considerations for the auditor regarding the appropriateness of the data selected for
use in the context of the applicable financial reporting framework, and, if applicable, the
appropriateness of the changes from the prior period may include:
• Management's rationale for the selection of the data;
• Whether the data is appropriate in the circumstances given the nature of the accounting
estimate, the requirements of the applicable financial reporting framework, and the business,
industry and environment in which the entity operates; and
• Whether the change from prior periods in the sources or items of data selected or data
selected, is based on new circumstances or new information. When it is not, it is unlikely to
be reasonable nor in compliance with the applicable financial reporting framework. Arbitrary
changes in an accounting estimate result in inconsistent financial statements over time and
may give rise to financial statement misstatements or may be an indicator of possible
management bias (see paragraphs A133–A136).
Relevance and reliability of the data (Ref: Para. 25(c))

A107.When using information produced by the entity, ISA 500 requires the auditor to evaluate
whether the information is sufficiently reliable for the auditor's purposes, including as necessary in
the circumstances, to obtain audit evidence about the accuracy and completeness of the
information and evaluating whether the information is sufficiently precise and detailed for the
auditor's purposes.[50]
Complex legal or contractual terms (Ref: Para. 25(d))

A108.Procedures that the auditor may consider when the accounting estimate is based on complex
legal or contractual terms include:
• Considering whether specialized skills or knowledge are needed to understand or interpret
the contract;
• Inquiring of the entity's legal counsel regarding the legal or contractual terms; and
• Inspecting the underlying contracts to:
○ Evaluate, the underlying business purpose for the transaction or agreement; and
○ Consider whether the terms of the contracts are consistent with management's
explanations.
Management's Selection of a Point Estimate and Related Disclosures

about Estimation Uncertainty
Management's steps to understand and address estimation uncertainty

(Ref: Para. 26(a))
A109.Relevant considerations regarding whether management has taken appropriate steps to
understand and address estimation uncertainty may include whether management has:
(a) Understood the estimation uncertainty, through identifying the sources, and assessing the
degree of inherent variability in the measurement outcomes and the resulting range of
reasonably possible measurement outcomes;
(b) Identified the degree to which, in the measurement process, complexity or subjectivity affect
the risk of material misstatement, and addressed the resulting potential for misstatement
through applying:
(i) Appropriate skills and knowledge in making accounting estimates; and
(ii) Professional judgment, including by identifying and addressing susceptibility to
management bias; and
(c) Addressed estimation uncertainty through appropriately selecting management's point
estimate and related disclosures that describe the estimation uncertainty.
The selection of management's point estimate and related disclosures of

estimation uncertainty (Ref: Para. 26(b))
A110.Matters that may be relevant regarding the selection of management's point estimate and the
development of related disclosures about estimation uncertainty include whether:
• The methods and data used were selected appropriately, including when alternative methods
for making the accounting estimate and alternative sources of data were available.
• Valuation attributes used were appropriate and complete.
• The assumptions used were selected from a range of reasonably possible amounts and
were supported by appropriate data that is relevant and reliable.
• The data used was appropriate, relevant and reliable, and the integrity of that data was
maintained.
• The calculations were applied in accordance with the method and were mathematically
accurate.
• Management's point estimate is appropriately chosen from the reasonably possible
measurement outcomes.
• The related disclosures appropriately describe the amount as an estimate and explain the
nature and limitations of the estimation process, including the variability of the reasonably
possible measurement outcomes.
A111.Relevant considerations for the auditor regarding the appropriateness of management's point
estimate, may include:
• When the requirements of the applicable financial reporting framework prescribe the point
estimate that is to be used after consideration of the alternative outcomes and assumptions,
or prescribes a specific measurement method, whether management has followed the
requirements of the applicable financial reporting framework.
• When the applicable financial reporting framework has not specified how to select an amount
from reasonably possible measurement outcomes, whether management has exercised
judgment, taking into account the requirements of the applicable financial reporting
framework.
A112.Relevant considerations for the auditor regarding management's disclosures about estimation
uncertainty include the requirements of the applicable financial reporting framework, which may
require disclosures:
• That describe the amount as an estimate and explain the nature and limitations of the
process for making it, including the variability in reasonably possible measurement
outcomes. The framework also may require additional disclosures to meet a disclosure
objective.[51]
• About significant accounting policies related to accounting estimates. Depending on the
circumstances, relevant accounting policies may include matters such as the specific
principles, bases, conventions, rules and practices applied in preparing and presenting
accounting estimates in the financial statements.
• About significant or critical judgments (for example, those that had the most significant effect
on the amounts recognized in the financial statements) as well as significant forward-looking
assumptions or other sources of estimation uncertainty.

In certain circumstances, additional disclosures beyond those explicitly required by the financial
reporting framework may be needed in order to achieve fair presentation, or in the case of a
compliance framework, for the financial statements not to be misleading.
A113.The greater the degree to which an accounting estimate is subject to estimation uncertainty, the
more likely the risks of material misstatement will be assessed as higher and therefore the more
persuasive the audit evidence needs to be to determine, in accordance with paragraph 35,
whether management's point estimate and related disclosures about estimation uncertainty are
reasonable in the context of the applicable financial reporting framework, or are misstated.
A114.If the auditor's consideration of estimation uncertainty associated with an accounting estimate,
and its related disclosure, is a matter that required significant auditor attention, then this may
constitute a key audit matter.[52]
When Management Has Not Taken Appropriate Steps to Understand and

Address Estimation Uncertainty (Ref: Para. 27)
A115.When the auditor determines that management has not taken appropriate steps to understand
and address estimation uncertainty, additional procedures that the auditor may request
management to perform to understand estimation uncertainty may include, for example,
consideration of alternative assumptions or the performance of a sensitivity analysis.
A116.In considering whether it is practicable to develop a point estimate or range, matters the auditor
may need to take into account include whether the auditor could do so without compromising
independence requirements. This may include relevant ethical requirements that address
prohibitions on assuming management responsibilities.
A117.If, after considering management's response, the auditor determines that it is not practicable to
develop an auditor's point estimate or range, the auditor is required to evaluate the implications
for the audit or the auditor's opinion on the financial statements in accordance with paragraph 34.
Developing an Auditor's Point Estimate or Using an Auditor's

Range (Ref: Para. 28–29)
A118.Developing an auditor's point estimate or range to evaluate management's point estimate and
related disclosures about estimation uncertainty may be an appropriate approach when, for
example:
• The auditor's review of similar accounting estimates made in the prior period financial
statements suggests that management's current period process is not expected to be
effective.
• The entity's controls within and over management's process for making accounting estimates
are not well designed or properly implemented.
• Events or transactions between the period end and the date of the auditor's report have not
been properly taken into account, when it is appropriate for management to do so, and such
events or transactions appear to contradict management's point estimate.
• There are appropriate alternative assumptions or sources of relevant data that can be used
in developing an auditor's point estimate or a range.
• Management has not taken appropriate steps to understand or address the estimation
uncertainty (see paragraph 27).
A119.The decision to develop a point estimate or range also may be influenced by the applicable
financial reporting framework, which may prescribe the point estimate that is to be used after
consideration of the alternative outcomes and assumptions, or prescribe a specific measurement
method (for example, the use of a discounted probability-weighted expected value, or the most
likely outcome).
A120.The auditor's decision as to whether to develop a point estimate rather than a range may
depend on the nature of the estimate and the auditor's judgment in the circumstances. For
example, the nature of the estimate may be such that there is expected to be less variability in the
reasonably possible outcomes. In these circumstances, developing a point estimate may be an
effective approach, particularly when it can be developed with a higher degree of precision.
A121.The auditor may develop a point estimate or a range in a number of ways, for example, by:
• Using a different model than the one used by management, for example, one that is
commercially available for use in a particular sector or industry, or a proprietary or auditor-
developed model.
• Using management's model but developing alternative assumptions or data sources to those
used by management.
• Using the auditor's own method but developing alternative assumptions to those used by
management.
• Employing or engaging a person with specialized expertise to develop or execute a model,
or to provide relevant assumptions.
• Consideration of other comparable conditions, transactions or events, or, where relevant,
markets for comparable assets or liabilities.
A122.The auditor also may develop a point estimate or range for only part of the accounting estimate
(for example, for a particular assumption, or when only a certain part of the accounting estimate is
giving rise to the risk of material misstatement).
A123.When using the auditor's own methods, assumptions or data to develop a point estimate or
range, the auditor may obtain evidence about the appropriateness of management's methods,
assumptions or data. For example, if the auditor uses the auditor's own assumptions in
developing a range to evaluate the reasonableness of management's point estimate, the auditor
may also develop a view about whether management's judgments in selecting the significant
assumptions used in making the accounting estimate give rise to indicators of possible
management bias.
A124.The requirement in paragraph 29(a) for the auditor to determine that the range includes only
amounts that are supported by sufficient appropriate audit evidence does not mean that the
auditor is expected to obtain audit evidence to support each possible outcome in the range
individually. Rather, the auditor is likely to obtain evidence to determine that the points at both
ends of the range are reasonable in the circumstances, thereby supporting that amounts falling
between those two points also are reasonable.
A125.The size of the auditor's range may be multiples of materiality for the financial statements as a
whole, particularly when materiality is based on operating results (for example, pre-tax income)
and this measure is relatively small in relation to assets or other balance sheet measures. This
situation is more likely to arise in circumstances when the estimation uncertainty associated with
the accounting estimate is itself multiples of materiality, which is more common for certain types
of accounting estimates or in certain industries, such as insurance or banking, where a high
degree of estimation uncertainty is more typical and there may be specific requirements in the
applicable financial reporting framework in that regard. Based on the procedures performed and
audit evidence obtained in accordance with the requirements of this ISA, the auditor may
conclude that a range that is multiples of materiality is, in the auditor's judgment, appropriate in
the circumstances. When this is the case, the auditor's evaluation of the reasonableness of the
disclosures about estimation uncertainty becomes increasingly important, particularly whether
such disclosures appropriately convey the high degree of estimation uncertainty and the range of
possible outcomes. Paragraphs A139–A144 include additional considerations that may be
relevant in these circumstances.
Other Considerations Relating to Audit Evidence (Ref: Para.

30)
A126.Information to be used as audit evidence, regarding risks of material misstatement relating to
accounting estimates, may have been produced by the entity, prepared using the work of a
management's expert, or provided by an external information source.
External Information Sources

A127.As explained in ISA 500,[53] the reliability of information from an external information source is
influenced by its source, its nature, and the circumstances under which it is obtained.
Consequently, the nature and extent of the auditor's further audit procedures to consider the
reliability of the information used in making an accounting estimate may vary depending on the
nature of these factors. For example:
• When market or industry data, prices, or pricing related data, are obtained from a single
external information source, specializing in such information, the auditor may seek a price
from an alternative independent source with which to compare.
• When market or industry data, prices, or pricing related data, are obtained from multiple
independent external information sources and points to consensus across those sources, the
auditor may need to obtain less evidence about the reliability of the data from an individual
source.
• When information obtained from multiple information sources points to divergent market
views the auditor may seek to understand the reasons for the diversity in views. The diversity
may result from the use of different methods, assumptions, or data. For example, one source
may be using current prices and another source using future prices. When the diversity
relates to estimation uncertainty, the auditor is required by paragraph 26(b) to obtain
sufficient appropriate audit evidence about whether, in the context of the applicable financial
reporting framework, the disclosures in the financial statements that describe the estimation
uncertainty are reasonable. In such cases professional judgment is also important in
considering information about the methods, assumptions or data applied.
• When information obtained from an external information source has been developed by that
source using its own model(s). Paragraph A34e of ISA 500 provides relevant guidance.
A128.For fair value accounting estimates, additional considerations of the relevance and reliability of
information obtained from external information sources may include:
(a) Whether fair values are based on trades of the same instrument or active market quotations;
(b) When the fair values are based on transactions of comparable assets or liabilities, how those
transactions are identified and considered comparable;
(c) When there are no transactions either for the asset or liability or comparable assets or
liabilities, how the information was developed including whether the inputs developed and
used represent the assumptions that market participants would use when pricing the asset or
liability, if applicable; and
(d) When the fair value measurement is based on a broker quote, whether the broker quote:
(i) Is from a market maker who transacts in the same type of financial instrument;
(ii) Is binding or nonbinding, with more weight placed on quotes based on binding offers;
and
(iii) Reflects market conditions as of the date of the financial statements, when required by
the applicable financial reporting framework.
A129.When information from an external information source is used as audit evidence, a relevant
consideration for the auditor may be whether information can be obtained, or whether the
information is sufficiently detailed, to understand the methods, assumptions and other data used
by the external information source. This may be limited in some respects and consequently
influence the auditor's consideration of the nature, timing and extent of procedures to perform.
For example, pricing services often provide information about their methods and assumptions by
asset class rather than individual securities. Brokers often provide only limited information about
their inputs and assumptions when providing broker indicative quotes for individual securities.
Paragraph A34f of ISA 500 provides guidance with respect to restrictions placed by the external
information source on the provision of supporting information.
Management's Expert
A130.Assumptions relating to accounting estimates that are made or identified by a management's
expert become management's assumptions when used by management in making an accounting
estimate. Accordingly, the auditor applies the relevant requirements in this ISA to those
assumptions.
A131.If the work of a management's expert involves the use of methods or sources of data relating to
accounting estimates, or developing or providing findings or conclusions relating to a point
estimate or related disclosures for inclusion in the financial statements, the requirements in
paragraphs 21–29 of this ISA may assist the auditor in applying paragraph 8(c) of ISA 500.
Service Organizations
A132.ISA 402[54] deals with the auditor's understanding of the services provided by a service
organization, including internal control, as well as the auditor's responses to assessed risks of
material misstatement. When the entity uses the services of a service organization in making
accounting estimates, the requirements and guidance in ISA 402 may therefore assist the auditor
in applying the requirements of this ISA.
Indicators of Possible Management Bias (Ref: Para. 32)

A133.Management bias may be difficult to detect at an account level and may only be identified by
the auditor when considering groups of accounting estimates, all accounting estimates in
aggregate, or when observed over a number of accounting periods. For example, if accounting
estimates included in the financial statements are considered to be individually reasonable but
management's point estimates consistently trend toward one end of the auditor's range of
reasonable outcomes that provide a more favorable financial reporting outcome for
management, such circumstances may indicate possible bias by management.
A134.Examples of indicators of possible management bias with respect to accounting estimates

include:
• Changes in an accounting estimate, or the method for making it, when management has
made a subjective assessment that there has been a change in circumstances.
• Selection or development of significant assumptions or the data that yield a point estimate
favorable for management objectives.
• Selection of a point estimate that may indicate a pattern of optimism or pessimism.
When such indicators are identified, there may be a risk of material misstatement either at the
assertion or financial statement level. Indicators of possible management bias themselves do not
constitute misstatements for purposes of drawing conclusions on the reasonableness of
individual accounting estimates. However, in some cases the audit evidence may point to a
misstatement rather than simply an indicator of management bias.
A135.Indicators of possible management bias may affect the auditor's conclusion as to whether the
auditor's risk assessment and related responses remain appropriate. The auditor may also need
to consider the implications for other aspects of the audit, including the need to further question
the appropriateness of management's judgments in making accounting estimates. Further,
indicators of possible management bias may affect the auditor's conclusion as to whether the
financial statements as a whole are free from material misstatement, as discussed in ISA 700
(Revised).[55]
A136.In addition, in applying ISA 240, the auditor is required to evaluate whether management's
judgments and decisions in making the accounting estimates included in the financial statements
indicate a possible bias that may represent a material misstatement due to fraud.[56] Fraudulent
financial reporting is often accomplished through intentional misstatement of accounting
estimates, which may include intentionally understating or overstating accounting estimates.
Indicators of possible management bias that may also be a fraud risk factor, may cause the
auditor to reassess whether the auditor's risk assessments, in particular the assessment of fraud
risks, and related responses remain appropriate.
Overall Evaluation Based on Audit Procedures Performed

(Ref: Para. 33)
A137.As the auditor performs planned audit procedures, the audit evidence obtained may cause the
auditor to modify the nature, timing or extent of other planned audit procedures.[57] In relation to
accounting estimates, information may come to the auditor's attention through performing
procedures to obtain audit evidence that differs significantly from the information on which the risk
assessment was based. For example, the auditor may have identified that the only reason for an
assessed risk of material misstatement is the subjectivity involved in making the accounting
estimate. However, while performing procedures to respond to the assessed risks of material
misstatement, the auditor may discover that the accounting estimate is more complex than
originally contemplated, which may call into question the assessment of the risk of material
misstatement (for example, the inherent risk may need to be re-assessed on the higher end of the
spectrum of inherent risk due to the effect of complexity) and therefore the auditor may need to
perform additional further audit procedures to obtain sufficient appropriate audit evidence.[58]
A138.With respect to accounting estimates that have not been recognized, a particular focus of the
auditor's evaluation may be on whether the recognition criteria of the applicable financial
reporting framework have in fact been met. When an accounting estimate has not been
recognized, and the auditor concludes that this treatment is appropriate, some financial reporting
frameworks may require disclosure of the circumstances in the notes to the financial statements.
Determining Whether the Accounting Estimates are

Reasonable or Misstated (Ref: Para. 9, 35)
A139.In determining whether, based on the audit procedures performed and evidence obtained,
management's point estimate and related disclosures are reasonable, or are misstated:
• When the audit evidence supports a range, the size of the range may be wide and, in some
circumstances, may be multiples of materiality for the financial statements as a whole (see
also paragraph A125). Although a wide range may be appropriate in the circumstances, it
may indicate that it is important for the auditor to reconsider whether sufficient appropriate
audit evidence has been obtained regarding the reasonableness of the amounts within the
range.
• The audit evidence may support a point estimate that differs from management's point
estimate. In such circumstances, the difference between the auditor's point estimate and
management's point estimate constitutes a misstatement.
• The audit evidence may support a range that does not include management's point estimate.
In such circumstances, the misstatement is the difference between management's point
estimate and the nearest point of the auditor's range.
A140.Paragraphs A110–A114 provide guidance to assist the auditor in evaluating management's

selection of a point estimate and related disclosures to be included in the financial statements.
A141.When the auditor's further audit procedures include testing how management made the
accounting estimate or developing an auditor's point estimate or range, the auditor is required to
obtain sufficient appropriate audit evidence about disclosures that describe estimation
uncertainty in accordance with paragraphs 26(b) and 29(b) and other disclosures in accordance
with paragraph 31. The auditor then considers the audit evidence obtained about disclosures as
part of the overall evaluation, in accordance with paragraph 35, of whether the accounting
A142.ISA 450 also provides guidance regarding qualitative disclosures[59] and when misstatements
in disclosures could be indicative of fraud.[60]
A143.When the financial statements are prepared in accordance with a fair presentation framework,
the auditor's evaluation as to whether the financial statements achieve fair presentation[61]
includes the consideration of the overall presentation, structure and content of the financial
statements, and whether the financial statements, including the related notes, represent the
transactions and events in a manner that achieves fair presentation. For example, when an
accounting estimate is subject to a higher degree of estimation uncertainty, the auditor may
determine that additional disclosures are necessary to achieve fair presentation. If management
does not include such additional disclosures, the auditor may conclude that the financial
statements are materially misstated.
A144.ISA 705 (Revised)[62] provides guidance on the implications for the auditor's opinion when the
auditor believes that management's disclosures in the financial statements are inadequate or
misleading, including, for example, with respect to estimation uncertainty.
Written Representations (Ref: Para. 37)

A145.Written representations about specific accounting estimates may include representations:
• That the significant judgments made in making the accounting estimates have taken into
account all relevant information of which management is aware.
• About the consistency and appropriateness in the selection or application of the methods,
assumptions and data used by management in making the accounting estimates.
• That the assumptions appropriately reflect management's intent and ability to carry out
specific courses of action on behalf of the entity, when relevant to the accounting estimates
and disclosures.
• That disclosures related to accounting estimates, including disclosures describing estimation
uncertainty, are complete and are reasonable in the context of the applicable financial
• That appropriate specialized skills or expertise has been applied in making the accounting
estimates.
• That no subsequent event requires adjustment to the accounting estimates and related
disclosures included in the financial statements.
• When accounting estimates are not recognized or disclosed in the financial statements,
about the appropriateness of management's decision that the recognition or disclosure
criteria of the applicable financial reporting framework have not been met.
Communication with Those Charged With Governance,

Management or Other Relevant Parties (Ref: Para. 38)
A146.In applying ISA 260 (Revised), the auditor communicates with those charged with governance
the auditor's views about significant qualitative aspects of the entity's accounting practices
relating to accounting estimates and related disclosures.[63] Appendix 2 includes matters specific
to accounting estimates that the auditor may consider communicating to those charged with
governance.
A147.ISA 265 requires the auditor to communicate in writing to those charged with governance
significant deficiencies in internal control identified during the audit.[64] Such significant
deficiencies may include those related to controls over:
(a) The selection and application of significant accounting policies, and the selection and
application of methods, assumptions and data;
(b) Risk management and related systems;
(c) Data integrity, including when data is obtained from an external information source; and
(d) The use, development and validation of models, including models obtained from an external
provider, and any adjustments that may be required.
A148.In addition to communicating with those charged with governance, the auditor may be permitted
or required to communicate directly with regulators or prudential supervisors. Such
communication may be useful throughout the audit or at particular stages, such as when planning
the audit or when finalizing the auditor's report. For example, in some jurisdictions, financial
institution regulators seek to cooperate with auditors to share information about the operation
and application of controls over financial instrument activities, challenges in valuing financial
instruments in inactive markets, expected credit losses, and insurance reserves while other
regulators may seek to understand the auditor's views on significant aspects of the entity's
operations including the entity's costs estimates. This communication may be helpful to the
auditor in identifying, assessing and responding to risks of material misstatement.
Documentation (Ref: Para. 39)

A149.ISA 315 (Revised)[65] and ISA 330[66] provide requirements and guidance on documenting the
auditor's understanding of the entity, risk assessments and responses to assessed risks. This
guidance is based on the requirements and guidance in ISA 230.[67] In the context of auditing
accounting estimates, the auditor is required to prepare audit documentation about key elements
of the auditor's understanding of the entity and its environment related to accounting estimates. In
addition, the auditor's judgments about the assessed risks of material misstatement related to
accounting estimates, and the auditor's responses, may likely be further supported by
documentation of communications with those charged with governance and management.
A150.In documenting the linkage of the auditor's further audit procedures with the assessed risks of
material misstatement at the assertion level, in accordance with ISA 330, this ISA requires that
the auditor take into account the reasons given to the risks of material misstatement at the
assertion level. Those reasons may relate to one or more inherent risk factors or the auditor's
assessment of control risk. However, the auditor is not required to document how every inherent
risk factor was taken into account in identifying and assessing the risks of material misstatement
in relation to each accounting estimate.
A151.The auditor also may consider documenting:

• When management's application of the method involves complex modeling, whether
management's judgments have been applied consistently and, when applicable, that the
design of the model meets the measurement objective of the applicable financial reporting
framework.
• When the selection and application of methods, significant assumptions, or the data is
affected by complexity to a higher degree, the auditor's judgments in determining whether
specialized skills or knowledge are required to perform the risk assessment procedures, to
design and perform procedures responsive to those risks, or to evaluate the audit evidence
obtained. In these circumstances, the documentation also may include how the required skills
or knowledge were applied.
A152.Paragraph A7 of ISA 230 notes that, although there may be no single way in which the auditor's
exercise of professional skepticism is documented, the audit documentation may nevertheless
provide evidence of the auditor's exercise of professional skepticism. For example, in relation to
accounting estimates, when the audit evidence obtained includes evidence that both
corroborates and contradicts management's assertions, the documentation may include how the
auditor evaluated that evidence, including the professional judgments made in forming a
conclusion as to the sufficiency and appropriateness of the audit evidence obtained. Examples of
other requirements in this ISA for which documentation may provide evidence of the exercise of
professional skepticism by the auditor include:
• Paragraph 13(d), regarding how the auditor has applied an understanding in developing the
auditor's own expectation of the accounting estimates and related disclosures to be included
in the entity's financial statements and how that expectation compares with the entity's
financial statements prepared by management;
• Paragraph 18, which requires further audit procedures to be designed and performed to
obtain sufficient appropriate evidence in a manner that is not biased toward obtaining audit
evidence that may be corroborative or towards excluding audit evidence that may be
contradictory;
• Paragraphs 23(b), 24(b), 25(b) and 32, which address indicators of possible management
bias; and
• Paragraph 34, which addresses the auditor's consideration of all relevant audit evidence,
whether corroborative or contradictory.
30 ISA 260 (Revised), paragraph 16(a)
33 See, for example, International Financial Reporting Standard (IFRS) 13, Fair Value Measurement.
35 IFRS 13, Fair Value Measurement, paragraph 63
36 ISA 315 (Revised) paragraph A77
37 ISA 240, The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements, paragraph 33(b)(ii)
38 ISA 560, Subsequent Events, paragraph 14
39 ISA 220, Quality Control for an Audit of Financial Statements, paragraph 14 and ISA 300, Planning an Audit of Financial
Statements, paragraph 8(e)
40 ISA 620, Using the Work of an Auditor's Expert
43 ISA 570, (Revised), Going Concern
45 ISA 330, paragraphs 7(b) and A19
51 IFRS 13, Fair Value Measurement, paragraph 92
52 ISA 701, Communicating Key Audit Matters in the Independent Auditor's Report
53 ISA 500, Paragraph A31
54 ISA 402, Audit Considerations Relating to an Entity Using a Service Organization
62 ISA 705 (Revised), paragraphs 22–23
65 ISA 315 (Revised), paragraphs 32 and A152–A155
66 ISA 330, paragraphs 28 and A63
67 ISA 230, paragraph 8(c)
Appendix 1 Inherent Risk Factors
Appendix 1Inherent Risk Factors

(Ref: Para. 2, 4, 12(c), A8, A66)
Introduction
1. In identifying, assessing and responding to the risks of material misstatement at the assertion
level for an accounting estimate and related disclosures, this ISA requires the auditor to take into
account the degree to which the accounting estimate is subject to estimation uncertainty, and the
degree to which the selection and application of the methods, assumptions and data used in
making the accounting estimate, and the selection of management's point estimate and related
disclosures for inclusion in the financial statements, are affected by complexity, subjectivity or
other inherent risk factors.
2. Inherent risk related to an accounting estimate is the susceptibility of an assertion about the
accounting estimate to material misstatement, before consideration of controls. Inherent risk
results from inherent risk factors, which give rise to challenges in appropriately making the
accounting estimate. This Appendix provides further explanation about the nature of the inherent
risk factors of estimation uncertainty, subjectivity and complexity, and their inter-relationships, in
the context of making accounting estimates and selecting management's point estimate and
related disclosures for inclusion in the financial statements.
Measurement Basis
3. The measurement basis and the nature, condition and circumstances of the financial statement
item give rise to relevant valuation attributes. When the cost or price of the item cannot be directly
observed, an accounting estimate is required to be made by applying an appropriate method and
using appropriate data and assumptions. The method may be specified by the applicable
financial reporting framework, or is selected by management, to reflect the available knowledge
about how the relevant valuation attributes would be expected to influence the cost or price of the
item on the measurement basis.
Estimation Uncertainty
4. Susceptibility to a lack of precision in measurement is often referred to in accounting frameworks

as measurement uncertainty. Estimation uncertainty is defined in this ISA as susceptibility to an
inherent lack of precision in measurement. It arises when the required monetary amount for a
financial statement item that is recognized or disclosed in the financial statements cannot be
measured with precision through direct observation of the cost or price. When direct observation
is not possible, the next most precise alternative measurement strategy is to apply a method that
reflects the available knowledge about cost or price for the item on the relevant measurement
basis, using observable data about relevant valuation attributes.
5. However, constraints on the availability of such knowledge or data may limit the verifiability of such
inputs to the measurement process and therefore limit the precision of measurement outcomes.
Furthermore, most accounting frameworks acknowledge that there are practical constraints on the
information that should be taken into account, such as when the cost of obtaining it would exceed
the benefits. The lack of precision in measurement arising from these constraints is inherent
because it cannot be eliminated from the measurement process. Accordingly, such constraints
are sources of estimation uncertainty. Other sources of measurement uncertainty that may occur in
the measurement process are, at least in principle, capable of elimination if the method is applied
appropriately and therefore are sources of potential misstatement rather than estimation
uncertainty.
6. When estimation uncertainty relates to uncertain future inflows or outflows of economic benefits
that will ultimately result from the underlying asset or liability, the outcome of these flows will only
be observable after the date of the financial statements. Depending on the nature of the
applicable measurement basis and on the nature, condition and circumstances of the financial
statement item, this outcome may be directly observable before the financial statements are
finalized or may only be directly observable at a later date. For some accounting estimates, there
may be no directly observable outcome at all.
7. Some uncertain outcomes may be relatively easy to predict with a high level of precision for an
individual item. For example, the useful life of a production machine may be easily predicted if
sufficient technical information is available about its average useful life. When it is not possible to
predict a future outcome, such as an individual's life expectancy based on actuarial assumptions,
with reasonable precision, it may still be possible to predict that outcome for a group of
individuals with greater precision. Measurement bases may, in some cases, indicate a portfolio
level as the relevant unit of account for measurement purposes, which may reduce inherent
Complexity
8. Complexity (i.e., the complexity inherent in the process of making an accounting estimate, before
consideration of controls) gives rise to inherent risk. Inherent complexity may arise when:
• There are many valuation attributes with many or non-linear relationships between them.
• Determining appropriate values for one or more valuation attributes requires multiple data
sets.
• More assumptions are required in making the accounting estimate, or when there are
correlations between the required assumptions.
• The data used is inherently difficult to identify, capture, access or understand.
9. Complexity may be related to the complexity of the method and of the computational process or
model used to apply it. For example, complexity in the model may reflect the need to apply
probability-based valuation concepts or techniques, option pricing formulae or simulation
techniques to predict uncertain future outcomes or hypothetical behaviors. Similarly, the
computational process may require data from multiple sources, or multiple data sets to support
the making of an assumption or the application of sophisticated mathematical or statistical
concepts.
10. The greater the complexity, the more likely it is that management will need to apply specialized
skills or knowledge in making an accounting estimate or engage a management's expert, for
example in relation to:
• Valuation concepts and techniques that could be used in the context of the measurement basis
and objectives or other requirements of the applicable financial reporting framework and how
to apply those concepts or techniques;
• The underlying valuation attributes that may be relevant given the nature of the measurement
basis and the nature, condition and circumstances of the financial statement items for which
accounting estimates are being made; or
• Identifying appropriate sources of data from internal sources (including from sources outside
the general or subsidiary ledgers) or from external information sources, determining how to
address potential difficulties in obtaining data from such sources or in maintaining its integrity
in applying the method, or understanding the relevance and reliability of that data.
11. Complexity relating to data may arise, for example, in the following circumstances:
(a) When data is difficult to obtain or when it relates to transactions that are not generally
accessible. Even when such data is accessible, for example through an external information
source, it may be difficult to consider the relevance and reliability of the data, unless the
external information source discloses adequate information about the underlying data sources
it has used and about any data processing that has been performed.
(b) When data reflecting an external information source's views about future conditions or events,
which may be relevant in developing support for an assumption, is difficult to understand
without transparency about the rationale and information taken into account in developing
those views.
(c) When certain types of data are inherently difficult to understand because they require an
understanding of technically complex business or legal concepts, such as may be required to
properly understand data that comprises the terms of legal agreements about transactions
involving complex financial instruments or insurance products.
Subjectivity
12. Subjectivity (i.e., the subjectivity inherent in the process of making an accounting estimate, before
consideration of controls) reflects inherent limitations in the knowledge or data reasonably
available about valuation attributes. When such limitations exist, the applicable financial reporting
framework may reduce the degree of subjectivity by providing a required basis for making certain
judgments. Such requirements may, for example, set explicit or implied objectives relating to
measurement, disclosure, the unit of account, or the application of a cost constraint. The
applicable financial reporting framework may also highlight the importance of such judgments
through requirements for disclosures about those judgments.
13. Management judgment is generally needed in determining some or all of the following matters,
which often involve subjectivity:
• To the extent not specified under the requirements of the applicable financial reporting
framework, the appropriate valuation approaches, concepts, techniques and factors to use in
the estimation method, having regard to available knowledge;
• To the extent valuation attributes are observable when there are various potential sources of
data, the appropriate sources of data to use;
• To the extent valuation attributes are not observable, the appropriate assumptions or range of
assumptions to make, having regard to the best available data, including, for example, market
views;
• The range of reasonably possible outcomes from which to select management's point
estimate, and the relative likelihood that certain points within that range would be consistent
with the objectives of the measurement basis required by the applicable financial reporting
framework; and
• The selection of management's point estimate, and the related disclosures to be made, in the
14. Making assumptions about future events or conditions involves the use of judgment, the difficulty
of which varies with the degree to which those events or conditions are uncertain. The precision
with which it is possible to predict uncertain future events or conditions depends on the degree to
which those events or conditions are determinable based on knowledge, including knowledge of
past conditions, events and related outcomes. The lack of precision also contributes to estimation
uncertainty, as described above.
15. With respect to future outcomes, assumptions will only need to be made for those features of the
outcome that are uncertain. For example, in considering the measurement of a possible
impairment of a receivable for a sale of goods at the balance sheet date, the amount of the
receivable may be unequivocally established and directly observable in the related transaction
documents. What may be uncertain is the amount, if any, for loss due to impairment. In this case,
assumptions may only be required about the likelihood of loss and about the amount and timing of
any such loss.
16. However, in other cases, the amounts of cash flows embodied in the rights relating to an asset
may be uncertain. In those cases, assumptions may have to be made about both the amounts of
the underlying rights to cash flows and about potential losses due to impairment.
17. It may be necessary for management to consider information about past conditions and events,
together with current trends and expectations about future developments. Past conditions and
events provide historical information that may highlight repeating historical patterns that can be
extrapolated in evaluating future outcomes. Such historical information may also indicate
changing patterns of such behavior over time (cycles or trends). These may suggest that the
underlying historical patterns of behavior have been changing in somewhat predictable ways that
may also be extrapolated in evaluating future outcomes. Other types of information may also be
available that indicate possible changes in historical patterns of such behavior or in related cycles
or trends. Difficult judgments may be needed about the predictive value of such information.
18. The extent and nature (including the degree of subjectivity involved) of the judgments taken in
making the accounting estimates may create opportunity for management bias in making
decisions about the course of action that, according to management, is appropriate in making the
accounting estimate. When there is also a high level of complexity or a high level of estimation
uncertainty, or both, the risk of, and opportunity for, management bias or fraud may also be
increased.
Relationship of Estimation Uncertainty to Subjectivity and

Complexity
19. Estimation uncertainty gives rise to inherent variation in the possible methods, data sources and
assumptions that could be used to make an accounting estimate. This gives rise to subjectivity,
and hence, the need for the use of judgment in making the accounting estimate. Such judgments
are required in selecting the appropriate methods and data sources, in making the assumptions,
and in selecting management's point estimate and related disclosures for inclusion in the financial
statements. These judgments are made in the context of the recognition, measurement,
presentation and disclosure requirements of the applicable financial reporting framework.
However, because there are constraints on the availability and accessibility of knowledge or
information to support these judgments, they are subjective in nature.
20. Subjectivity in such judgments creates the opportunity for unintentional or intentional management
bias in making them. Many accounting frameworks require that information prepared for inclusion
in the financial statements should be neutral (i.e., that it should not be biased). Given that bias can,
at least in principle, be eliminated from the estimation process, sources of potential bias in the
judgments made to address subjectivity are sources of potential misstatement rather than sources
of estimation uncertainty.
21. The inherent variation in the possible methods, data sources and assumptions that could be used
to make an accounting estimate (see paragraph 19) also gives rise to variation in the possible
measurement outcomes. The size of the range of reasonably possible measurement outcomes
results from the degree of estimation uncertainty and is often referred to as the sensitivity of the
accounting estimate. In addition to determining measurement outcomes, an estimation process
also involves analyzing the effect of inherent variations in the possible methods, data sources and
assumptions on the range of reasonably possible measurement outcomes (referred to as
sensitivity analysis).
22. Developing a financial statement presentation for an accounting estimate, which, when required
by the applicable financial reporting framework, achieves faithful representation (i.e., complete,
neutral and free from error) includes making appropriate judgments in selecting a management
point estimate that is appropriately chosen from within the range of reasonably possible
measurement outcomes and related disclosures that appropriately describe the estimation
uncertainty. These judgments may themselves involve subjectivity, depending on the nature of the
requirements in the applicable financial reporting framework that address these matters. For
example, the applicable financial reporting framework may require a specific basis (such as a
probability weighted average or a best estimate) for the selection of the management point
estimate. Similarly, it may require specific disclosures or disclosures that meet specified
disclosure objectives or additional disclosures that are required to achieve fair presentation in the
circumstances.
23. Although an accounting estimate that is subject to a higher degree of estimation uncertainty may
be less precisely measurable than one subject to a lower degree of estimation uncertainty, the
accounting estimate may still have sufficient relevance for users of the financial statements to be
recognized in the financial statements if, when required by the applicable financial reporting
framework, a faithful representation of the item can be achieved. In some cases, estimation
uncertainty may be so great that the recognition criteria in the applicable financial reporting
framework are not met and the accounting estimate cannot be recognized in the financial
statements. Even in these circumstances, there may still be relevant disclosure requirements, for
example to disclose the point estimate or range of reasonably possible measurement outcomes
and information describing the estimation uncertainty and constraints in recognizing the item. The
requirements of the applicable financial reporting framework that apply in these circumstances
may be specified to a greater or lesser degree. Accordingly, in these circumstances, there may
be additional judgments that involve subjectivity to be made.
Appendix 2 Communications with Those Charged with Governance
Appendix 2Communications with

Those Charged with Governance
(Ref: Para. A146)
Matters that the auditor may consider communicating with those charged with governance with
respect to the auditor's views about significant qualitative aspects of the entity's accounting practices
related to accounting estimates and related disclosures include:
(a) How management identifies transactions, other events and conditions that may give rise to the
need for, or changes in, accounting estimates and related disclosures.
(b) Risks of material misstatement.

(c) The relative materiality of the accounting estimates to the financial statements as a whole;
(d) Management's understanding (or lack thereof) regarding the nature and extent of, and the risks
associated with, accounting estimates;
(e) Whether management has applied appropriate specialized skills or knowledge or engaged
appropriate experts.
(f) The auditor's views about differences between the auditor's point estimate or range and
management's point estimate.
(g) The auditor's views about the appropriateness of the selection of accounting policies related to
accounting estimates and presentation of accounting estimates in the financial statements.
(h) Indicators of possible management bias.
(i) Whether there has been or ought to have been a change from the prior period in the methods for
making the accounting estimates
(j) When there has been a change from the prior period in the methods for making the accounting
estimate, why, as well as the outcome of accounting estimates in prior periods.
(k) Whether management's methods for making the accounting estimates, including when
management has used a model, are appropriate in the context of the measurement objectives,
the nature, conditions and circumstances, and other requirements of the applicable financial
(l) The nature and consequences of significant assumptions used in accounting estimates and the
degree of subjectivity involved in the development of the assumptions;
(m) Whether significant assumptions are consistent with each other and with those used in other
accounting estimates, or with assumptions used in other areas of the entity's business activities.
(n) When relevant to the appropriateness of the significant assumptions or the appropriate
application of the applicable financial reporting framework, whether management has the intent to
carry out specific courses of action and has the ability to do so.
(o) How management has considered alternative assumptions or outcomes and why it has rejected
them, or how management has otherwise addressed estimation uncertainty in making the
accounting estimate.
(p) Whether the data and significant assumptions used by management in making the accounting
estimates are appropriate in the context of the applicable financial reporting framework.
(q) The relevance and reliability of information obtained from an external information source.
(r) Significant difficulties encountered when obtaining sufficient appropriate audit evidence relating to
data obtained from an external information source or valuations performed by management or a
management's expert.
(s) Significant differences in judgments between the auditor and management or a management's
expert regarding valuations.
(t) The potential effects on the entity's financial statements of material risks and exposures required
to be disclosed in the financial statements, including the estimation uncertainty associated with
accounting estimates.
(u) The reasonableness of disclosures about estimation uncertainty in the financial statements.
(v) Whether management's decisions relating to the recognition, measurement, presentation and
disclosure of the accounting estimates and related disclosures in the financial statements are in
accordance with the applicable financial reporting framework.
Conforming and Consequential Amendments to Other International Standards
Conforming and Consequential

Amendments to Other International
Standards
Note: The following are conforming amendments to other International Standards as a result of the
approval of ISA 540 (Revised). These amendments will become effective at the same time as ISA
540 (Revised), and are shown with marked changes from the latest approved versions of the
International Standards that are amended. The footnote numbers within these amendments do not
align with the International Standards that are amended, and reference should be made to those
International Standards. These conforming amendments have received the approval of the PIOB
which concluded that due process was followed in the development of the conforming amendments
and that proper regard was paid to the public interest.
ISA 200, Overall Objectives of the Independent Auditor

and the Conduct of an Audit in Accordance With
International Standards on Auditing
Sufficient Appropriate Audit Evidence and Audit Risk (Ref: Para. 5

and 17)
Audit Risk
Risks of Material Misstatement

A42.The assessment of the risks of material misstatement may be expressed in quantitative terms,
by which they may be made. The ISAs do not ordinarily refer to inherent risk and control risk
separately, but rather to a combined assessment of the "risks of material misstatement."
However, ISA 540 (Revised)[68]requires a separate assessment of inherent risk and control risk to
provide a basis for designing and performing further audit procedures to respond to the assessed
risks of material misstatement, including significant risks, for accounting estimates at the
assertion level in accordance with ISA 330.[69]In identifying and assessing risks of material
misstatement for significant classes of transactions, account balances or disclosures other than
accounting estimates, the auditor may make such as in percentages, or in non-quantitative terms.
In any case, the need for the auditor to make appropriate risk assessments is more important
than the different approaches separate or combined assessments of inherent and control risk
depending on preferred audit techniques or methodologies and practical considerations. The
assessment of the risks of material misstatement may be expressed in quantitative terms, such
as in percentages, or in non-quantitative terms. In any case, the need for the auditor to make
appropriate risk assessments is more important than the different approaches by which they may
be made.
ISA 230, Audit Documentation
Requirements
Documentation of the Audit Procedures Performed and Audit

Evidence Obtained
Form, Content and Extent of Audit Documentation

8. The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor,
having no previous connection with the audit, to understand: (Ref: Para. A2–A5, A16–A17)
(a) The nature, timing and extent of the audit procedures performed to comply with the ISAs and
applicable legal and regulatory requirements; (Ref: Para. A6–A7)
(b) The results of the audit procedures performed, and the audit evidence obtained; and
(c) Significant matters arising during the audit, the conclusions reached thereon, and significant
professional judgments made in reaching those conclusions. (Ref: Para. A8–A11)
Documentation of the Audit Procedures Performed and Audit

Evidence Obtained
Form, Content and Extent of Audit Documentation (Ref: Para. 8)
Documentation of Compliance with ISAs (Ref: Para. 8(a))

A7.Audit documentation provides evidence that the audit complies with the ISAs. However, it is
neither necessary nor practicable for the auditor to document every matter considered, or
professional judgment made, in an audit. Further, it is unnecessary for the auditor to document
separately (as in a checklist, for example) compliance with matters for which compliance is
demonstrated by documents included within the audit file. For example:
• The existence of an adequately documented audit plan demonstrates that the auditor has
planned the audit.
• The existence of a signed engagement letter in the audit file demonstrates that the auditor has
agreed the terms of the audit engagement with management or, where appropriate, those
charged with governance.
• An auditor's report containing an appropriately qualified opinion on the financial statements
demonstrates that the auditor has complied with the requirement to express a qualified
opinion under the circumstances specified in the ISAs.
• In relation to requirements that apply generally throughout the audit, there may be a number of
ways in which compliance with them may be demonstrated within the audit file:
○ For example, there may be no single way in which the auditor's professional skepticism is
documented. But the audit documentation may nevertheless provide evidence of the
auditor's exercise of professional skepticism in accordance with the ISAs. For example, in
relation to accounting estimates, when the audit evidence obtained includes evidence that
both corroborates and contradicts management's assertions, documenting how the auditor
evaluated that evidence, including the professional judgments made in forming a
conclusion as to the sufficiency and appropriateness of the audit evidence obtained. Such
evidence may include specific procedures performed to corroborate management's
responses to the auditor's inquiries.
○ Similarly, that the engagement partner has taken responsibility for the direction,
supervision and performance of the audit in compliance with the ISAs may be evidenced in
a number of ways within the audit documentation. This may include documentation of the
engagement partner's timely involvement in aspects of the audit, such as participation in
the team discussions required by ISA 315 (Revised).[70]
Documentation of Significant Matters and Related Significant Professional

Judgments (Ref: Para. 8(c))
A10.Some examples of circumstances in which, in accordance with paragraph 8, it is appropriate to
prepare audit documentation relating to the use of professional judgment include, where the
matters and judgments are significant:
• The rationale for the auditor's conclusion when a requirement provides that the auditor "shall
consider" certain information or factors, and that consideration is significant in the context of
the particular engagement.
• The basis for the auditor's conclusion on the reasonableness of areas of subjective judgments
made by management (for example, the reasonableness of significant accounting estimates).
• The basis for the auditor's evaluation of whether an accounting estimate and related
disclosures are reasonable in the context of the applicable financial reporting framework, or
are misstated.
• The basis for the auditor's conclusions about the authenticity of a document when further
investigation (such as making appropriate use of an expert or of confirmation procedures) is
undertaken in response to conditions identified during the audit that caused the auditor to
believe that the document may not be authentic.
• When ISA 701 applies,[71] the auditor's determination of the key audit matters or the
determination that there are no key audit matters to be communicated.
68 ISA 540 (Revised), Auditing Accounting Estimates and Disclosures,paragraph 16
Environment, paragraph 10
71 ISA 701, Communicating Key Audit Matters in the Independent Auditor's Report
Appendix Specific Audit Documentation Requirements in Other ISAs
AppendixSpecific Audit
Documentation Requirements in Other
ISAs
(Ref: Para 1)
• ISA 540 (Revised), Auditing Accounting Estimates, Including Fair Value Accounting Estimates,
and Related Disclosures – paragraph 3923
ISA 240, The Auditor's Responsibilities Relating to Fraud

in an Audit of Financial Statements
Responses to the Assessed Risks of Material Misstatement Due to

Fraud
Accounting Estimates (Ref: Para. 33(b))

A48.A retrospective review is also required by ISA 540 (Revised). That review is conducted as a risk
assessment procedure to obtain information regarding the effectiveness of management's
previousprior period estimation process accounting estimates, audit evidence about the
outcome, or where applicable, their subsequent re-estimation of prior period accounting
estimates that is pertinent to makingto assist in identifying and assessing the risks of material
misstatement in the current period accounting estimates, and audit evidence of matters, such as
estimation uncertainty, that may be required to be disclosed in the financial statements. As a
practical matter, the auditor's review of management judgments and assumptions for biases that
could represent a risk of material misstatement due to fraud in accordance with this ISA may be
carried out in conjunction with the review required by ISA 540 (Revised).
ISA 260 (Revised), Communication with Those Charged

with Governance
Matters to Be Communicated
Significant Findings from the Audit (Ref: Para. 16)
Significant Qualitative Aspects of Accounting Practices (Ref: Para. 16(a))
A19.Financial reporting frameworks ordinarily allow for the entity to make accounting estimates, and
judgments about accounting policies and financial statement disclosures, for example, in relation
to the use of key assumptions in the development of accounting estimates for which there is
significant measurement uncertainty. In addition, law, regulation or financial reporting frameworks
may require disclosure of a summary of significant accounting policies or make reference to
"critical accounting estimates" or "critical accounting policies and practices" to identify and
provide additional information to users about the most difficult, subjective or complex judgments
made by management in preparing the financial statements.
A20.As a result, the auditor's views on the subjective aspects of the financial statements may be
particularly relevant to those charged with governance in discharging their responsibilities for
oversight of the financial reporting process. For example, in relation to the matters described in
paragraph A19, those charged with governance may be interested in the auditor's evaluation of
the adequacy of disclosures of the estimation uncertainty relating to accounting estimates that
give rise to significant risks. views on the degree to which complexity, subjectivity or other inherent
risk factors affect the selection or application of the methods, assumptions and data used in
making a significant accounting estimate, as well as the auditor's evaluation of whether
management's point estimate and related disclosures in the financial statements are reasonable
in the context of the applicable financial reporting framework. Open and constructive
communication about significant qualitative aspects of the entity's accounting practices also may
include comment on the acceptability of significant accounting practices and on the quality of the
disclosures. When applicable, this may include whether a significant accounting practice of the
entity relating to accounting estimates is considered by the auditor not to be most appropriate to
the particular circumstances of the entity, for example, when an alternative acceptable method for
making an accounting estimate would, in the auditor's judgment, be more appropriate. Appendix
2 identifies matters that may be included in this communication.
Appendix 1 Specific Requirements in ISQC 1 and Other ISAs that Refer to Communications with Those Charged with Governance
Appendix 1Specific Requirements in

ISQC 1 and Other ISAs that Refer to
Communications with Those Charged
With Governance
(Ref: Para. 3)
This appendix identifies paragraphs in ISQC 1 [72] and other ISAs that require communication of
specific matters with those charged with governance. The list is not a substitute for considering the
requirements and related application and other explanatory material in ISAs.
• ISQC 1, Quality Control for Firms that Perform Audits and Reviews of Financial Statements,
and Other Assurance and Related Services Engagements – paragraph 30(a)
• ISA 240, The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements –
paragraphs 22, 39(c)(i) and 41-43
• ISA 250 (Revised), Consideration of Laws and Regulations in an Audit of Financial Statements
– paragraphs 15, 20 and 23–25
• ISA 265, Communicating Deficiencies in Internal Control to Those Charged with Governance
and Management – paragraph 9
• ISA 450, Evaluation of Misstatements Identified during the Audit – paragraphs 12-13
• ISA 505, External Confirmations – paragraph 9
• ISA 510, Initial Audit Engagements—Opening Balances – paragraph 7
• ISA 540 (Revised), Auditing Accounting Estimates and Related Disclosures –paragraph 38
• ISA 550, Related Parties – paragraph 27
• ISA 560, Subsequent Events – paragraphs 7(b)-(c), 10(a), 13(b), 14(a) and 17
• ISA 570 (Revised), Going Concern – paragraph 25
• ISA 600, Special Considerations—Audits of Group Financial Statements (Including the Work of
Component Auditors) – paragraph 49
• ISA 610 (Revised 2013), Using the Work of Internal Auditors – paragraphs 20 and 31
• ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements – paragraph 46
• ISA 701, Communicating Key Audit Matters in the Independent Auditor's Report – paragraph
17
• ISA 705 (Revised), Modifications to the Opinion in the Independent Auditor's Report –
paragraphs 12, 14, 23 and 30
• ISA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditor's Report – paragraph 12
• ISA 710, Comparative Information—Corresponding Figures and Comparative Financial

Statements – paragraph 18
• ISA 720 (Revised), The Auditor's Responsibilities Relating to Other Information – paragraphs
17—19
72 ISQC 1, Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and
Related Services Engagements
Appendix 2 Qualitative Aspects of Accounting Practices
Appendix 2Qualitative Aspects of

Accounting Practices
(Ref: Para. 16(a), A19–A20)
The communication required by paragraph 16(a), and discussed in paragraphs A19–A20, may
include such matters as:
Accounting Estimates and Related Disclosures

• For items for which estimates are significant, issues discussed in ISA 540,[73]including, for
example:Appendix 2 of ISA 540 (Revised) includes matters that the auditor may consider
communicating with respect to significant qualitative aspects of the entity's accounting practices
related to accounting estimates and related disclosures.
○ How management identifies those transactions, events and conditions that may give rise to
the need for accounting estimates to be recognized or disclosed in the financial statements.
○ Changes in circumstances that may give rise to new, or the need to revise existing,
○ Whether management's decision to recognize, or to not recognize, the accounting estimates
in the financial statements is in accordance with the applicable financial reporting framework.
○ Whether there has been or ought to have been a change from the prior period in the methods
for making the accounting estimates and, if so, why, as well as the outcome of accounting
estimates in prior periods.
○ Management's process for making accounting estimates (e.g., when management has used
a model), including whether the selected measurement basis for the accounting estimate is in
accordance with the applicable financial reporting framework.
○ Whether the significant assumptions used by management in developing the accounting
estimate are reasonable.
○ Where relevant to the reasonableness of the significant assumptions used by management
or the appropriate application of the applicable financial reporting framework, management's
intent to carry out specific courses of action and its ability to do so.
○ Risks of material misstatement.
○ Indicators of possible management bias.
○ How management has considered alternative assumptions or outcomes and why it has
rejected them, or how management has otherwise addressed estimation uncertainty in
making the accounting estimate.
○ The adequacy of disclosure of estimation uncertainty in the financial statements.
ISA 500, Audit Evidence

Introduction
Scope of this ISA

1. This International Standard on Auditing (ISA) explains what constitutes audit evidence in an audit
of financial statements, and deals with the auditor's responsibility to design and perform audit
procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the auditor's opinion.
2. This ISA is applicable to all the audit evidence obtained during the course of the audit. Other ISAs
deal with specific aspects of the audit (for example, ISA 315 (Revised)[74]), the audit evidence to
be obtained in relation to a particular topic (for example, ISA 570 (Revised)[75]), specific
procedures to obtain audit evidence (for example, ISA 520[76]), and the evaluation of whether
sufficient appropriate audit evidence has been obtained (ISA 200[77] and ISA 330[78]).
Effective Date
3. This ISA is effective for audits of financial statements for periods beginning on or after December
15, 2009.
Objective
4. The objective of the auditor is to design and perform audit procedures in such a way as to enable
the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the auditor's opinion.
Definitions
5. For purposes of the ISAs, the following terms have the meanings attributed below:
(a) Accounting records – The records of initial accounting entries and supporting records, such
as checks and records of electronic fund transfers; invoices; contracts; the general and
subsidiary ledgers, journal entries and other adjustments to the financial statements that are
not reflected in journal entries; and records such as work sheets and spreadsheets
supporting cost allocations, computations, reconciliations and disclosures.
(b) Appropriateness (of audit evidence) – The measure of the quality of audit evidence; that is,
its relevance and its reliability in providing support for the conclusions on which the auditor's
opinion is based.
(c) Audit evidence – Information used by the auditor in arriving at the conclusions on which the
auditor's opinion is based. Audit evidence includes both information contained in the
accounting records underlying the financial statements and information obtained from other
sources.
(cA)External information source – An external individual or organization that provides information
that has been used by the entity in preparing the financial statements, or that has been
obtained by the auditor as audit evidence, when such information is suitable for use by a
broad range of users. When information has been provided by an individual or organization
acting in the capacity of a management's expert, service organization[79], or auditor's
expert[80]the individual or organization is not considered an external information source with
respect to that particular information. (Ref: Para. A1a-A1c)
(d) Management's expert – An individual or organization possessing expertise in a field other
than accounting or auditing, whose work in that field is used by the entity to assist the entity in
preparing the financial statements.
(e) Sufficiency (of audit evidence) – The measure of the quantity of audit evidence. The quantity
of the audit evidence needed is affected by the auditor's assessment of the risks of material
misstatement and also by the quality of such audit evidence.
Requirements
Sufficient Appropriate Audit Evidence

6. The auditor shall design and perform audit procedures that are appropriate in the circumstances
for the purpose of obtaining sufficient appropriate audit evidence. (Ref: Para. A1-A25)
Information to Be Used as Audit Evidence

7. When designing and performing audit procedures, the auditor shall consider the relevance and
reliability of the information to be used as audit evidence., including information obtained from an
external information source. (Ref: Para. A26–A33-A34f)
8. If information to be used as audit evidence has been prepared using the work of a management's
expert, the auditor shall, to the extent necessary, having regard to the significance of that expert's
work for the auditor's purposes: (Ref: Para. A35–A37)
(a) Evaluate the competence, capabilities and objectivity of that expert; (Ref: Para. A38-A44)
(b) Obtain an understanding of the work of that expert; and (Ref: Para. A45-A48)
(c) Evaluate the appropriateness of that expert's work as audit evidence for the relevant
assertion. (Ref: Para. A49)
9. When using information produced by the entity, the auditor shall evaluate whether the information
is sufficiently reliable for the auditor's purposes, including, as necessary in the circumstances:
(a) Obtaining audit evidence about the accuracy and completeness of the information; and (Ref:
Para. A50-A51)
(b) Evaluating whether the information is sufficiently precise and detailed for the auditor's
purposes. (Ref: Para. A52)
Selecting Items for Testing to Obtain Audit Evidence

10. When designing tests of controls and tests of details, the auditor shall determine means of
selecting items for testing that are effective in meeting the purpose of the audit procedure. (Ref:
Para. A53-A57)
Inconsistency in, or Doubts over Reliability of, Audit Evidence

11. If:
(a) audit evidence obtained from one source is inconsistent with that obtained from another; or
(b) the auditor has doubts over the reliability of information to be used as audit evidence,
the auditor shall determine what modifications or additions to audit procedures are necessary to
resolve the matter, and shall consider the effect of the matter, if any, on other aspects of the audit.
(Ref: Para. A58)
***
External Information Source (Ref: Para 5(cA))

A1a.External information sources may include pricing services, governmental organizations, central
banks or recognized stock exchanges. Examples of information that may be obtained from
external information sources include:
• Prices and pricing related data;
• Macro-economic data, such as historical and forecast unemployment rates and economic
growth rates, or census data;
• Credit history data;
• Industry specific data, such as an index of reclamation costs for certain extractive industries,
or viewership information or ratings used to determine advertising revenue in the
entertainment industry; and
• Mortality tables used to determine liabilities in the life insurance and pension sectors.
A1b.A particular set of information is more likely to be suitable for use by a broad range of users and
less likely to be subject to influence by any particular user if the external individual or organization
provides it to the public for free, or makes it available to a wide range of users in return for
payment of a fee. Judgment may be required in determining whether the information is suitable
for use by a broad range of users, taking into account the ability of the entity to influence the
external information source.
A1c.An external individual or organization cannot, in respect of any particular set of information, be
both an external information source and a management's expert, or service organization or
auditor's expert.
A1d.However, an external individual or organization may, for example, be acting as a management's

expert when providing a particular set of information, but may be acting as an external information
source when providing a different set of information. In some circumstances, professional
judgment may be needed to determine whether an external individual or organization is acting as
an external information source or as a management's expert with respect to a particular set of
information. In other circumstances, the distinction may be clear. For example:
• An external individual or organization may be providing information about real estate prices
that is suitable for use by a broad range of users, for example, information made generally
available pertaining to a geographical region, and be determined to be an external
information source with respect to that set of information. The same external organization
may also be acting as a management's or auditor's expert in providing commissioned
valuations, with respect to the entity's real estate portfolio specifically tailored for the entity's
facts and circumstances.
• Some actuarial organizations publish mortality tables for general use which, when used by an
entity, would generally be considered to be information from an external information source.
The same actuarial organization may also be a management's expert with respect to different
information tailored to the specific circumstances of the entity to help management determine
the pension liability for several of the entity's pension plans.
• An external individual or organization may possess expertise in the application of models to
estimate the fair value of securities for which there is no observable market. If the external
individual or organization applies that expertise in making an estimate specifically for the
entity and that work is used by management in preparing its financial statements, the external
individual or organization is likely to be a management's expert with respect to that
information. If, on the other hand, that external individual or organization merely provides, to
the public, prices or pricing-related data regarding private transactions, and the entity uses
that information in its own estimation methods, the external individual or organization is likely
to be an external information source with respect to such information.
• An external individual or organization may publish information, suitable for a broad range of
users, about risks or conditions in an industry. If used by an entity in preparing its risk
disclosures (for example in compliance with IFRS 7[81]), such information would ordinarily be
considered to be information from an external information source. However, if the same type
of information has been specifically commissioned by the entity to use its expertise to
develop information about those risks, tailored to the entity's circumstances, the external
individual or organization is likely to be acting as a management's expert.
• An external individual or organization may apply its expertise in providing information about
current and future market trends, which it makes available to, and is suitable for use by, a
broad range of users. If used by the entity to help make decisions about assumptions to be
used in making accounting estimates, such information is likely to be considered to be
information from an external information source. If the same type of information has been
commissioned by the entity to address current and future trends relevant to the entity's
specific facts and circumstances, the external individual or organization is likely to be acting
as a management's expert.
Sufficient Appropriate Audit Evidence (Ref: Para. 6)

A1. Audit evidence is necessary to support the auditor's opinion and report. It is cumulative in nature
and is primarily obtained from audit procedures performed during the course of the audit. It may,
however, also include information obtained from other sources such as previous audits (provided
the auditor has determined whether changes have occurred since the previous audit that may
affect its relevance to the current audit[82] ) or a firm's quality control procedures for client
acceptance and continuance. In addition to other sources inside and outside the entity, the
entity's accounting records and other sources internal to the entity are an important sources of
audit evidence. Also, informationInformation that may be used as audit evidence may have been
prepared using the work of a management's expert. or be obtained from an external information
source. Audit evidence comprises both information that supports and corroborates
management's assertions, and any information that contradicts such assertions. In addition, in
some cases the absence of information (for example, management's refusal to provide a
requested representation) is used by the auditor, and therefore, also constitutes audit evidence
A2. Most of the auditor's work in forming the auditor's opinion consists of obtaining and evaluating
audit evidence. Audit procedures to obtain audit evidence can include inspection, observation,
confirmation, recalculation, reperformance, and analytical procedures, often in some
combination, in addition to inquiry. Although inquiry may provide important audit evidence, and
may even produce evidence of a misstatement, inquiry alone ordinarily does not provide
sufficient audit evidence of the absence of a material misstatement at the assertion level, nor of
the operating effectiveness of controls.
A3. As explained in ISA 200,[83] reasonable assurance is obtained when the auditor has obtained
sufficient appropriate audit evidence to reduce audit risk (that is, the risk that the auditor
expresses an inappropriate opinion when the financial statements are materially misstated) to an
acceptably low level.
A4. The sufficiency and appropriateness of audit evidence are interrelated. Sufficiency is the
measure of the quantity of audit evidence. The quantity of audit evidence needed is affected by
the auditor's assessment of the risks of misstatement (the higher the assessed risks, the more
audit evidence is likely to be required) and also by the quality of such audit evidence (the higher
the quality, the less may be required). Obtaining more audit evidence, however, may not
compensate for its poor quality.
A5. Appropriateness is the measure of the quality of audit evidence; that is, its relevance and its
reliability in providing support for the conclusions on which the auditor's opinion is based. The
reliability of evidence is influenced by its source and by its nature, and is dependent on the
individual circumstances under which it is obtained.
A6. ISA 330 requires the auditor to conclude whether sufficient appropriate audit evidence has been
obtained.[84] Whether sufficient appropriate audit evidence has been obtained to reduce audit
risk to an acceptably low level, and thereby enable the auditor to draw reasonable conclusions on
which to base the auditor's opinion, is a matter of professional judgment. ISA 200 contains
discussion of such matters as the nature of audit procedures, the timeliness of financial reporting,
and the balance between benefit and cost, which are relevant factors when the auditor exercises
professional judgment regarding whether sufficient appropriate audit evidence has been
obtained.
Sources of Audit Evidence

A7. Some audit evidence is obtained by performing audit procedures to test the accounting records,
for example, through analysis and review, reperforming procedures followed in the financial
reporting process, and reconciling related types and applications of the same information.
Through the performance of such audit procedures, the auditor may determine that the
accounting records are internally consistent and agree to the financial statements.
A8. More assurance is ordinarily obtained from consistent audit evidence obtained from different
sources or of a different nature than from items of audit evidence considered individually. For
example, corroborating information obtained from a source independent of the entity may
increase the assurance the auditor obtains from audit evidence that is generated internally, such
as evidence existing within the accounting records, minutes of meetings, or a management
representation.
A9. Information from sources independent of the entity that the auditor may use as audit evidence
may include confirmations from third parties, and information from an external information source,
including analysts' reports, and comparable data about competitors (benchmarking data).
Audit Procedures for Obtaining Audit Evidence

A10.As required by, and explained further in, ISA 315 (Revised) and ISA 330, audit evidence to draw
reasonable conclusions on which to base the auditor's opinion is obtained by performing:
(a) Risk assessment procedures; and
(b) Further audit procedures, which comprise:
(i) Tests of controls, when required by the ISA or when the auditor has chosen to do so; and
(ii) Substantive procedures, including tests of details and substantive analytical procedures.
A11.The audit procedures described in paragraphs A14-A25 below may be used as risk
assessment procedures, tests of controls or substantive procedures, depending on the context in
which they are applied by the auditor. As explained in ISA 330, audit evidence obtained from
previous audits may, in certain circumstances, provide appropriate audit evidence where the
auditor performs audit procedures to establish its continuing relevance.[85]
A12.The nature and timing of the audit procedures to be used may be affected by the fact that some
of the accounting data and other information may be available only in electronic form or only at
certain points or periods in time. For example, source documents, such as purchase orders and
invoices, may exist only in electronic form when an entity uses electronic commerce, or may be
discarded after scanning when an entity uses image processing systems to facilitate storage and
reference.
A13.Certain electronic information may not be retrievable after a specified period of time, for
example, if files are changed and if backup files do not exist. Accordingly, the auditor may find it
necessary as a result of an entity's data retention policies to request retention of some
information for the auditor's review or to perform audit procedures at a time when the information
is available.
Inspection
A14.Inspection involves examining records or documents, whether internal or external, in paper form,
electronic form, or other media, or a physical examination of an asset. Inspection of records and
documents provides audit evidence of varying degrees of reliability, depending on their nature
and source and, in the case of internal records and documents, on the effectiveness of the
controls over their production. An example of inspection used as a test of controls is inspection of
records for evidence of authorization.
A15.Some documents represent direct audit evidence of the existence of an asset, for example, a
document constituting a financial instrument such as a stock or bond. Inspection of such
documents may not necessarily provide audit evidence about ownership or value. In addition,
inspecting an executed contract may provide audit evidence relevant to the entity's application of
accounting policies, such as revenue recognition.
A16.Inspection of tangible assets may provide reliable audit evidence with respect to their existence,
but not necessarily about the entity's rights and obligations or the valuation of the assets.
Inspection of individual inventory items may accompany the observation of inventory counting.
Observation
A17.Observation consists of looking at a process or procedure being performed by others, for
example, the auditor's observation of inventory counting by the entity's personnel, or of the
performance of control activities. Observation provides audit evidence about the performance of
a process or procedure, but is limited to the point in time at which the observation takes place,
and by the fact that the act of being observed may affect how the process or procedure is
performed. See ISA 501 for further guidance on observation of the counting of inventory.[86]
External Confirmation
A18.An external confirmation represents audit evidence obtained by the auditor as a direct written
response to the auditor from a third party (the confirming party), in paper form, or by electronic or
other medium. External confirmation procedures frequently are relevant when addressing
assertions associated with certain account balances and their elements. However, external
confirmations need not be restricted to account balances only. For example, the auditor may
request confirmation of the terms of agreements or transactions an entity has with third parties;
the confirmation request may be designed to ask if any modifications have been made to the
agreement and, if so, what the relevant details are. External confirmation procedures also are
used to obtain audit evidence about the absence of certain conditions, for example, the absence
of a "side agreement" that may influence revenue recognition. See ISA 505 for further guidance.
[87]
Recalculation
A19.Recalculation consists of checking the mathematical accuracy of documents or records.
Recalculation may be performed manually or electronically.
Reperformance
A20.Reperformance involves the auditor's independent execution of procedures or controls that were
originally performed as part of the entity's internal control.
Analytical Procedures
A21.Analytical procedures consist of evaluations of financial information through analysis of plausible
relationships among both financial and non-financial data. Analytical procedures also encompass
such investigation as is necessary of identified fluctuations or relationships that are inconsistent
with other relevant information or that differ from expected values by a significant amount. See
ISA 520 for further guidance.
Inquiry
A22.Inquiry consists of seeking information of knowledgeable persons, both financial and non-
financial, within the entity or outside the entity. Inquiry is used extensively throughout the audit in
addition to other audit procedures. Inquiries may range from formal written inquiries to informal
oral inquiries. Evaluating responses to inquiries is an integral part of the inquiry process.
A23.Responses to inquiries may provide the auditor with information not previously possessed or
with corroborative audit evidence. Alternatively, responses might provide information that differs
significantly from other information that the auditor has obtained, for example, information
regarding the possibility of management override of controls. In some cases, responses to
inquiries provide a basis for the auditor to modify or perform additional audit procedures.
A24.Although corroboration of evidence obtained through inquiry is often of particular importance, in

the case of inquiries about management intent, the information available to support
management's intent may be limited. In these cases, understanding management's past history of
carrying out its stated intentions, management's stated reasons for choosing a particular course
of action, and management's ability to pursue a specific course of action may provide relevant
information to corroborate the evidence obtained through inquiry.
A25.In respect of some matters, the auditor may consider it necessary to obtain written
representations from management and, where appropriate, those charged with governance to
confirm responses to oral inquiries. See ISA 580 for further guidance.[88]
Information to Be Used as Audit Evidence
Relevance and Reliability (Ref: Para. 7)

A26.As noted in paragraph A1, while audit evidence is primarily obtained from audit procedures
performed during the course of the audit, it may also include information obtained from other
sources such as, for example, previous audits, in certain circumstances, a firm's quality control
procedures for client acceptance and continuance and complying with certain additional
responsibilities under law, regulation or relevant ethical requirements (e.g., regarding an entity's
non-compliance with laws and regulations). The quality of all audit evidence is affected by the
relevance and reliability of the information upon which it is based.
Relevance
A27.Relevance deals with the logical connection with, or bearing upon, the purpose of the audit
procedure and, where appropriate, the assertion under consideration. The relevance of
information to be used as audit evidence may be affected by the direction of testing. For
example, if the purpose of an audit procedure is to test for overstatement in the existence or
valuation of accounts payable, testing the recorded accounts payable may be a relevant audit
procedure. On the other hand, when testing for understatement in the existence or valuation of
accounts payable, testing the recorded accounts payable would not be relevant, but testing such
information as subsequent disbursements, unpaid invoices, suppliers' statements, and
unmatched receiving reports may be relevant.
A28.A given set of audit procedures may provide audit evidence that is relevant to certain assertions,
but not others. For example, inspection of documents related to the collection of receivables after
the period end may provide audit evidence regarding existence and valuation, but not necessarily
cutoff. Similarly, obtaining audit evidence regarding a particular assertion, for example, the
existence of inventory, is not a substitute for obtaining audit evidence regarding another
assertion, for example, the valuation of that inventory. On the other hand, audit evidence from
different sources or of a different nature may often be relevant to the same assertion.
A29.Tests of controls are designed to evaluate the operating effectiveness of controls in preventing,
or detecting and correcting, material misstatements at the assertion level. Designing tests of
controls to obtain relevant audit evidence includes identifying conditions (characteristics or
attributes) that indicate performance of a control, and deviation conditions which indicate
departures from adequate performance. The presence or absence of those conditions can then
be tested by the auditor.
A30.Substantive procedures are designed to detect material misstatements at the assertion level.
They comprise tests of details and substantive analytical procedures. Designing substantive
procedures includes identifying conditions relevant to the purpose of the test that constitute a
misstatement in the relevant assertion.
Reliability
A31.The reliability of information to be used as audit evidence, and therefore of the audit evidence
itself, is influenced by its source and its nature, and the circumstances under which it is obtained,
including the controls over its preparation and maintenance where relevant. Therefore,
generalizations about the reliability of various kinds of audit evidence are subject to important
exceptions. Even when information to be used as audit evidence is obtained from sources
external to the entity, circumstances may exist that could affect its reliability. For example,
information obtained from ana source independent external sourceof the entity may not be
reliable if the source is not knowledgeable, or a management's expert may lack objectivity. While
recognizing that exceptions may exist, the following generalizations about the reliability of audit
evidence may be useful:
• The reliability of audit evidence is increased when it is obtained from independent sources
outside the entity.
• The reliability of audit evidence that is generated internally is increased when the related
controls, including those over its preparation and maintenance, imposed by the entity are
effective.
• Audit evidence obtained directly by the auditor (for example, observation of the application of
a control) is more reliable than audit evidence obtained indirectly or by inference (for
example, inquiry about the application of a control).
• Audit evidence in documentary form, whether paper, electronic, or other medium, is more
reliable than evidence obtained orally (for example, a contemporaneously written record of a
meeting is more reliable than a subsequent oral representation of the matters discussed).
• Audit evidence provided by original documents is more reliable than audit evidence provided
by photocopies or facsimiles, or documents that have been filmed, digitized or otherwise
transformed into electronic form, the reliability of which may depend on the controls over their
preparation and maintenance.
A32.ISA 520 provides further guidance regarding the reliability of data used for purposes of
designing analytical procedures as substantive procedures.[89]
A33.ISA 240 deals with circumstances where the auditor has reason to believe that a document may
not be authentic, or may have been modified without that modification having been disclosed to
the auditor.[90]
A34.ISA 250 (Revised)[91] provides further guidance with respect to the auditor complying with any
additional responsibilities under law, regulation or relevant ethical requirements regarding an
entity's identified or suspected non-compliance with laws and regulations that may provide further
information that is relevant to the auditor's work in accordance with ISAs and evaluating the
implications of such non-compliance in relation to other aspects of the audit.
External Information Sources

A34a.The auditor is required by paragraph 7 to consider the relevance and reliability of information
obtained from an external information source that is to be used as audit evidence, regardless of
whether that information has been used by the entity in preparing the financial statements or
obtained by the auditor. For information obtained from an external information source, that
consideration may, in certain cases, include audit evidence about the external information source
or the preparation of the information by the external information source, obtained through
designing and performing further audit procedures in accordance with ISA 330 or, where
applicable, ISA 540 (Revised).[92]
A34b.Obtaining an understanding of why management or, when applicable, a management's expert

uses an external information source, and how the relevance and reliability of the information was
considered (including its accuracy and completeness), may help to inform the auditor's
consideration of the relevance and reliability of that information.
A34c.The following factors may be important when considering the relevance and reliability of
information obtained from an external information source, including its accuracy and
completeness, taking into account that some of these factors may only be relevant when the
information has been used by management in preparing the financial statements or has been
obtained by the auditor:
• The nature and authority of the external information source. For example, a central bank or
government statistics office with a legislative mandate to provide industry information to the
public is likely to be an authority for certain types of information;
• The ability to influence the information obtained, through relationships between the entity and
the information source;
• The competence and reputation of the external information source with respect to the
information, including whether, in the auditor's professional judgment, the information is
routinely provided by a source with a track record of providing reliable information;
• Past experience of the auditor with the reliability of the information provided by the external
information source;
• Evidence of general market acceptance by users of the relevance and/or reliability of
information from an external information source for a similar purpose to that for which the
information has been used by management or the auditor;
• Whether the entity has in place controls to address the relevance and reliability of the
information obtained and used;
• Whether the external information source accumulates overall market information or engages
directly in "setting" market transactions;
• Whether the information is suitable for use in the manner in which it is being used and, if
applicable, was developed taking into account the applicable financial reporting framework;
• Alternative information that may contradict the information used;
• The nature and extent of disclaimers or other restrictive language relating to the information
obtained;
• Information about the methods used in preparing the information, how the methods are being
applied including, where applicable, how models have been used in such application, and the
controls over the methods; and
• When available, information relevant to considering the appropriateness of assumptions and
other data applied by the external information sources in developing the information
obtained.
A34d.The nature and extent of the auditor's consideration takes into account the assessed risks of
material misstatement at the assertion level to which the use of the external information is
relevant, the degree to which the use of that information is relevant to the reasons for the
assessed risks of material misstatement and the possibility that the information from the external
information source may not be reliable (for example, whether it is from a credible source). Based
on the auditor's consideration of the matters described in paragraph A34a, the auditor may
determine that further understanding of the entity and its environment, including its internal control,
is needed, in accordance with ISA 315, or that further audit procedures, in accordance with ISA
330[93], and ISA 540 (Revised)[94]when applicable, are appropriate in the circumstances, to
respond to the assessed risks of material misstatement related to the use of information from an
external information source. Such procedures may include:
• Performing a comparison of information obtained from the external information source with
information obtained from an alternative independent information source.
• When relevant to considering management's use of an external information source, obtaining
an understanding of controls management has in place to consider the reliability of the
information from external information sources, and potentially testing the operating
effectiveness of such controls.
• Performing procedures to obtain information from the external information source to
understand its processes, techniques, and assumptions, for the purposes of identifying,
understanding and, when relevant, testing the operating effectiveness of its controls.
A34e.In some situations, there may be only one provider of certain information, for example,
information from a central bank or government, such as an inflation rate, or a single recognized
industry body. In such cases, the auditor's determination of the nature and extent of audit
procedures that may be appropriate in the circumstances is influenced by the nature and
credibility of the source of the information, the assessed risks of material misstatement to which
that external information is relevant, and the degree to which the use of that information is relevant
to the reasons for the assessed risk of material misstatement. For example, when the information
is from a credible authoritative source, the extent of the auditor's further audit procedures may be
less extensive, such as corroborating the information to the source's website or published
information. In other cases, if a source is not assessed as credible, the auditor may determine
that more extensive procedures are appropriate and, in the absence of any alternative
independent information source against which to compare, may consider whether performing
procedures to obtain information from the external information source, when practical, is
appropriate in order to obtain sufficient appropriate audit evidence.
A34f.When the auditor does not have a sufficient basis with which to consider the relevance and
reliability of information from an external information source, the auditor may have a limitation on
scope if sufficient appropriate audit evidence cannot be obtained through alternative procedures.
Any imposed limitation on scope is evaluated in accordance with the requirements of ISA 705
(Revised).[95]
Reliability of Information Produced by a Management's Expert (Ref: Para.

8)
A35.The preparation of an entity's financial statements may require expertise in a field other than
accounting or auditing, such as actuarial calculations, valuations, or engineering data. The entity
may employ or engage experts in these fields to obtain the needed expertise to prepare the
financial statements. Failure to do so when such expertise is necessary increases the risks of
material misstatement.
A36.When information to be used as audit evidence has been prepared using the work of a
management's expert, the requirement in paragraph 8 of this ISA applies. For example, an
individual or organization may possess expertise in the application of models to estimate the fair
value of securities for which there is no observable market. If the individual or organization
applies that expertise in making an estimate which the entity uses in preparing its financial
statements, the individual or organization is a management's expert and paragraph 8 applies. If,
on the other hand, that individual or organization merely provides price data regarding private
transactions not otherwise available to the entity which the entity uses in its own estimation
methods, such information, if used as audit evidence, is subject to paragraph 7 of this ISA, but
isbeing information from an external information source and not the use of a management's
expert by the entity.
A37.The nature, timing and extent of audit procedures in relation to the requirement in paragraph 8 of
this ISA, may be affected by such matters as:
• The nature and complexity of the matter to which the management's expert relates.
• The risks of material misstatement in the matter.
• The availability of alternative sources of audit evidence.
• The nature, scope and objectives of the management's expert's work.
• Whether the management's expert is employed by the entity, or is a party engaged by it to
provide relevant services.
• The extent to which management can exercise control or influence over the work of the
management's expert.
• Whether the management's expert is subject to technical performance standards or other
professional or industry requirements.
• The nature and extent of any controls within the entity over the management's expert's work.
• The auditor's knowledge and experience of the management's expert's field of expertise.
• The auditor's previous experience of the work of that expert.
The Competence, Capabilities and Objectivity of a Management's Expert

(Ref: Para. 8(a))
A38.Competence relates to the nature and level of expertise of the management's expert. Capability
relates the ability of the management's expert to exercise that competence in the circumstances.
Factors that influence capability may include, for example, geographic location, and the
availability of time and resources. Objectivity relates to the possible effects that bias, conflict of
interest or the influence of others may have on the professional or business judgment of the
management's expert. The competence, capabilities and objectivity of a management's expert,
and any controls within the entity over that expert's work, are important factors in relation to the
reliability of any information produced by a management's expert.
A39.Information regarding the competence, capabilities and objectivity of a management's expert

may come from a variety of sources, such as:
• Personal experience with previous work of that expert.
• Discussions with that expert.
• Discussions with others who are familiar with that expert's work.
• Knowledge of that expert's qualifications, membership of a professional body or industry
association, license to practice, or other forms of external recognition.
• Published papers or books written by that expert.
• An auditor's expert, if any, who assists the auditor in obtaining sufficient appropriate audit
evidence with respect to information produced by the management's expert.
A40.Matters relevant to evaluating the competence, capabilities and objectivity of a management's

expert include whether that expert's work is subject to technical performance standards or other
professional or industry requirements, for example, ethical standards and other membership
requirements of a professional body or industry association, accreditation standards of a
licensing body, or requirements imposed by law or regulation.
A41.Other matters that may be relevant include:

• The relevance of the management's expert's competence to the matter for which that expert's
work will be used, including any areas of specialty within that expert's field. For example, a
particular actuary may specialize in property and casualty insurance, but have limited
expertise regarding pension calculations.
• The management's expert's competence with respect to relevant accounting requirements,
for example, knowledge of assumptions and methods, including models where applicable,
that are consistent with the applicable financial reporting framework.
• Whether unexpected events, changes in conditions, or the audit evidence obtained from the
results of audit procedures indicate that it may be necessary to reconsider the initial
evaluation of the competence, capabilities and objectivity of the management's expert as the
audit progresses.
A42.A broad range of circumstances may threaten objectivity, for example, self-interest threats,
advocacy threats, familiarity threats, self-review threats and intimidation threats. Safeguards may
reduce such threats, and may be created either by external structures (for example, the
management's expert's profession, legislation or regulation), or by the management's expert's
work environment (for example, quality control policies and procedures).
A43.Although safeguards cannot eliminate all threats to a management's expert's objectivity, threats
such as intimidation threats may be of less significance to an expert engaged by the entity than to
an expert employed by the entity, and the effectiveness of safeguards such as quality control
policies and procedures may be greater. Because the threat to objectivity created by being an
employee of the entity will always be present, an expert employed by the entity cannot ordinarily
be regarded as being more likely to be objective than other employees of the entity.
A44.When evaluating the objectivity of an expert engaged by the entity, it may be relevant to discuss
with management and that expert any interests and relationships that may create threats to the
expert's objectivity, and any applicable safeguards, including any professional requirements that
apply to the expert; and to evaluate whether the safeguards are adequate. Interests and
relationships creating threats may include:
• Financial interests.
• Business and personal relationships.
• Provision of other services.
Obtaining an Understanding of the Work of the Management's Expert (Ref:

Para. 8(b))
A45.An understanding of the work of the management's expert includes an understanding of the
relevant field of expertise. An understanding of the relevant field of expertise may be obtained in
conjunction with the auditor's determination of whether the auditor has the expertise to evaluate
the work of the management's expert, or whether the auditor needs an auditor's expert for this
purpose.[96]
A46.Aspects of the management's expert's field relevant to the auditor's understanding may include:
• Whether that expert's field has areas of specialty within it that are relevant to the audit.
• Whether any professional or other standards, and regulatory or legal requirements apply.
• What assumptions and methods are used by the management's expert, and whether they are
generally accepted within that expert's field and appropriate for financial reporting purposes.
• The nature of internal and external data or information the management's expert uses.
A47.In the case of a management's expert engaged by the entity, there will ordinarily be an
engagement letter or other written form of agreement between the entity and that expert.
Evaluating that agreement when obtaining an understanding of the work of the management's
expert may assist the auditor in determining the appropriateness of the following for the auditor's
purposes:
• The nature, scope and objectives of that expert's work;
• The respective roles and responsibilities of management and that expert; and
• The nature, timing and extent of communication between management and that expert,
including the form of any report to be provided by that expert.
A48.In the case of a management's expert employed by the entity, it is less likely there will be a
written agreement of this kind. Inquiry of the expert and other members of management may be
the most appropriate way for the auditor to obtain the necessary understanding
Evaluating the Appropriateness of the Management's Expert's Work (Ref:

Para. 8(c))
A49.Considerations when evaluating the appropriateness of the management's expert's work as
audit evidence for the relevant assertion may include:
• The relevance and reasonableness of that expert's findings or conclusions, their consistency
with other audit evidence, and whether they have been appropriately reflected in the financial
statements;
• If that expert's work involves use of significant assumptions and methods, the relevance and
reasonableness of those assumptions and methods; and
• If that expert's work involves significant use of source data the relevance, completeness, and
accuracy of that source data; and
• If that expert's work involves the use of information from an external information source, the
relevance and reliability of that information.
Information Produced by the Entity and Used for the Auditor's Purposes
(Ref: Para. 9(a)–(b))
A50.In order for the auditor to obtain reliable audit evidence, information produced by the entity that is
used for performing audit procedures needs to be sufficiently complete and accurate. For
example, the effectiveness of auditing revenue by applying standard prices to records of sales
volume is affected by the accuracy of the price information and the completeness and accuracy of
the sales volume data. Similarly, if the auditor intends to test a population (for example,
payments) for a certain characteristic (for example, authorization), the results of the test will be
less reliable if the population from which items are selected for testing is not complete.
A51.Obtaining audit evidence about the accuracy and completeness of such information may be
performed concurrently with the actual audit procedure applied to the information when obtaining
such audit evidence is an integral part of the audit procedure itself. In other situations, the auditor
may have obtained audit evidence of the accuracy and completeness of such information by
testing controls over the preparation and maintenance of the information. In some situations,
however, the auditor may determine that additional audit procedures are needed.
A52.In some cases, the auditor may intend to use information produced by the entity for other audit
purposes. For example, the auditor may intend to make use of the entity's performance measures
for the purpose of analytical procedures, or to make use of the entity's information produced for
monitoring activities, such as reports of the internal audit function. In such cases, the
appropriateness of the audit evidence obtained is affected by whether the information is
sufficiently precise or detailed for the auditor's purposes. For example, performance measures
used by management may not be precise enough to detect material misstatements.
Selecting Items for Testing to Obtain Audit Evidence (Ref: Para. 10)
A53.An effective test provides appropriate audit evidence to an extent that, taken with other audit
evidence obtained or to be obtained, will be sufficient for the auditor's purposes. In selecting
items for testing, the auditor is required by paragraph 7 to determine the relevance and reliability
of information to be used as audit evidence; the other aspect of effectiveness (sufficiency) is an
important consideration in selecting items to test. The means available to the auditor for selecting
items for testing are:
(a) Selecting all items (100% examination);
(b) Selecting specific items; and
(c) Audit sampling.
The application of any one or combination of these means may be appropriate depending on the
particular circumstances, for example, the risks of material misstatement related to the assertion
being tested, and the practicality and efficiency of the different means.
Selecting All Items

A54.The auditor may decide that it will be most appropriate to examine the entire population of items
that make up a class of transactions or account balance (or a stratum within that population).
100% examination is unlikely in the case of tests of controls; however, it is more common for tests
of details. 100% examination may be appropriate when, for example:
• The population constitutes a small number of large value items;
• There is a significant risk and other means do not provide sufficient appropriate audit
evidence; or
• The repetitive nature of a calculation or other process performed automatically by an
information system makes a 100% examination cost effective.
Selecting Specific Items

A55.The auditor may decide to select specific items from a population. In making this decision,
factors that may be relevant include the auditor's understanding of the entity, the assessed risks
of material misstatement, and the characteristics of the population being tested. The judgmental
selection of specific items is subject to non-sampling risk. Specific items selected may include:
• High value or key items. The auditor may decide to select specific items within a population
because they are of high value, or exhibit some other characteristic, for example, items that
are suspicious, unusual, particularly risk-prone or that have a history of error.
• All items over a certain amount. The auditor may decide to examine items whose recorded
values exceed a certain amount so as to verify a large proportion of the total amount of a
class of transactions or account balance.
• Items to obtain information. The auditor may examine items to obtain information about
matters such as the nature of the entity, or the nature of transactions.
A56.While selective examination of specific items from a class of transactions or account balance will
often be an efficient means of obtaining audit evidence, it does not constitute audit sampling. The
results of audit procedures applied to items selected in this way cannot be projected to the entire
population; accordingly, selective examination of specific items does not provide audit evidence
concerning the remainder of the population.
Audit Sampling
A57.Audit sampling is designed to enable conclusions to be drawn about an entire population on the
basis of testing a sample drawn from it. Audit sampling is discussed in ISA 530.[97]
Inconsistency in, or Doubts over Reliability of, Audit Evidence (Ref:

Para. 11)
A58.Obtaining audit evidence from different sources or of a different nature may indicate that an
individual item of audit evidence is not reliable, such as when audit evidence obtained from one
source is inconsistent with that obtained from another. This may be the case when, for example,
responses to inquiries of management, internal auditors, and others are inconsistent, or when
responses to inquiries of those charged with governance made to corroborate the responses to
inquiries of management are inconsistent with the response by management. ISA 230 includes a
specific documentation requirement if the auditor identified information that is inconsistent with
the auditor's final conclusion regarding a significant matter.[98]
73ISA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures
Environment
75 ISA 570 (Revised), Going Concern
76 ISA 520, Analytical Procedures
77 ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International
Standards on Auditing
79 ISA 402, Audit Considerations Relating to an Entity Using a Service Organization, paragraph 8.
80ISA 620, Using the Work of an Auditor's Expert, paragraph 6
81International Financial Reporting Standards 7 (IFRS), Financial Instruments: Disclosures
86 ISA 501, Audit Evidence—Specific Considerations for Selected Items
87 ISA 505, External Confirmations
88 ISA 580, Written Representations
89 ISA 520, paragraph 5(a)
90 ISA 240, The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements, paragraph 14
91 ISA 250 (Revised), Consideration of Laws and Regulations in an Audit of Financial Statements, paragraph 9
92ISA 540 (Revised), Auditing Accounting Estimates and Disclosures
93ISA 330, paragraph 6
94ISA 540 (Revised), paragraph 30
95ISA 705 (Revised), Modifications to the Opinion in the Independent Auditor's Report, paragraph 13
96 ISA 620, Using the Work of an Auditor's Expert, paragraph 7
97 ISA 530, Audit Sampling
98 ISA 230, Audit Documentation, paragraph 11
Appendix 1 List of ISAs Containing Requirements for Written Representations
ISA 580, Written

RepresentationsAppendix 1List of
ISAs Containing Requirements for
Written Representations
(Ref: Para. 2)
This appendix identifies paragraphs in other ISAs that require subject-matter specific written
representations. The list is not a substitute for considering the requirements and related application
and other explanatory material in ISAs.
• ISA 240, The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements –
paragraph 40
• ISA 250 (Revised), Consideration of Laws and Regulations in an Audit of Financial Statements
– paragraph 17
• ISA 450, Evaluation of Misstatements Identified during the Audit – paragraph 14
• ISA 501, Audit Evidence—Specific Considerations for Selected Items – paragraph 12
• ISA 540 (Revised), Auditing Accounting Estimates, Including Fair Value Accounting Estimates,
and Related Disclosures – paragraph 2237
• ISA 550, Related Parties – paragraph 26
• ISA 560, Subsequent Events – paragraph 9
• ISA 570 (Revised), Going Concern – paragraph 16(e)
• ISA 710, Comparative Information—Corresponding Figures and Comparative Financial

Statements – paragraph 9
ISA 720 (Revised), The Auditor's Responsibilities Relating to Other Information – paragraph
13(c)
Appendix 2 Illustrative Representation Letter
Appendix 2Illustrative Representation

Letter
(Ref: Para. A21)
The following illustrative letter includes written representations that are required by this and other
ISAs. It is assumed in this illustration that the applicable financial reporting framework is International
Financial Reporting Standards; the requirement of ISA 570 (Revised)[99] to obtain a written
representation is not relevant; and that there are no exceptions to the requested written
representations. If there were exceptions, the representations would need to be modified to reflect the
exceptions.
(Entity Letterhead)
(To Auditor) (Date)
This representation letter is provided in connection with your audit of the financial statements of ABC
Company for the year ended December 31, 20XX [100] for the purpose of expressing an opinion as to
whether the financial statements are presented fairly, in all material respects, (or give a true and fair
view) in accordance with International Financial Reporting Standards.
We confirm that ( , to the best of our knowledge and belief, having made such inquiries as we
considered necessary for the purpose of appropriately informing ourselves):
Financial Statements
• We have fulfilled our responsibilities, as set out in the terms of the audit engagement dated [insert
date], for the preparation of the financial statements in accordance with International Financial
Reporting Standards; in particular the financial statements are fairly presented (or give a true and
fair view) in accordance therewith.
• Significant The methods, the data, and the significant assumptions used in making accounting
estimates, including those measured at fair value,and their related disclosures are appropriate to
achieve recognition, measurement or disclosure that is reasonable in the context of the applicable
financial reporting framework. (ISA 540 (Revised))
ISA 700 (Revised), Forming an Opinion and Reporting on

Financial Statements
Requirements
Forming an Opinion on the Financial Statements

13. In particular, the auditor shall evaluate whether, in view of the requirements of the applicable
financial reporting framework:
(a) The financial statements appropriately disclose the significant accounting policies selected
and applied. In making this evaluation, the auditor shall consider the relevance of the
accounting policies to the entity, and whether they have been presented in an understandable
manner; (Ref: Para. A4)
(b) The accounting policies selected and applied are consistent with the applicable financial
reporting framework and are appropriate;
(c) The accounting estimates and related disclosures made by management are reasonable;
(d) The information presented in the financial statements is relevant, reliable, comparable, and
understandable. In making this evaluation, the auditor shall consider whether:
• The information that should have been included has been included, and whether such
information is appropriately classified, aggregated or disaggregated, and characterized.
• The overall presentation of the financial statements has been undermined by including
information that is not relevant or that obscures a proper understanding of the matters
disclosed. (Ref: Para. A5)
(e) The financial statements provide adequate disclosures to enable the intended users to
understand the effect of material transactions and events on the information conveyed in the
financial statements; and (Ref: Para. A6)
(f) The terminology used in the financial statements, including the title of each financial statement,
is appropriate.
ISA 701, Communicating Key Audit Matters in the

Independent Auditor's Report
Requirements
Determining Key Audit Matters

9. The auditor shall determine, from the matters communicated with those charged with governance,
those matters that required significant auditor attention in performing the audit. In making this
determination, the auditor shall take into account the following: (Ref: Para. A9–A18)
(a) Areas of higher assessed risk of material misstatement, or significant risks identified in
accordance with ISA 315 (Revised). (Ref: Para. A19–A22)
(b) Significant auditor judgments relating to areas in the financial statements that involved
significant management judgment, including accounting estimates that have are subject
tobeen identified as havinga high degree of estimation uncertainty. (Ref: Para. A23–A24)
(c) The effect on the audit of significant events or transactions that occurred during the period.
(Ref: Para. A25–A26)
Determining Key Audit Matters (Ref: Para. 9–10)
Considerations in Determining Those Matters that Required Significant

Auditor Attention (Ref: Para. 9)
Significant Auditor Judgments Relating to Areas in the Financial Statements that Involved Significant
Management Judgment, Including Accounting Estimates that Have Been Identified as HavingAre
Subject to a High Degree of Estimation Uncertainty (Ref: Para. 9(b))
A23.ISA 260 (Revised) requires the auditor to communicate with those charged with governance the
auditor's views about significant qualitative aspects of the entity's accounting practices, including
accounting policies, accounting estimates and financial statement disclosures.[101] In many cases,
this relates to critical accounting estimates and related disclosures, which are likely to be areas of
significant auditor attention, and also may be identified as significant risks.
A24.However, users of the financial statements have highlighted their interest in accounting estimates
that have are subject to abeen identified as havinghigh degree of estimation uncertainty (seein
accordance with ISA 540 (Revised)[102]) that may have not been determined to be significant
risks. Among other things, such estimates are highly dependent on management judgment and
are often the most complex areas of the financial statements, and may require the involvement of
both a management's expert and an auditor's expert. Users have also highlighted that accounting
policies that have a significant effect on the financial statements (and significant changes to those
policies) are relevant to their understanding of the financial statements, especially in
circumstances where an entity's practices are not consistent with others in its industry.
99 ISA 570 (Revised), Going Concern
100 Where the auditor reports on more than one period, the auditor adjusts the date so that the letter pertains to all periods
covered by the auditor's report.
102 See paragraphs 160–171 of ISA 540 (Revised), Auditing Accounting Estimates, Including Fair Value Accounting Estimates,
and Related Disclosures.
Basis for Conclusions Prepared by the Staff of the IAASB
Basis for Conclusions Prepared by the

Staff of the IAASB
This Basis for Conclusions has been prepared by Staff of the International Auditing and Assurance
Standards Board (IAASB). It relates to, but does not form part of, ISA 540 (Revised), Auditing
Accounting Estimates and Related Disclosures, or the conforming and consequential amendments
to other International Standards.
ISA 540 (Revised) and the conforming and consequential amendments to other International
Standards were approved with the affirmative votes of 17 out of 18 IAASB members present for the
vote at the June 2018 meeting. [2]
[1]
Introduction
Background
1. The project to revise ISA 540[3] started with the IAASB consultations in developing its Strategy for
2015–2019: Fulfilling Our Public Interest Mandate in an Evolving World[4] and related Work
Plan for 2015–2016: Enhancing Audit Quality and Preparing for the Future.[5] These
consultations indicated a need for the IAASB to take action to address issues relevant to the
application of ISA 540 in audits of financial institutions, as well as more broadly. In addition,
findings from the IAASB's post-implementation review of the clarified ISAs[6] indicated areas in
which clearer or additional requirements or guidance were needed to enable auditors to
appropriately deal with increasingly complex accounting estimates and related disclosures. The
input from the IAASB's consultations, along with reports of inspection findings from audit
regulatory bodies noting consistent issues with respect to auditing accounting estimates,
highlighted this as a key area where enhanced standards were needed to drive improved audit
performance.
2. Since early 2015, the IAASB has undertaken outreach activities to identify issues regarding the
auditing of accounting estimates for financial institutions and other entities. The outreach
indicated that regulators and auditors of financial institutions were of the view that the IAASB
should focus on the issues for audits of financial institutions arising from IFRS 9,[7] ahead of its
effective date for financial statements for annual periods beginning on or after January 1, 2018,
and a similar accounting standard-setting project being conducted by the United States Financial
Accounting Standards Board. These standards adopt expected credit loss models for loan loss
provisions, which fundamentally changes the way that banks and other entities will account for
their loan assets and other credit exposures.
3. After considering the input from key stakeholders, including the IAASB Consultative Advisory
Group, the IAASB concluded that most, if not all, of the issues identified with respect to expected
credit losses would be equally relevant when auditing other complex accounting estimates.
Accordingly, it was concluded that a holistic revision of ISA 540 should be undertaken as a matter
of priority.
4. The IAASB approved a project proposal[8] to revise ISA 540 in December 2015 with the following
objectives:
• Propose revisions to ISA 540, establishing more robust requirements and appropriately
detailed guidance to foster audit quality by driving auditors to perform appropriate
procedures in relation to accounting estimates and related disclosures. It is anticipated that
these revisions would also seek to emphasize the importance of the appropriate application
of professional skepticism when auditing accounting estimates.
• Determine whether non-authoritative guidance and support tools, such as IAPNs,[9] Staff
publications,[10] project updates or other materials, should be developed in the future to
address special audit considerations relevant to financial institutions[11] to supplement the
revisions to ISA 540 and oversee the development of the guidance material considered
necessary.
5. The Task Force issued a project update[12] in early 2016 to summarize the audit challenges
identified with respect to expected credit losses and set out initial thinking on how these
challenges may be addressed under the current ISAs.
6. In its March 2017 meeting, the IAASB approved proposed ISA 540 (Revised)[13] (ED-540) for
public exposure, including related conforming and consequential amendments to other
International Standards. ED-540 was issued on April 20, 2017 for comment by August 1, 2017.
Comment letters were received from 69 respondents, including investors and analysts, those
charged with governance, regulators and audit oversight authorities, national auditing standard
setters, accounting firms, public sector organizations, preparers, International Federation of
Accountants (IFAC) Member Bodies and other professional organizations, academics and
individuals. Responses were received from four Monitoring Group members.[14]
ISA 315 (Revised)

[15]
7. In 2016, the IAASB commenced a project to revise ISA 315 (Revised), an important building
block to Enhancing Audit Quality, which resulted in the publication of an Exposure Draft (ED) in
July 2018 (ED-315).[16] In developing its Work Plan for 2015-2016, the IAASB recognized that
close coordination would be needed with the project to revise ISA 540 because the auditor's risk
assessment procedures in relation to accounting estimates are an extension of those required by
ISA 315 (Revised). The IAASB also acknowledged that the revisions to ISA 540 needed to
progress at a faster pace based on input from stakeholders, and therefore agreed that close
coordination between the projects was necessary to keep the revisions to the respective
standards in alignment.
8. In August 2018, the IAASB issued a supplemental, but related, ED, ISA 315 (Revised),
Identifying and Assessing the Risks of Material Misstatement—Proposed Conforming
Amendments to ISA 540 (Revised) and ISA 200 (Paragraph A42).[17] This ED contains
proposed changes that are indicative of those that would be necessary to conform the relevant
requirements and application material paragraphs in ISA 540 (Revised) to the changes that have
been proposed in ED-315. The two project Task Forces coordinated closely to minimize the
extent of conforming changes to ISA 540 (Revised). As a result, the proposed conforming
amendments to ISA 540 (Revised) that have been exposed for comment are generally limited to
aligning concepts and terminology and do not change the performance requirements in ISA 540
(Revised).
Public Interest Issues

9. The table below shows the public interest outcomes identified by the IAASB in the project
proposal and the subsequent decisions made to enhance the standard in the public interest,
taking into account the comments received in response to ED-540 (paragraph references in this
table are to ISA 540 (Revised)).
Public Interest Issues IAASB Decisions
Addressing evolving audit The IAASB responded by:

risks relating to
accounting estimates, due • Introducing the concept of inherent risk factors,
to a more complex including not only estimation uncertainty but also
business environment complexity, subjectivity and others (paragraphs 2, 4,
and 16).
• Audit risks relating to
accounting estimates are • Addressing the nature and extent of oversight and
evolving and increasing governance that the entity has in place over
because: management's process for making accounting
○ Financial reporting estimates, in connection with obtaining an
understanding of the entity's internal control (paragraph
frameworks are
13).
evolving in a complex
business
environment, to • Explicitly recognizing a spectrum of inherent risk
require more (paragraph 4), and requiring a separate assessment of
inherent risk and control risk (paragraph 16).
complex accounting
estimates with high Assessing inherent risk, and determining whether a risk
estimation is a significant risk (paragraph 17), involves
uncertainty (e.g., considering the effect of the inherent risk factors and
their inter-relationships.
IFRS 9); and
○ Complex accounting
• Referring to relevant requirements in ISA 315 (Revised)
estimates are
and ISA 330[18] emphasizing the importance of the
becoming more
auditor's decisions about controls relating to
prevalent generally
accounting estimates (paragraphs 19 and 20).
and are now a
fundamental part of
• With respect to external information sources, making
the financial
conforming and consequential amendments to the
statements for some
definitions, requirements and application material in
entities.
ISA 500.[19] The IAASB clarified that, in obtaining audit
• Audit risks may arise evidence regarding the risks of material misstatement
because such accounting relating to accounting estimates, and irrespective of the
estimates require: sources of information to be used as audit evidence,

the auditor also is required to comply with the relevant
○ Significant
requirements in ISA 500 (paragraph 30).
management
judgment, with
• Introducing objectives-based requirements directed to
potential for
methods (including specifically when complex
management bias
modelling is involved), data and assumptions, to design
and fraud in making
and perform further audit procedures and to respond to
such accounting
assessed risks of material misstatement. The further
estimates;
audit procedures need to be responsive to the
○ Use of more forward- assessed risks of material misstatement at the
looking information in assertion level, taking into account the effect of one or
making such more inherent risk factors and the auditor's assessment
accounting estimates of control risk (paragraphs 7, 19, 22-25).
and more related
disclosures about • With respect to disclosures:
such information; and
○ Changing the objective of the standard to obtain
○ More disclosures
sufficient appropriate audit evidence about whether
about the
"accounting estimates and related disclosures" in
measurement basis,
the financial statements are "reasonable" in the
estimation
context of the applicable financial reporting
uncertainty, data and
framework (the objective in extant ISA 540 is that
assumptions relating
related disclosures are "adequate") (paragraph
to such accounting
11).
estimates.
○ Enhancing the requirements to obtain audit
• Issues of concern to evidence about whether the related disclosures are
financial regulators have "reasonable" (paragraphs 26(b), 29(b) and 31).
arisen, in a financial ○ Enhancing the overall evaluation requirements to
stability context, because determine whether the related disclosures are
making complex "reasonable" in the context of the applicable
accounting estimates financial reporting framework, or are misstated
may require complex (paragraph 35).
business processes
(e.g., in the financial • Providing extensive new and revised application
services industry), which material supporting the requirements.
may give rise to risks
relating to the need for:
○ Reliance on
technology to make
such accounting
estimates,
particularly when they
require large volumes
of system-generated
data; and
○ Reliance on greater
oversight by
management and
governance in using
complex models.
• Responding to the
evolving audit risks may
require a greater focus
on the importance of
testing the operating

effectiveness of relevant
controls for accounting
estimates.
Addressing audit quality The IAASB responded by:

for accounting estimates
and fostering improved • Enhancing the risk assessment procedures relating to
exercise of professional obtaining an understanding of the entity and its
skepticism environment, including the entity's internal control
(paragraph 13).
• Inspection findings raise
significant concerns • Including a requirement to design and perform further
about audit quality for audit procedures in a manner that is not biased
accounting estimates, towards obtaining audit evidence that may be
and a need to address corroborative or towards excluding audit evidence that
this by fostering a more may be contradictory (paragraph 18).
independent and
challenging skeptical • Including more granular, objectives-based,
mindset in auditors. requirements for obtaining audit evidence (paragraphs
21–29).
• Enhancing the requirements to "stand back" and

evaluate the audit evidence obtained regarding the
accounting estimates, including both corroborative and
contradictory audit evidence (paragraphs 33–35.
• Using stronger language to reinforce the importance of

exercising professional skepticism (see, for example,
paragraphs A60, A95, and A135).
Realizing public interest The IAASB responded by:

benefits through improved
communication and • Enhancing the requirement to communicate with those
transparency charged with governance about significant qualitative
aspects of the entity's accounting practices (paragraph
• Public interest benefits to 38).
governance, reporting
and regulation may be • Specifically noting that, in certain circumstances, the
realized through auditor is required by law or regulation to communicate
enhanced: about certain matters with other relevant parties, such
○ Two-way dialogue as regulators and prudential supervisors (paragraph
38).
between the auditor
and those charged
with governance, • Noting in the application material that if the auditor's
about complex consideration of estimation uncertainty associated with
an accounting estimate, and its related disclosures, is
accounting estimates
a matter that required significant auditor attention, then
with high estimation
uncertainty, and this may constitute a key audit matter (paragraph
about control A114).
deficiencies and
changes to reporting
standards for such
accounting
estimates;
○ Communication with
supervisors and
regulators, when
required or in the
public interest; and
○ Communication of
Key Audit Matters
relating to complex
accounting estimates
with high estimation
uncertainty.
10. The Appendix to this document shows how the IAASB addressed the list of public interest issues
related to the project to revise ISA 540 that were provided to the IAASB by the Public Interest
Oversight Board (PIOB). These issues were identified from observation activities by PIOB
members and from analyses carried out by PIOB staff. Most of these issues were raised by PIOB
observers during the course of meetings attended.
Scalability
Background
11. Throughout the development of ED-540, the IAASB had a continuing dialogue with the IFAC
Small and Medium Practices (SMP) Committee and other relevant SMP stakeholders with the
objective of minimizing unnecessary consequences for audits of smaller entities. To support a
scalable application of the standard, ED-540 introduced a threshold to make requirements for
more detailed objectives-based work effort requirements only applicable to accounting estimates
when inherent risk was not assessed as "low." Such conditional requirements were to design and
perform further audit procedures to obtain sufficient appropriate audit evidence about certain
matters relating to methods, assumptions and data when estimation uncertainty, complexity,
judgment were the reasons for assessing inherent risk as other than "low." The required work
effort was therefore intended to be scalable to the nature of the identified and assessed inherent
risk. In designing and performing further audit procedures when inherent risk was assessed as
"low," ED-540 required the auditor to determine whether one or more of three overall testing
strategies would provide sufficient appropriate audit evidence in the circumstances.
Summary of Comments Received on Exposure

12. Overall, many respondents commented that ED-540 was sufficiently scalable, including
expressing support for the use of a threshold of low inherent risk as a way to drive scalability.
Respondents that supported the threshold approach noted that it is not necessary to perform the
same level of work for an accounting estimate with "low" inherent risk as for an accounting
estimate with higher inherent risk. By contrast, other respondents either opposed the threshold, or
expressed various concerns about its practical application and believed that additional
clarification or guidance was needed. Such concerns included whether the threshold was
operable, whether it aligned with other ISAs (including ISA 315 (Revised)), and how to apply it to
material accounting estimates with low inherent risk. Many of those that supported the threshold
also asked for more application material or examples to help assess inherent risk as "low" or
"not low."
13. Those that indicated that ED-540 was not sufficiently scalable often commented that the ED was
too complex or confusing for "simple" accounting estimates, that substantial levels of
documentation would be required, or that the risk assessment requirements (including the
requirements related to obtaining an understanding of internal control) broadly were too onerous
for simple accounting estimates.
IAASB Decisions
14. The IAASB acknowledged that scalability was important, but concluded that it could be provided
without the need for a threshold, which would also address the concerns about how such a
threshold would be applied in practice.
15. To demonstrate that ISA 540 (Revised) is scalable for all types of accounting estimates, from
those that are relatively "simple" to those that are complex, the IAASB decided to:
• Introduce and emphasize a spectrum of inherent risk concept, building on existing concepts
in ISA 200,[20] ISA 315 (Revised), and ISA 330. Under the spectrum of inherent risk concept,
the assessment of inherent risk depends on the degree to which the inherent risk factors
affect the likelihood or magnitude of misstatement, and varies on a scale. The spectrum of
inherent risk concept is explained in paragraph 4 of ISA 540 (Revised);
• Highlight that the nature, timing and extent of the risk assessment and further audit
procedures required by ISA 540 (Revised) will vary in relation to the estimation uncertainty
and the assessment of the related risks of material misstatement associated with the
accounting estimate (paragraph 3);
• Include specific paragraphs in the application material that demonstrate how ISA 540
(Revised) is scalable depending on the risk assessment (paragraphs A20-A23) and the
responses to the assessed risks of material misstatement (paragraph A84);
• Retain the requirement in ED-540 that the auditor's further audit procedures need to be
responsive to the reasons for the assessment of the risks of material misstatement at the
assertion level (paragraph 18) and highlighted this as well in the Key Concepts section;
• Retain the wording from paragraph 7(b) of ISA 330 that the auditor's further audit procedures
shall take into account that the higher the assessed risk of material misstatement, the more
persuasive the audit evidence needs to be (paragraph 18). The IAASB also added
corresponding wording for tests of controls in paragraph 19.
Professional Skepticism
Background
16. The IAASB recognizes the central role that professional skepticism plays in auditing accounting
estimates. Therefore, ED-540 contained several key provisions that were designed to enhance
the auditor's application of professional skepticism, including:
• Enhanced risk assessment requirements that provide a better basis for identifying and
assessing the risks of material misstatement related to accounting estimates;
• More granular, objectives-based requirements to obtain audit evidence about particular
matters when inherent risk is not low; and
• A requirement to "stand back" and consider all audit evidence obtained, whether
corroborative or contradictory, when evaluating whether the accounting estimates and related
disclosures are reasonable in the context of the applicable financial reporting framework, or
are misstated.

17. Respondents generally believed that the approach taken in ED-540 appropriately reinforced the
application of professional skepticism when auditing accounting estimates. Several aspects of
ED-540 were mentioned as key improvements in this regard, including the stand-back provision.
18. Specific comments were received noting that the effective exercise of professional skepticism is
important with respect to the auditor's evaluation of management's judgments relating to
accounting estimates, particularly when those judgments are subjective and there is greater
opportunity for management bias. This involves evaluating whether management's judgments are
appropriate, including whether there is evidence to suggest that other alternatives (e.g., methods,
assumptions or data) may be more appropriate in the circumstances, and questioning or
challenging management when it is appropriate to do so. Accordingly, suggestions were
received for the IAASB to consider the use of words such as "question" or "challenge" in the
requirements to drive appropriate auditor behavior in the audit of accounting estimates, including
the exercise of professional skepticism.
IAASB Decisions
19. Based on the support from respondents for the stand-back requirement with respect to audit
evidence ("consider all evidence obtained, whether corroborative or contradictory"), the IAASB
determined that similar wording also should be included earlier in the requirements section to
enhance professional skepticism in obtaining audit evidence. The IAASB therefore added a
requirement in paragraph 19 to drive auditors to design and perform further audit procedures in a
manner that is not biased towards obtaining audit evidence that may be corroborative or towards
excluding audit evidence that may be contradictory.
20. The IAASB also added application material to indicate that obtaining audit evidence in an
unbiased manner may involve obtaining evidence from multiple sources within and outside the
entity. However, the IAASB does not intend for the auditor to perform an exhaustive search to
identify all possible sources of audit evidence (paragraph A82).
21. The IAASB acknowledged that using terms such as "challenge" or "question" would be
responsive to the calls, particularly from regulators and investors, for stronger language to
reinforce the importance of exercising professional skepticism in auditing accounting estimates.
The IAASB agreed to include terms such as "challenge", "question" and "reconsider" in several
places of ISA 540 (Revised), including:
• Retrospective review (paragraph A60);
• Changes in methods, significant assumptions and the data from prior periods (paragraph
A95);
• Indicators of management bias (paragraph A96); and
• Overall evaluation based on audit procedures performed (paragraphs A137 and A139).
22. The IAASB noted that the structure and flow of the stand-back provisions could be improved
(paragraphs 33–36). Accordingly, the requirement for the auditor to take into account all relevant
audit evidence obtained, whether corroborative or contradictory, has been separated into a new
paragraph (paragraph 34). This paragraph also notes that if the auditor is unable to obtain
sufficient appropriate audit evidence, then the auditor needs to evaluate the implications for the
audit in accordance with ISA 705 (Revised).[21] In addition, the IAASB included, in paragraph 35,
essential application material to highlight how misstatements may be distinguished.
23. The IAASB also considered, and decided against, adding a specific requirement to document
how the auditor exercised professional skepticism with respect to accounting estimates. The
IAASB noted that ISA 230[22] already contains application material indicating that there may be
no single way in which the auditor's professional skepticism is documented. However, the IAASB
decided to make a consequential amendment to paragraph A7 of ISA 230 to provide an example
of how the exercise of professional skepticism could be documented in relation to accounting
estimates and illustrate how professional skepticism could be demonstrated when the auditor
obtains evidence that both corroborates and contradicts management's assertions. In addition,
the IAASB agreed to add application material in ISA 540 (Revised) (paragraph A152) noting
examples of requirements in ISA 540 (Revised), the documentation of which may provide
evidence of the exercise of professional skepticism by the auditor.
Risk assessment
Background
24. The IAASB's outreach indicated that there were possible areas for improvement in extant ISA
540, including improving the consistency in the extent to which auditors obtain an understanding
of the data, assumptions, and methods that are used to make accounting estimates, focusing on
the internal consistency of management assumptions used, and how management has
understood and addressed estimation uncertainty. The IAASB also noted that changes in the
business environment, including the increasing complexity of information systems and the use of
complex modelling, the use of information from external sources, and the importance of the
regulatory environment in certain industries are not adequately emphasized in extant ISA 540. As
a result, the IAASB determined that a key focus for the project was enhancing the risk
assessment requirements for accounting estimates to support professional skepticism and to
better identify risks of material misstatement at an appropriately granular level based on the
enhanced understanding.
25. Paragraph 10 of ED-540 addressed these points through requiring the auditor to obtain an
understanding of:
• The regulatory factors, if any, relevant to accounting estimates;
• The nature of the accounting estimates and related disclosures that the auditor expects to be
included in the entity's financial statements;
• The use of models; the process used to select data, including the source(s) of that data and
how management identifies data; and
• Each of the components of internal control as they relate to accounting estimates.

26. While many respondents supported the IAASB's proposed risk assessment procedures
(paragraph 10 of ED-540), there were concerns about scalability, particularly the requirements
related to obtaining an understanding of internal control, which were considered by some
respondents to be too onerous for simple accounting estimates. Respondents also noted that the
relationship between paragraph 10 of ED-540 and ISA 315 (Revised) was unclear, that the
inherent risk factors should be included in the risk assessment, and that the requirements should
reinforce how management uses methods, data, and assumptions in making the accounting
estimates. There were also concerns about the overall clarity and length of that paragraph.
IAASB Decisions
27. The IAASB agreed with respondents that believed that more needed to be done to clarify how the
risk assessment requirements would be scalable. Accordingly, paragraph 13 of ISA 540
(Revised) now clarifies that the procedures to obtain an understanding of the entity and its
environment, including the entity's internal control, need to be performed to the extent necessary
to provide an appropriate basis for the identification and assessment of the risks of material
misstatement at the financial statement and assertion levels. See paragraphs 14-15 above for
more information on the IAASB's decisions regarding the scalability of ISA 540 (Revised).
28. The IAASB acknowledged that the linkage to ISA 315 (Revised) could be clarified and included
paragraph A19 in ISA 540 (Revised) to explain the relationship. Subheadings have been used in
paragraph 13 of ISA 540 (Revised) to align with the subheadings in ISA 315 (Revised) and some
of the subparagraphs were reordered and edited to better align with ISA 315 (Revised). Due to
the improved alignment with ISA 315 (Revised), the IAASB decided to remove the broad
reference to "each of the components of internal control as they related to making accounting
estimates," to address comments from respondents to ED-540 that this would be too onerous for
simple accounting estimates. Instead, the IAASB decided to build upon other requirements in
paragraph 10 of ED-540 that already addressed obtaining an understanding of the components
of the system of internal control (see, for example, the requirements on control activities relevant
to the audit over management's process for making accounting estimates (paragraph 13(i)) and
how management reviews the outcomes of previous accounting estimates (paragraph 13(j)).
29. The IAASB also acknowledged that ED-540 could have been read to imply that the provisions of
paragraph 10(e) of ED-540 applied to all accounting estimates, regardless of the significance of
the accounting estimate. The IAASB concluded that paragraph 13(h) of ISA 540 (Revised) should
have the same scope as the equivalent requirements in ISA 315 (Revised),[23] as this would
clarify that the required risk assessment procedures would apply only to classes of transactions,
events and conditions that are significant to the financial statements and that give rise to the need
for, or changes in, accounting estimates and related disclosures, rather than to all accounting
estimates.
30. The application material to this section was amended to align with the new structure of paragraph
13. The IAASB also streamlined this application material to reduce complexity, with certain
material being repurposed as guidance for the introduction or the work effort paragraphs of ISA
540 (Revised).
Inherent Risk Factors
Background
31. Extant ISA 540 focuses specifically on estimation uncertainty with respect to the identification and
assessment of the risks of material misstatement. Outreach performed by the IAASB indicated
that there may be other factors that influence the risks of material misstatement in relation to an
accounting estimate. Therefore, in identifying and assessing risks of material misstatement in
relation to an accounting estimate, ED-540 required the auditor to take into account the extent to
which the accounting estimates is subject to, or affected by, one or more relevant factors,
including:
• Complexity;
• The need for the use of judgment by management; and
• Estimation uncertainty.

32. Generally, respondents to ED-540 supported the inherent risk factors, specifically the
consideration of these factors in identifying and assessing the risks of material misstatement.
However, some respondents were of the view that more emphasis should be placed on possible
other inherent risk factors, to align with proposals being developed to revise ISA 315, and also
questioned if alignment in the wording used to describe inherent risk factors could be achieved
both with the proposals to revise ISA 315 and with similar terms used by the United States Public
Company Accounting Oversight Board (PCAOB) in its proposed auditing standard on accounting
estimates.
IAASB Decisions
33. In response to comments received, the IAASB agreed to make the following changes to the
inherent risk factors in the identification and assessment of the risks of material misstatement
relating to accounting estimates and related disclosures:
• Including a reference to other relevant inherent risk factors in the requirement to identify and
assess the risks of material misstatement to place more emphasis on other inherent risk
factors, namely 'change' and the 'susceptibility to misstatement due to management bias or
fraud'. The IAASB specifically highlighted the inherent risk factor 'susceptibility of the
accounting estimate to misstatement due to management bias or fraud' by explaining that:
○ The degree of subjectivity associated with an accounting estimate influences the
susceptibility of the accounting estimate to misstatement due to management bias or

fraud (paragraph A79); and
○ The exercise of professional skepticism is important when there is greater susceptibility
to misstatement due to management bias or fraud (paragraph 8)
• Changing the name of the inherent risk factor 'judgment' to 'subjectivity,' without changing its
nature. By doing so the IAASB aligned the wording with ED-315 and the PCAOB's proposed
standard on auditing accounting estimates.
• Referring to the inherent risk factor 'estimation uncertainty' separately from the other inherent
risk factors by including it in a separate bullet in paragraph 16. The IAASB decided that
estimation uncertainty influences the other inherent risk factors and that referring to it
separately would help to explain its relationship with the other inherent risk factors.
• Adding 'the degree to which …' before the inherent risk factors to reflect scalability by
emphasizing the need to consider the extent to which the accounting estimate is subject to
estimation uncertainty or the extent to which the other inherent risk factors affect susceptibility
to misstatement through linking the effect of the risk factors to the selection of the data,
assumptions, and methods used and the selection of management's point estimate and
disclosures. The relationship between the inherent risk factors and data, assumptions, and
methods is further explained in the application material.
34. To improve clarity of the standard, the IAASB has included the determination of whether any of the
identified risks give rise to a significant risk as a separate requirement (paragraph 17). This
determination is also included as a separate requirement in extant ISA 540.
35. In response to comments received on the interrelationships between inherent risk factors, the
IAASB agreed to better explain the application of the inherent risk factors throughout the
standard, but specifically in the application material to paragraph 16 (paragraphs A64–A79) to
highlight how these factors relate to methods, assumptions and data.
36. In addition, the IAASB clarified the interrelationships among the inherent risk factors by:
• Including references throughout the ISA to Appendix 1, which further explains the nature of the
inherent risk factors of estimation uncertainty, subjectivity and complexity, and their inter-
relationships, in the context of making accounting estimates and selecting management's
point estimate and related disclosures for inclusion in the financial statements (paragraphs
A8, A66);
• Referring to estimation uncertainty separately from the other inherent risk factors (as
described in paragraph 33 above); and
• Explaining the inherent risk factors in the Nature of Accounting Estimates section in the
introduction to the revised standard.
Separate Assessments of Inherent and Control Risk
Background
37. ED-540 focused in several places on the inherent risk factors, including the consideration of
those factors in identifying, assessing and responding to the risks of material misstatement.
Paragraph 15 of ED-540 required the auditor, in applying ISA 330, to design and perform further
audit procedures to respond to the assessed risks of material misstatement, including significant
risks, at the assertion level. Paragraph A94 of ED-540 referenced the requirement in paragraph
7 of ISA 330, which requires the auditor, in designing the further audit procedures to be
performed, to consider the reasons for the assessment given to the risk of material misstatement
at the assertion level, including inherent risk and control risk.
IAASB Decisions
38. Given that the proposed revisions to ISA 315 (Revised) included a separate assessment of
inherent and control risk, the IAASB continued to discuss the separate assessment of inherent
and control risk for accounting estimates in seeking to move away from using a threshold of low
inherent risk and towards emphasizing the spectrum of inherent risk.
39. The IAASB discussed whether the reference to the separate and combined assessments of
inherent and control risk could be removed from ISA 200, but concluded that respondents to ED-
540 did not have the opportunity to comment on making that change, and therefore this should be
addressed in the project to revise ISA 315 (Revised).
40. In discussions about the proposed conforming amendment to paragraph A42 of ISA 200, the
IAASB expressed concerns that the proposed wording may be confusing, given the statement in
that paragraph that the ISAs do not ordinarily refer to inherent risk and control risk separately, but
rather to a combined assessment of the risks of material misstatement. Although some Board
members suggested that any change to ISA 200 should await deliberation as part of the ISA 315
project, the Board was supportive of addressing separate assessments of inherent risk and
control risk more narrowly, in the context of accounting estimates, within the scope of the ISA 540
project.
41. Accordingly, the IAASB agreed to:

• Add an explicit requirement (paragraph 16) for the auditor to separately assess inherent and
control risk in identifying and assessing the risks of material misstatement relating to an
accounting estimate and related disclosures at the assertion level; and
• Make a conforming amendment to paragraph A42 of ISA 200 to highlight this explicit
requirement and to explain that, for ISA 540 (Revised), a separate assessment of inherent
risk and control risk is performed to provide a basis for designing and performing further
audit procedures to respond to the assessed risks of material misstatement, including
significant risks, for accounting estimates.
Work Effort
Background
42. Extant ISA 540 requires the auditor to undertake one or more of four responses to the risks of
material misstatement relating to an accounting estimate:
• Determine whether events occurring up to the date of the auditor's report provide audit
evidence regarding the accounting estimate;
• Test how management made the accounting estimate and the data on which it is based;
• Test the operating effectiveness of the controls over how management made the accounting
estimate, together with appropriate substantive procedures; and
• Develop a point estimate or a range to evaluate management's point estimate.
43. During outreach and the related IAASB discussions in developing ED-540, it was suggested that,
in some cases, auditors may not identify and assess risks of material misstatement relating to
accounting estimates at a sufficiently granular level, which may result in developing and
performing further audit procedures that do not provide sufficient appropriate audit evidence to
address the risks.
44. In response to these concerns, the IAASB chose to develop an approach in ED-540 that:
• Required the auditor to take into account, in designing and performing further audit
procedures, the extent to which accounting estimates are subject to or affected by the
inherent risk factors in order to drive further audit procedures that are more responsive to the
nature and circumstances of the risks of material misstatement.
• Supported scalable application of the standard by introducing more detailed objectives-
based requirements to design and perform further audit procedures to obtain sufficient
appropriate audit evidence about certain matters when inherent risk is not low.
• When inherent risk is low, required the auditor to determine whether one or more of the
following three testing strategies would provide sufficient appropriate audit evidence
regarding the assessed risks of material misstatement:
○ Obtaining audit evidence about events occurring up to the date of the auditor's report;
○ Testing how management made the accounting estimate and the data on which it is
based; and
○ Developing a point estimate or range based on available audit evidence to evaluate
management's point estimate.
• Noted that the auditor's further audit procedures (whether substantive procedures or tests of
controls) have to be responsive to the reasons for the assessment given to the risk of
material misstatement and that the higher the assessed risk of material misstatement, the
more persuasive the audit evidence needs to be. This is intended to remind the auditor of the
obligation under paragraph 7(a) of ISA 330 and reinforce the need for the auditor's
responses to be commensurate with the assessed risks of material misstatement; and
• Reminded the auditor of the need to test the operating effectiveness of controls when the
auditor intends to rely on those controls relating to accounting estimates or when substantive
procedures alone cannot provide sufficient appropriate audit evidence at the assertion level.

45. There were mixed views as to whether the response to the assessed risks of material
misstatement should be based around each inherent risk factor. Some respondents noted that
the interrelationship between the inherent risk factors made it challenging to determine the
appropriate response to the assessed risks of material misstatement because the assessed
risks could relate to one or more inherent risk factors. These respondents believed that
categorizing responses by the inherent risk factors would generally not be consistent with
management's process for making accounting estimates and the auditor's approach to obtaining
audit evidence, as management and the auditor often consider accounting estimates more in
terms of evaluating the methods, assumptions and data used.
46. Respondents to ED-540 variously noted that the work effort requirements may be difficult to apply
in practice, may lead to inconsistencies in application and interpretation, and may result in less
professional judgment and professional skepticism being exercised.
47. Other comments on the structure of the work effort section included that it was unclear:
• Whether the testing strategies for low inherent risk accounting estimates are also applicable
to accounting estimates for which inherent risk is not low.
• Whether, and the extent to which, the objectives-based requirements that apply when inherent
risk is not low may also be applicable for accounting estimates with low inherent risk.
• Why certain requirements were only listed under a single inherent risk factor (e.g., certain
objectives-based requirements for complexity may also be applicable for judgment).
IAASB Decisions
Testing Strategies
48. Given the responses received, the IAASB agreed to reduce the complexity caused by the direct
link between the inherent risk factors and the requirements addressing the response to the
assessed risk of material misstatement. See paragraphs 53-55 below for the IAASB's decisions
in this regard.
49. The IAASB concluded that the clarity of the standard would be enhanced by including the testing
strategies in a separate requirement that applies to all accounting estimates. This approach is
similar to extant ISA 540, and also would be consistent with the approach proposed by the
PCAOB. The IAASB also explained in the application material that one or a combination of the
testing strategies can be selected in responding to the assessed risk of material misstatement
(paragraph A81).
Controls Testing
50. Given the support for highlighting the ISA 330 requirement to test the operating effectiveness of
controls when the auditor intends to rely on those controls or when substantive procedures alone
cannot provide sufficient appropriate audit evidence at the assertion level, the IAASB decided to
retain the requirement (paragraph 19) and enhance it by adding that:
• The design and performance of tests of relevant controls shall be responsive to the reasons
for the risks of material misstatement; and
• The auditor shall take into account that the greater the reliance placed on the effectiveness of
a control, the more persuasive the audit evidence needs to be.
These additions are based on paragraph 7 and paragraph 9 of ISA 330, respectively.
51. Given the importance of controls over accounting estimates in some industries, the IAASB
highlighted in the application material to paragraph 19 that in some industries, such as the
financial services industry, management makes extensive use of IT to conduct business and it
may therefore be more likely that there are risks related to certain accounting estimates for which
substantive procedures alone cannot provide sufficient appropriate audit evidence.
52. Given the importance of control testing to many stakeholders, the IAASB also highlighted (in
paragraph 20) the existing requirements in paragraph 15 and 21 of ISA 330. Paragraph 20 of ISA
540 (Revised) highlights that for significant risks relating to an accounting estimate, the auditor's
further audit procedures shall include tests of controls in the current period if the auditor plans to
rely on those controls, and that when the approach to a significant risk consists only of substantive
procedures, those procedures shall include tests of details.
Work Effort Paragraphs

53. Given that ISA 540 (Revised) will be used for all accounting estimates, from simple to complex,
and that respondents did not have many comments on the objectives-based requirements
themselves, the IAASB decided that the objectives-based requirements should be retained, but
restructured.
54. The IAASB decided to restructure the objectives-based requirements in the work effort around
the three testing strategies (paragraphs 21-30). The IAASB believes that retaining the objectives-
based requirements under this alternative structure is responsive to stakeholders that supported
the objectives-based approach in ED-540, as well as to those who wanted improvements to the
clarity, understandability, and operability of the standard. The IAASB also noted that this
approach is similar to extant ISA 540 and the PCAOB's proposed standard.
55. The IAASB decided to structure the requirements around methods, assumptions and data
instead of the risk factors (complexity, subjectivity and estimation uncertainty). The IAASB
believes that this structure makes designing the response to risks of material misstatement more
intuitive for the auditor, as it would be more consistent with how management makes the
accounting estimate and how the auditor would obtain audit evidence to address the risks.
Significant Risks
56. The IAASB discussed again whether specific procedures could be required for significant risks,
which would be different from procedures performed for other risks of material misstatement, but
did not identify any. Given the limited number of respondents who raised this point, and in light of
the proposal to drive scalability by highlighting the spectrum of inherent risk (including significant
risks) in the standard, the IAASB did not add specific requirements for significant risks in ISA 540
(Revised).
Developing an Auditor's Range
Background
57. Under extant ISA 540, if the auditor concludes that it is appropriate to develop a range to evaluate
management's point estimate, the auditor is required to narrow the range, based on audit
evidence available, until all outcomes within the range are considered reasonable.
58. The guidance in extant ISA 540 on narrowing the range indicates, among other matters, that the
auditor's range is required to encompass all "reasonable outcomes" rather than all possible
outcomes. It also indicates that a range that has been narrowed to be equal to or less than
performance materiality ordinarily is adequate for evaluating management's point estimate
(although also noting that in some industries it may not be possible to do so). The IAASB
discussed concerns that this approach to "narrowing the range," coupled with a lack of
explanation about what would constitute a "reasonable outcome," could result in an auditor's
range that was inappropriately wide. Therefore, the IAASB agreed not to retain this approach.
59. When the reasons for the assessment given to a risk of material misstatement included
estimation uncertainty, and inherent risk was not low, paragraph 19(a) of ED-540 required the
auditor to obtain sufficient appropriate audit evidence about whether management has taken
appropriate steps to understand and address estimation uncertainty and to develop a point
estimate and related disclosures that are reasonable. If, in the auditor's judgment, management
has not done so, paragraph 19(b) required the auditor, to the extent possible, to develop an
auditor's point estimate or range to enable the auditor to evaluate the reasonableness of
management's point estimate and the related disclosures that describe the estimation
uncertainty.
60. If the auditor concluded that it was appropriate to develop an auditor's range, paragraph 20 of
ED-540 required the auditor to include in that range only amounts that:
• Are supported by the audit evidence; and
• The auditor has evaluated to be reasonable in the context of the measurement objectives and
other requirements of the applicable financial reporting framework.
Summary of comments received on exposure

61. A majority of respondents indicated generally that the requirement in paragraph 20 of ED-540,
along with the related application material, appropriately established how the auditor's range
should be developed, often noting that this will be more effective or a better approach than the
concept of "narrowing the range" in extant ISA 540. Respondents also commented on the need
for additional guidance in this area.
62. Some respondents suggested that the IAASB clarify that paragraph 20 applies in all instances
when the auditor concludes that it is appropriate to develop an auditor's range. The placement of
this requirement in ED-540 suggested to some that it only applied when, in the auditor's
judgment, management had not appropriately understood and addressed estimation uncertainty.
Several respondents further commented that the requirement in paragraph 19(b) and related
application material in ED-540 could lead to concerns about the auditor assuming the
responsibilities of management, or otherwise raise concerns about the auditor's independence.
63. While expressing support for the guidance that, in certain circumstances, the auditor's range may
be multiples of materiality for the financial statements as a whole, respondents had various
suggestions for revising or further clarifying this guidance. These suggestions included explaining
why the auditor's evaluation of the reasonableness of disclosures becomes increasingly
important in these circumstances, and noting that the nature of the estimation uncertainty and the
requirements of the applicable financial reporting framework will be relevant in considering the
disclosures that may be needed.
IAASB decisions
64. The IAASB clarified that developing an auditor's point estimate or range is one of the strategies
that may be selected to respond to the assessed risks of material misstatement at the assertion
level. In addition, similar to extant ISA 540, the auditor is required, to the extent practicable, to
develop an auditor's point estimate or range if the auditor determines that management has not
sufficiently addressed estimation uncertainty.
65. When the auditor develops a point estimate or range to evaluate management's point estimate
and related disclosures about estimation uncertainty, the IAASB required the auditor's further
audit procedures to include procedures to evaluate whether the methods, assumptions or data
used are appropriate in the context of the applicable financial reporting framework. Regardless of
whether the auditor uses management's or the auditor's own methods, assumptions or data,
these further audit procedures are required to be designed and performed to address the
matters in paragraphs 23–25. Application material (paragraph A123) was added to emphasize
that, when using the auditor's own methods, assumptions or data to develop a point estimate or
range, the auditor may obtain evidence about the appropriateness of management's methods,
assumptions or data.
66. The IAASB further discussed and retained the requirement in ED-540 that, if the auditor develops
an auditor's range to evaluate management's point estimate and related disclosures about
estimation uncertainty, the auditor needs to determine that the range includes only amounts that
are supported by sufficient appropriate audit evidence and have been evaluated by the auditor to
be reasonable in the context of the measurement objectives and other requirements of the
applicable financial reporting framework.
67. The IAASB also explained in application material that the requirement to determine that the range
includes "only amounts that are supported by sufficient appropriate audit evidence" does not
mean that the auditor is expected to obtain audit evidence to support each possible outcome in
the range individually. Rather, the auditor is likely to obtain evidence to determine that the points
at both ends of the range are reasonable in the circumstances, thereby supporting that amounts
falling between those two points also are reasonable.
68. With respect to the size of the auditor's range being multiples of materiality for the financial
statements as a whole, the IAASB expanded the application material (paragraph A125) to clarify
that:
(i) This situation is more likely to arise in circumstances when the estimation uncertainty
associated with the accounting estimate is itself multiples of materiality, which is more
common for certain types of accounting estimates or in certain industries, such as insurance
or banking, where a high degree of estimation uncertainty is more typical and there may be
specific requirements in the applicable financial reporting framework in that regard.
(ii) When the auditor concludes, based on the procedures performed and audit evidence
obtained, that a range that is multiples of materiality is, in the auditor's judgment, appropriate
in the circumstances, the auditor's evaluation of the reasonableness of the disclosures about
estimation uncertainty becomes increasingly important, particularly whether such disclosures
appropriately convey the high degree of estimation uncertainty and the range of possible
outcomes.
(iii) The considerations in paragraphs A139-A144 also may be relevant in these circumstances.
In particular, when the audit evidence supports a range that is multiples of materiality, the
exercise of professional skepticism is important in determining whether management's point
estimate and related disclosures are reasonable, or are misstated. Although a wide range
may be appropriate in the circumstances, it may indicate that it is important for the auditor to
reconsider whether sufficient appropriate audit evidence has been obtained regarding the
reasonableness of the amounts within the range.
69. To address concerns raised by respondents about the auditor assuming the responsibilities of
management, or otherwise creating threats to the auditor's independence, the IAASB

restructured paragraph 19(b) of ED-540. A requirement was added for the auditor to first request
management to perform additional procedures when, in the auditor's judgment based on the
audit evidence obtained, management has not taken appropriate steps to understand or address
estimation uncertainty. The IAASB also added application material (paragraph A116) indicating
that, in considering whether it is practicable to develop an auditor's point estimate or range, the
auditor may need to take into account whether the auditor could do so without compromising
independence requirements, and also consider relevant ethical requirements that address
prohibitions on assuming management responsibilities.
Disclosures
Use of the Term "Reasonable"
Background
70. The word "reasonable" is used in extant ISA 540 in the objective and many key requirements. In
extant ISA 540, the objective of the standard uses the term "reasonable" for accounting estimates
but "adequate" for disclosures, although neither term is defined or explained further. In developing
ED-540, the IAASB concluded that both the accounting estimate and the related disclosures
should be "reasonable in the context of the applicable financial reporting framework," as
continuing to use "adequate" may inappropriately suggest that disclosures are less important
than the accounting estimate itself.
71. In aligning the objective of ED-540 to refer to "reasonable in the context of the applicable financial
reporting framework" for the accounting estimate and related disclosures, the IAASB recognized
that ISA 700 (Revised)[24] uses the terms "reasonable," "appropriate" and "adequate" in relation
to disclosures.[25] Noting a degree of inconsistency, the IAASB decided not to make conforming
amendments to ISA 700 (Revised) in connection with ED-540, but rather to consider the need to
do so as part of the planned post-implementation review of the auditor reporting standards. ED-
540 also provided an explanation of reasonable and how this relates to "appropriate."

72. Respondents to ED-540 commented in various ways about the use of the term "reasonable,"
including:
• The inconsistencies with some of the terms in ISA 700 (Revised), including suggestions for
conforming amendments to ISA 700 (Revised);
• Whether "reasonable" should be included in the definitions;
• Whether using "reasonable" as the evaluation criterion for disclosures related to accounting
estimates creates a stronger criterion for these disclosures compared with other disclosures
(including qualitative disclosures) in the financial statements; and
• Consistency of the use of the terms "reasonable," "appropriate," and "adequate" throughout
the standard.
IAASB Decisions
73. The IAASB discussed the use of "reasonable" in the objective of the standard, and concluded
that this is the appropriate criterion for both the accounting estimate and related disclosures.
However, in view of the comments received on the inconsistencies with the terminology in ISA
700 (Revised), the IAASB agreed to make a conforming amendment to paragraph 13(c) of ISA
700 (Revised) that requires the auditor to evaluate whether related disclosures made by
management, as well as the accounting estimates, are reasonable in view of the requirements of
the applicable financial reporting framework.
74. The IAASB also discussed whether a conforming amendment should be made to paragraph
13(e) of ISA 700 (Revised), which requires the auditor to "… evaluate whether, in view of the
requirements of the applicable financial reporting framework, the financial statements provide
adequate disclosures to enable the intended users to understand the effect of material
transactions and events on the information conveyed in the financial statements." The IAASB
believed that the use of "adequate" in this context is related to the sufficiency and completeness
of the disclosures needed to enable the intended users to understand the effect of material
transactions and events on the entity's financial position, financial performance and cash flows.
Accordingly, the IAASB is not making a conforming amendment to paragraph 13(e).
75. The IAASB considered whether the term "reasonable" should be included in the definitions of ISA
540 (Revised) and continues to believe, consistent with ED-540, that doing so could lead to
questions or confusion with the many uses of the term in different contexts throughout the ISAs.
However, the IAASB concluded that it would be responsive to comments received to give more
prominence to what is meant by the phrase 'reasonable in the context of the applicable financial
reporting framework' and therefore included paragraph 9 in the Key Concepts section and added
application material (paragraphs A12-A13) that further explains the IAASB's rationale.
Disclosure Requirements
Background and Summary of Comments Received on Exposure

76. The IAASB has noted the increasingly important role of disclosures in financial reporting,
particularly with respect to accounting estimates, and has already completed a project
addressing the audit implications of disclosures in general. The IAASB noted that, in many
cases, disclosures relating to accounting estimates are critical to users' understanding of the
accounting policies applied, the nature and extent of estimation uncertainty, and key judgments
and other matters relating to accounting estimates, in particular when estimation uncertainty is
high. ED-540 continued the IAASB's emphasis on the importance of disclosures by including
requirements addressing:
• Disclosures that describe estimation uncertainty; and
• Other disclosures related to accounting estimates.
In addition, the new stand back requirement included an evaluation of whether management's
decision relating to the recognition, measurement, presentation and disclosure of these
accounting estimates in the financial statements are in accordance with the applicable financial
77. Respondents generally supported the increased focus on disclosures as they are so important to
users' understanding of estimation uncertainty. A few respondents were of the view that ED-540
did not adequately emphasize the importance of appropriate disclosures.
IAASB Decisions
78. Given the general support for the disclosure requirements, the IAASB decided to make limited
changes to the requirements in ED-540. The IAASB was of the view that application material
explaining the relationships and distinctions between the various paragraphs that address
disclosures would be useful as the IAASB's intentions may not have been clear. The IAASB
therefore agreed to add paragraph A141 to explain the relationship between the requirements
that relate to obtaining sufficient appropriate audit evidence about disclosures (including those
that describe estimation uncertainty) and the requirement in paragraph 35 to evaluate whether the
accounting estimates and related disclosures are reasonable in the context of the applicable
financial reporting framework, or are misstated.
Other matters
Linkages to Other Standards


79. The IAASB recognizes the importance of having clear linkages from ISA 540 (Revised) to other
standards because ISA 540 (Revised) expands on how ISA 315 (Revised), ISA 330, ISA 450,[26]
ISA 500 and other relevant ISAs are to be applied in relation to accounting estimates.
80. The IAASB particularly discussed the linkage between ISA 540 (Revised) and ISA 500 given the
conforming and consequential amendments to bring in guidance on external information sources.
When an external information source is used, it often relates to making an accounting estimate.
Therefore, before finalizing ED-540, the IAASB discussed whether the guidance relating to the
use of external information sources should be included in ISA 540 (Revised) or ISA 500. The
IAASB decided to incorporate the proposed new application material on external information
sources within ISA 500.
81. Some respondents were of the view that the suggested changes to ISA 500 would be better
located within ISA 540. Other respondents called for a more explicit linkage from ED-540 to the
new application material in ISA 500 in respect of both information from an external information
source and work of a management's expert.
IAASB Decisions
82. To address the comments received the IAASB decided to:
• Highlight in the requirements (paragraph 30) that the auditor shall comply with the relevant
requirements in ISA 500. The application material to this paragraph addresses the use of a
management's expert, an external information source or a service organization when auditing
an accounting estimate. Paragraph 30 also states that, when using the work of a
management's expert, the requirements in paragraphs 21–29 may assist the auditor in
evaluating the appropriateness of the expert's work as audit evidence for a relevant
assertion. It was not the IAASB's intention that the auditor should address every single
requirement in paragraphs 21–29 when using the work of a management's expert but that the
auditor may consider the matters described in paragraphs 21–29.
• Move several paragraphs (paragraphs A126 to A129) from ISA 500 to ISA 540 (Revised) as
the IAASB was of the view that these paragraphs were specific to accounting estimates and
were therefore better placed in ISA 540 (Revised).
• Enhance the references in the requirements and application material, including footnote
references, to other ISAs.
83. The IAASB also highlighted in the application material that assumptions relating to accounting
estimates that are made or identified by a management's expert become management's
assumptions when used by management in making an accounting estimate (paragraph A130).
Communication with Those Charged with Governance,

Management or Other Relevant Parties

84. In developing ED-540, the IAASB recognized the importance of a two-way dialogue between the
auditor and those charged with governance. Therefore, the IAASB included a new requirement in
ED-540 that placed more emphasis on communications with those charged with governance or
management regarding accounting estimates. The application material included guidance on
communications with regulators as the IAASB was of the view that this application material is
particularly important for audits of financial institutions. Respondents to the ED supported the new
requirement and application material.
IAASB Decisions
85. Given the broad support, the IAASB made only limited changes to the requirement. The IAASB
agreed to highlight that, in certain circumstances, the auditor may be required by law or regulation
to communicate about certain matters with regulators and prudential supervisors, as it concluded
that doing so would be in the public interest.
Documentation

86. In developing ED-540, the IAASB recognized that the documentation requirements in ISA 230
would already apply to many of the auditor's judgments required by ED-540. Accordingly, the
IAASB included application material in ED-540 that reinforced the link back to the documentation
requirement in ISA 230, and highlighted aspects of the auditor's work under ED-540 that likely
would give rise to judgments that would be documented under ISA 230. In addition, the extant ISA
540 documentation requirement was extended to include documentation of not only indicators of
possible management bias, if any, identified but also of the auditor's evaluation thereof in forming
the opinion on the financial statements as a whole.
87. Some respondents to ED-540 were of the view that the documentation requirement could be
clarified, particularly the expectations for documentation of the risk assessment procedures, the
reasons for the assessed risk of material misstatement, the response to the assessed risk of
material misstatement, the stand back, and the auditor's consideration of management bias.
IAASB Decisions
88. To address the comments received on exposure, the IAASB decided to expand the
documentation requirement by including several areas in ISA 540 that should be documented:
• For the risk assessment procedures, key elements of the auditor's understanding of the entity
and its environment. This requirement is based on paragraph 32(b) of ISA 315 (Revised);
• In the responding to the assessed risks of material misstatement:
○ The linkage of the auditor's further audit procedures with the assessed risks of material
misstatement at the assertion level, taking into account the reasons given to the
assessment of those risks. This requirement is based on paragraph 28(b) of ISA 330
(Revised); and
○ The auditor's response(s) when management has not taken appropriate steps to
understand and address estimation uncertainty; and
• Significant judgments relating to the auditor's determination of whether the accounting
89. In addition to expanding the documentation requirement, the IAASB was of the view that the
application material could be enhanced by explaining other matters that the auditor may consider
documenting when management's application of the method involves complex modeling and
when the selection and application of methods, significant assumptions, or the data is affected by
complexity to a higher degree.
90. The IAASB also included examples of requirements in ISA 540 (Revised) for which
documentation in support of the requirement may provide evidence of the exercise of
professional skepticism by the auditor to support the consequential amendment to paragraph A7
of ISA 230.
Restructuring of the Application Material and Appendices

91. Many comments were received from respondents on the application material in ED-540, both
positive and negative, including a significant number of suggestions for restructuring this material.
One key theme of the comments was that the application material was complex and needed
restructuring to assist readers in obtaining a proper understanding of the concepts, and in
applying the requirements, and in navigating through the application material. In addition, there
were many calls for additional guidance on a variety of topics.
92. A significant number of comments were received asking for additional guidance or examples,
particularly with respect to audits for smaller entities, professional skepticism, internal controls,
the inherent risk assessment, the auditor's development of a point estimate or range, and
clarification of the meanings of certain terms in the application or requirements.
93. Respondents that commented on Appendices 1 and 2 of ED-540 had mixed views. Some
respondents suggested that one or both of the appendices were educational and did not need to
be included in the ISA, while other respondents supported including them.
IAASB Decisions
94. To address the comments received, the IAASB analyzed, reviewed and discussed the
application material, with a view to clarifying and restructuring it to:
○ Delete or re-purpose material that was considered repetitive of guidance in other ISAs;
○ Reorganize paragraphs (or specific sentences within paragraphs) to better align with the
restructured requirements; and
○ Change certain parts of the application material that were considered to be educational in
style to include relevant considerations for the auditor to support the consistent and effective
implementation of the requirements.
95. The IAASB carefully considered the comments received asking for additional guidance
recognizing that the requests for increasing or strengthening the application material need to be
considered along with comments received regarding the overall length, complexity and
readability of the standard. In working through the detailed analysis of the comments, and in its
further discussions on the application material, the IAASB sought an appropriate balance, with
the objective of ensuring that the application material is clear and understandable, and
appropriately supports the application of the requirements.
96. The IAASB also decided not to include Appendix 1 of ED-540, which discussed measurement
bases for accounting estimates, in ISA 540 (Revised) as this guidance was considered to be
educational in nature and therefore could be placed outside of the standard. The IAASB intends
to publish this guidance in connection with the development of other implementation support
materials.
Effective Date
Background and Summary of Comments Received on

Exposure
97. The Explanatory Memorandum to ED-540 asked respondents whether an appropriate effective
date for the standard would be for financial reporting periods ending approximately 18 months
after the approval of the final ISA. Respondents were generally supportive of the proposed 18-
month transition period from the date of approval of a final ISA. Some of the respondents that
were supportive of the proposed 18-month transition period noted that 18 months should be the
minimum transition period, given the time needed for translation and due process in various
jurisdictions, and that audit firms need sufficient time to implement significant changes to their
methodologies. Other respondents indicated that the transition period should be at least 12
months after approval or suggested an effective date for financial reporting periods beginning
two years after approval of the final ISA.
IAASB Decisions
98. The IAASB discussed whether ISA 540 (Revised) should be effective for periods beginning on or
after December 15, 2018 or December 15, 2019, and concluded that December 15, 2019 would
be more appropriate given that:
• As ISA 540 (Revised) affects the planning and risk assessment activities for an audit, the
standard would often be implemented nearer the beginning of the period of the financial
statements being audited. Given that the final revised standard would be expected to be
issued no earlier than September 2018, following approval of due process by the PIOB, an
effective date for audits beginning on or after December 15, 2018 would mean that firms and
national auditing standard setters would effectively have five or six months for implementation
of the standard before the commencement of planning for larger audit engagements (i.e., in
early 2019).
• Firms need time to update their methodologies and audit tools, develop training materials,
and train their staff to reflect the changes made to ISA 540 (Revised). The IAASB noted that a
short implementation period may result in a rushed or ineffective implementation, which may
have the unintended (and undesired) effect of causing a higher level of negative audit
inspection findings.
• Smaller firms often rely on external providers for a "packaged" methodology. An effective
date for audits beginning on or after December 15, 2018, may leave insufficient time for the
third party to develop such a package for 2019 audits.
• Some national auditing standard setters need time to translate the standard and, in some
cases, develop supplemental implementation material based on the translated standard. In
some cases, there may also be a need for public exposure of the standard before it will be
effective in their jurisdiction.
99. The IAASB agreed that early implementation should be permitted and encouraged given that:
• A significant number of inspection findings related to accounting estimates; and

• Regulators of financial institutions urged the IAASB to have a revised auditing standard on
accounting estimates in place to coincide with the effective date of IFRS 9 (January 1, 2018).
To facilitate the commencement of implementation activities the IAASB, with the agreement of the
PIOB, made a version of the standard with the final IAASB approved wording available on the
IAASB's website in July 2018, noting that the public release of the revised standard is subject to
approval of the due process by the PIOB.
Conforming and Consequential Amendments
Background
100.In the Project Proposal, the IAASB acknowledged that amendments to ISA 500 (in addition to
changes in ISA 540) may be needed to clarify the distinction between a third-party pricing source
and a management's expert.
101.In the Explanatory Memorandum to ED-540, the IAASB noted that many entities use external
parties as a source of non-pricing related information in preparing the financial statements and
concluded that conforming and consequential amendments should also be made for non-pricing
data obtained from external information sources. The IAASB was therefore of the view that it
would be more appropriate to refer to external information sources instead of third-party pricing
sources.
102.The IAASB proposed the following conforming and consequential amendments to ISA 500:
○ A definition of an external information source with related application material that explains
how an external information source differs from a management's expert.

○ Specifically including a reference to information obtained from an external information source
in paragraph 7, which addresses procedures to consider the relevance and reliability of
information to be used as audit evidence.
○ New application material addressing audit evidence considerations related to external
information sources. These paragraphs included material regarding factors about the
relevance and reliability of information obtained from an external information source, specific
material on fair value measurements, and when management and the auditor use the same
information source.

103.Generally, respondents were supportive of the proposed intent of the changes and enhanced
focus on the consideration of the relevance and reliability of information obtained from an external
information source. A few respondents did, however, highlight the possibility of a proposed future
project to revise ISA 500 and indicated a preference to defer making changes until the ISA 500
project can consider all potential changes in a more holistic manner.
104.Other comments received primarily focused on:

○ The necessity of the change to paragraph 7 in ISA 500, in light of the definition of "audit
evidence";
○ The proposed definition of an external information source and challenges with the term
"publicly available";
○ The clarity and practicality of the proposed new application material in support of the
amended requirement in paragraph 7; and
○ The linkage between proposed ISA 540 (Revised) and ISA 500, including the location of
certain application material that related more specifically to accounting estimates.
IAASB Decisions
ISA 500, Audit Evidence

105.With respect to the definition of an external information source, the IAASB removed the reference
to information being "publicly available" and instead focused on the information being suitable for
a broad range of users. In addition, service organizations were explicitly excluded from the scope
of the definition to avoid confusion with those services to which ISA 402 applies. Changes were
also made to the application material to better explain relevant considerations, and provide
examples, in distinguishing an external information source from a management's expert.
106.With respect to the application material in ISA 500, the IAASB agreed to:
○ Clarify in paragraph A1 that information to be used as audit evidence may come from
sources internal and external to the entity.
○ Move several paragraphs from ISA 500 to ISA 540 (Revised) (paragraphs A126 to A129) as
the IAASB agreed with the view that these paragraphs were specific to accounting
estimates.
○ Make clear in the application material when the guidance applies both to when management
makes use of an external information source and when an auditor independently obtains
information from such a source.
○ Give greater prominence to key challenges in dealing with external information sources,
including:
○ Guidance on obtaining an understanding of why management or, when applicable, a
management's expert, uses an external information source (paragraph A33c).
○ The consideration of completeness and accuracy of information from an external
information source (paragraphs A33c and A33d).
○ Further explanation related to considerations of the relevance and reliability of
information obtained from an external information source (paragraph A33d).

○ Clarifying in paragraph A33f the implications when there is only one source of information
(and hence the auditor can only consider that source alone).
Conforming and Consequential Amendments to Other Standards

107.ED-540 included proposed changes to other ISAs as a result of the changes proposed to ISA
540. Respondents did not raise significant concerns with other conforming and consequential
amendments and, accordingly, the IAASB made only minor changes to align with the final text of
ISA 540 (Revised). With respect to ISA 230, in addition to the conforming amendment to
paragraph A7 described earlier, the IAASB also amended paragraph A10 of ISA 230 to include
an additional example of a circumstance related to accounting estimates in which it is
appropriate to prepare audit documentation relating to the use of professional judgment.
Post-Implementation Review and Other Activities to

Promote Awareness and Understanding and Support
Effective Implementation of ISA 540 (Revised)
108.The IAASB intends to undertake a post-implementation review of ISA 540 (Revised). The
objective of this review will be to assess if ISA 540 (Revised) has achieved its intended
objectives, and to assist the IAASB in, among other matters:
• Understanding whether the standard is sufficiently scalable and whether it enhances the
exercise of professional skepticism;
• Identifying implementation challenges and possible areas for improvement within the
standard; and
• Considering whether further enhancements to ISA 540 (Revised) are necessary.
109.The post-implementation review may also identify how practical challenges and concerns are
being addressed in practice (by auditors, management and audit committees), and whether
further enhancements or refinements to the standard, or additional implementation support, are
needed.
Implementation Support Activities

110.The IAASB's Steering Committee agreed to form an implementation support working group to
perform activities to support awareness, understanding and effective implementation of ISA 540
(Revised). Further information on the working group's activities will be available on the IAASB's
website as it becomes available.
1 The IAASB's International Standards comprise the International Standards on Auditing (ISAs), the International Standards on
Review Engagements (ISREs), the International Standards on Assurance Engagements (ISAEs), and the International
Standards on Related Services (ISRSs).
2 For a full record of the voting on ISA 540 (Revised), including the rationale of the IAASB members who abstained from the vote,
see http://www.iaas b.org/system/files/meetings/files/Approved-IAASB-Public-Session-Minutes-of-the-Meeting-June-2018.pdf.
3 ISA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures
4https://www.ifac.org/system/files/publications/files/IAASB-Strategy-2015-2019_0.pdf
5https://www.ifac.org/system/files/publications/files/IAASB-W ork-Plan-2015-2016.pdf
6 These findings are discussed in the 2013 publication, Clarified International Standards on Auditing-Findings from the Post-
Implementation Review.
7 International Financial Reporting Standard 9 (IFRS), Financial Instruments
8https://www.ifac.org/publications-resources/project-proposal-revision-isa-540
9 IAPNs do not impose additional requirements on auditors beyond those included in the ISAs, nor do they change the auditor's
responsibility to comply with all ISAs relevant to the audit. IAPNs provide practical assistance to auditors. They are intended to
be disseminated by those responsible for national standards, or used in developing corresponding national material. They also
provide material that firms can use in developing their training programs and internal guidance.
10 Staff publications are used to help raise practitioners' awareness of significant new or emerging issues by referring to
existing requirements and application material, or to direct their attention to relevant provisions of IAASB pronouncements.
11 For the purpose of the project proposal, financial institutions include banks and insurance companies.
12https://www.ifac.org/publications-resources/isa-540-revision-project-publication
13 ISA 540 (Revised), Auditing Accounting Estimates and Related Disclosures
14 The Monitoring Group comprises the Basel Committee on Banking Supervision (BCBS), the European Commission, the
Financial Stability Board, the International Association of Insurance Supervisors (IAIS), the International Forum of Independent
Audit Regulators (IFIAR), the International Organization of Securities Commissions (IOSCO), and the World Bank. BCBS, IAIS,
IFIAR, and IOSCO responded to ED-540.
Environment
16http://www.ifac.org/system/files/publications/files/Proposed-ISA-315-Revised-Explanatory-Memorandum.pdf
17http://www.ifac.org/system/files/publications/files/ED-ISA-315-Revised-Supplement-Conforming-Amendments-to-ISA-540-
Revised-and-ISA-200_0.pdf
19 ISA 500, Audit Evidence
20 ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International
Standards on Auditing
21 ISA 705 (Revised), Modifications to the Opinion in the Independent Auditor's Report
22 ISA 230, Audit Documentation
23 ISA 315 (Revised), paragraphs 18(a) and (d)
24 ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements
25 ISA 700 (Revised), paragraphs 13(b), 13(e), and 39(b)(iii)
26 ISA 450, Evaluation of Misstatements Identified during the Audit
Appendix PIOB Public Interest Issues Relating to ISA 540
AppendixPIOB Public Interest Issues

Relating to ISA 540
Public Interest Issues IAASB's Decisions
Better explanation and

articulation of risk
factors
The risk factors need to The IAASB has expanded the use of the inherent risk factors in
be clearly explained and the ISA's risk assessment procedures, and further clarified the
articulated in the standard inherent risk factors in relevant requirements and application
and well supported by material. Appendix 1 includes an additional discussion of the
application material. inherent risk factors relating to accounting estimates and their
inter-relationship.
Requirement to
understand and test
internal controls
Auditors should thoroughly The IAASB decided that, for all entities, the ISA should direct
understand and test the the auditor to obtain an understanding of control activities at a
internal controls around more granular level than was the case in ED-540. This is
complex accounting supported by a new requirement to separately assess control
estimates and valuation risk and by re-emphasizing the requirement in ISA 330 to test
models, particularly for controls for significant risks in the current period if the auditor
financial institutions. A plans to rely on those controls. The ISA also re-emphasizes the
robust internal control requirement in ISA 330 regarding when testing the operating
environment is a critical effectiveness of controls is required. Application material
part of an entity's includes further guidance to highlight when testing the
governance system, operating effectiveness of controls may be deemed necessary
including how risk is (e.g., high volume of transactions or data, use of complex
managed by the entity and model, extensive use of information technology).
reported in the entity's
Additional expected
credit loss specific
application material
should be included in
ISA 540
Given that ISA 540 The IAASB has included material in ISA 540 (Revised) that
applies to all accounting may be particularly useful when auditing expected credit losses
estimates, additional and insurance contract liabilities. This includes addressing
guidance on auditing (complex) modelling, the need for the auditor to apply
complex expected credit specialized skills and knowledge, the use of information from
loss estimates and the entity's risk management system, and communications with
valuation models would be regulators or prudential supervisors. The IAASB also included
helpful for auditors in the several references to expected credit losses and insurance
banking and insurance contract liabilities to emphasize the importance of accounting
industry. Such guidance estimates of this nature, which are generally complex and have
would help auditors: high estimation uncertainty.
• Understand the entity's

business model.
• Assess the
classification and
nature of financial
assets and liabilities.
• Audit management's
assessment of credit
risk and the
consequent
accounting estimation,
e.g., in "lifetime"
expected credit
losses.
Auditors should know

the applicable
regulatory and
prudential requirements
and practices relevant
to accounting
estimations –
communication with
supervisors
In addition to "understand To the extent that applicable prudential requirements are part
regulatory factors," of the applicable financial reporting framework, the audit of the
auditors should be financial statements would include compliance with the
required to provide prudential requirements. If not part of the applicable financial
evidence that the financial reporting framework, the auditor may be required to report on
institutions comply with the relevant matters in the Other Reporting Responsibilities
applicable prudential section of the auditor's report.
requirements and
practices relevant to
Auditors of financial The IAASB highlighted in the requirements in ISA 540

institutions should be (Revised) that, in certain circumstances, the auditor is required
required to communicate by law or regulation to communicate about certain matters with
regularly with supervisors regulators and prudential supervisors.
on key issues.
Early adoption
The PIOB supports early The IAASB is permitting and encouraging early adoption of the
adoption of the ISA by standard.
auditors.
Copyright © December 2018 by the International Federation of Accountants® (IFAC®). All rights
reserved.
Copyright © 2018 by the International Federation of Accountants (IFAC). All rights reserved. Reproduced with the permission of IFAC. Contact
Permissions@ifac.org for permission to reproduce, store or transmit, or to make other similar uses of this document.

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ISA 540 (Revised) Auditing Accounting Estimates and Related Disclosures

ISA 540 (Revised) Auditing Accounting Estimates and Related Disclosures

ISA 540 (Revised) Auditing

Scope of this ISA 1

Nature of Accounting Estimates 2–3

Key Concepts of This ISA 4–9

Risk 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

Overall Evaluation Based on Audit Procedures Performed 33–36

Communication with Those Charged With Governance, Management, or Other

Application and Other Explanatory Material

Nature of Accounting Estimates A1–A7

Key Concepts of This ISA A8–A13

Risk Assessment Procedures and Related Activities A19–A63

Identifying and Assessing the Risks of Material Misstatement A64–A80

Written Representations A145

Communication with Those Charged With Governance, Management or Other A146–

Appendix 1: Inherent Risk Factors

Appendix 2: Communications with Those Charged with Governance

Conforming and Consequential Amendments to Other International Standards

Basis for Conclusions Prepared by the Staff of the IAASB

Nature of Accounting Estimates

Key Concepts of This ISA

8. The exercise of professional skepticism in relation to accounting estimates is affected by the

2 ISA 330, The Auditor's Responses to Assessed Risks

3 ISA 450, Evaluation of Misstatements Identified during the Audit

4 ISA 500, Audit Evidence

6 ISA 530, Audit Sampling, Appendix 3

Risk Assessment Procedures and Related Activities

The Entity and Its Environment

The Entity's Internal Control

Identifying and Assessing the Risks of Material

Responses to the Assessed Risks of Material

Obtaining Audit Evidence from Events Occurring up to the

Testing How Management Made the Accounting Estimate

applying the method. (Ref: Para. A101)

Management's Selection of a Point Estimate and Related Disclosures

Developing an Auditor's Point Estimate or Range

29. If the auditor develops an auditor's range, the auditor shall:

Other Considerations Relating to Audit Evidence

Disclosures Related to Accounting Estimates

Indicators of Possible Management Bias

Overall Evaluation Based on Audit Procedures Performed

(c) Sufficient appropriate audit evidence has been obtained.

Determining Whether the Accounting Estimates are

36. In relation to accounting estimates, the auditor shall evaluate:

Communication with Those Charged With Governance,

inherent risk or control risk) given to the assessment of those risks;

8 ISA 315 (Revised), paragraphs 3, 5–6, 9, 11–12, 15–17, and 20–21

9 ISA 315 (Revised), paragraphs 25 and 26

10 ISA 315 (Revised), paragraph 27

11 ISA 315 (Revised), paragraph 29

12 ISA 330, paragraphs 6–15 and 18

13 ISA 330, paragraphs 6–7 and 21

14 ISA 330, paragraph 7(b)

15 ISA 330, paragraph 8