ISA 540 (Revised) — Requirements

This flowchart shows the flow of the requirements in ISA 540 (Revised).
Documentation
Risk Assessment

Obtain an understanding of the entity (*Note 2)

and Related

Perform a
Procedures

and its environment, including Determine whether the engagement

Activities

the entity’s internal control related retrospective team requires specialized skills or
to the entity’s accounting estimates review (Para. 14) knowledge (Para. 15) Document key
(Para. 13) (*Note 1) elements of
understanding
of the entity and
its environment,
Identify and assess the risks of material misstatement relating to an accounting estimate and related disclosures including internal
the Risks of Material Misstatement

at the assertion level (Para. 16) control related

• Separately assess inherent risk and control risk to accounting
Identifying and Assessing

• Take into account the degree to which the accounting estimate is subject to, or affected by, estimation uncertainty, estimates
complexity, subjectivity and other inherent risk factors (Para. 39(a))

Determine whether any of the identified and assessed risks of material misstatement are significant risk (Para. 17)

No significant risk exists Significant risk exists

Document linkage
of further audit
Obtain an understanding of the entity’s controls, including control procedures with
activities, relevant to that risk (Para. 17) the assessed risks
of material
misstatement
Design and perform tests of controls if: (Para. 19) at the assertion
• The auditor’s assessment of risks of material misstatement at the assertion level includes an expectation that the level (Para. 39(b))
controls are operating effectively; or
• Substantive procedures alone cannot provide sufficient appropriate audit evidence at the assertion level
Responses to the Assessed Risks

• Include tests of controls in the current period if the auditor plans

to rely on controls (Para. 20)
of Material Misstatement

• Include tests of details if the approach consists only of

substantive procedures (Para. 20)

Include one or more of the following testing approaches in designing and performing 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 (Para. 18) (*Note 1)
Document auditor’s
response(s) when
Three Testing Approaches (See separate flowchart) management has
not taken
Obtain audit evidence from Test how management made appropriate steps
Develop an auditor’s point
events occurring up to the date the accounting estimate to understand and
estimate or range (Para. 28-29)
of the auditor’s report (Para. 21) (Para. 22-27) address estimation
uncertainty
(Para. 39(c))
Comply with the relevant requirements on audit evidence in ISA 500 (Para. 30)
Disclosures

• Obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement at the assertion
level for disclosures (Para. 31)
• When the auditor’s further audit procedures include testing how management made the accounting estimate or
developing an auditor’s point estimate or range, obtain sufficient appropriate audit evidence about the disclosures Document
that describe estimation uncertainty (Para. 26(b) and 29(b)) indicators of
possible
management
Manage-

Evaluate whether there are indicators of possible management bias and, if there are, the implications for the audit bias related
ment
Bias

(Para. 32) to accounting

estimates, if any,
and implications
Evaluate whether: for the audit
Procedures Performed

• The assessments of the risks of material misstatement at the assertion level remain appropriate (Para. 33(a)) (Para. 39(d))
Overall Evaluation
Based on Audit

• Management’s decisions relating to the recognition, measurement, presentation and disclosure are in accordance
with the applicable financial reporting framework (Para. 33(b))
• Sufficient appropriate audit evidence has been obtained. If unable to obtain sufficient appropriate audit evidence,
evaluate the implications for the audit or the auditor’s opinion on the financial statements (Para. 33(c) and 34)
Document
significant
judgments
Determine whether the accounting estimates and related disclosures are reasonable in the context of the applicable in determining
financial reporting framework, or are misstated (Para. 35) whether
accounting
Commu- Written

estimates and
Rep

Request written representations from management and, when appropriate, those charged with governance (Para. 37) related disclosures
are reasonable,
or are misstated
nication

Communicate with those charged with governance, management, and other relevant parties as appropriate (Para. 38) (Para. 39(e))
ISA 540 (Revised) — Requirements

* Notes
1. Scalability
• The nature, timing and extent of the risk assessment and further audit procedures will vary in relation to the estimation uncertainty and the assessment
of the related risks of material misstatement. (Para. 3)
° The auditor’s procedures to obtain the understanding of the entity and its environment 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. (Para. 13)
° 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 and 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. (Para. 18)
• Guidance that demonstrates how the standard is scalable can be found in paragraphs A20–A22, A63, A67 and A84. (Para. A7)
2. Documentation
• Paragraph 39 of ISA 540 (Revised) outlines the specific documentation requirements with respect to auditing accounting estimates and related
disclosures. Refer to ISA 230, Audit Documentation, with respect to the auditor’s responsibility to prepare audit documentation for an audit of
financial statements, and its Appendix, which lists other ISAs that contain specific documentation requirements and guidance.
ISA 540 (Revised) – Three Testing Approaches
This flowchart provides an overview of the key requirements relating to the three testing approaches, including their linkages.

Include one or more of the following testing approaches in designing and performing 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 (Para. 18) (*Note)

Obtain Audit Evidence Test How Management Made the Accounting Estimate Develop an Auditor’s
from Events Occurring Point Estimate
Obtain sufficient appropriate audit evidence regarding risks of material misstatement relating or Range
up to the Date of to: (Para. 22)
the Auditor’s Report
Evaluate whether
the methods,
Evaluate whether The selection and application of the methods, How management selected the point estimate assumptions or data
audit evidence is significant assumptions and the data; and and developed related disclosures about used are appropriate
sufficient and (Para. 22(a)) estimation uncertainty (Para. 22(b)) in the context of the
appropriate to address applicable financial
risks of material
misstatement relating reporting framework.
to the accounting Linkage
estimates Significant Regardless of whether
Methods (Para. 23) Assumptions Data (Para. 25) using management’s
(Para. 24) Address whether
Take into account management has taken or the auditor’s own
that changes in steps to: (Para. 26) methods, assumptions
circumstances and • Understand
other relevant or data, the auditor’s
estimation procedures are
conditions between Address whether methods, significant assumptions and data uncertainty; and
the event and are appropriate in the context of the applicable financial designed and
• Address estimation
the measurement reporting framework (Para. 23(a), 24(a) and 25(a)) uncertainty by performed to address
date may affect selecting an the matters in
the relevance of such appropriate point paragraphs 23-25
audit evidence in estimate and
the context of (Para. 28)
by developing
the applicable Address whether judgments made in selecting methods, related disclosures
financial reporting significant assumptions and data give rise to indicators of about estimation
framework possible management bias (Para. 23(b), 24(b) and 25(b)) uncertainty
(Para. 21)

If the auditor develops

Address whether
Address whether Management has not an auditor’s range:
calculations are Address whether
significant taken appropriate steps (Para. 29)
applied in the data is relevant
assumptions • Determine that
accordance and reliable in
are consistent
Linkage
with method the circumstances the range includes
with each other
and are accurate (Para. 25(c)) Request management only amounts that
(Para. 24(c))
(Para. 23(c)) to perform additional are supported by
procedures to
understand or to sufficient
address estimation appropriate audit
Address whether, Address whether, Address whether uncertainty by evidence and
when complex when applicable, the data has been reconsidering evaluated to be
modelling is management has appropriately the selection of reasonable; and
involved, the intent to carry understood or management’s • Design and perform
judgments have out specific interpreted by point estimate or
considering providing further audit
been applied courses of action management, procedures to be
consistently and has the including with additional disclosures
and model design ability to do respect to relating to the estimation obtain sufficient
meets/adjustments so (Para. 24(d)) contractual terms uncertainty (Para. 27(a)) appropriate audit
to output are (Para. 25(d)) evidence regarding
consistent with the assessed risks
measurement material
objective Evaluate management’s misstatement
(Para. 23(d)) Management has taken response(s) in
accordance with relating to the
appropriate steps disclosures on
paragraph 26
(Para. 27(a)) estimation
Address whether uncertainty
the integrity
of significant Management’s
Management’s response response does not
assumptions
sufficiently addresses sufficiently address
and data are
estimation uncertainty estimation uncertainty
maintained
in applying
the method
(Para. 23(e)) To the extent practicable,
Evaluate whether
a deficiency in internal develop an auditor’s point Linkage
control exists estimate or range in accordance
(Para. 27(c)) with paragraphs 28-29
(Para. 27(b))
ISA 540 (Revised) — Three Testing Approaches

* Note: Scalability
The nature, timing and extent of the auditor’s further audit procedures are affected by, for example: (Para. A84)
• 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
• The reasons for the assessed risks of material misstatement