ISA 540 - Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures

Question 1

ISA 540: Auditor and Management Responsibilities

Answer 1

Auditor:
> Responsibility is to evaluate appropriateness.

Management:
> Responsibility is to prepare.

Question 2

ISA 540 : Accounting Estimates:

Answer 2

1. Accounting Estimates:
   * Based on past experience for present/ future possible obligations:
   > Warrantees,
   > Provisions for BDD,
   > Provisions for Litigations,
   > Useful life of Assets.
2. Fair Value Accounting Estimates:
   * Based on market prices or exchange values.
   > Share-based payments,
   > Property or equipment held for disposal,
   > Goodwill,
   > Intangible Assets.

Applicable FRF may require FV measurement based on an assumed hypothetical current transaction between knowledgeable willing parties in an arm’s length transaction.

Estimates Uncertainty:
*High:
RMM is high.

*Low:
> RMM is Low.

RMM - Risk of Material Mis-statement.

Question 3

ISA 540: Auditor Responsibility:

Answer 3

1. Risk Assessment Procedure performed,
2. Identify RMM,
3. Respond to assessed risk.
   - ISA 315 & ISA 330.

Auditor:
1. Understand applicable FRF,
2. Enquire with management for:
> Identification of estimates and related events.
> Change in events/ conditions for re-estimates or new estimates.
> Estimation process,
> Control over Estimation process,
> Outcome of last year estimate process.
3. Identify and Assess Risk:
> Check for uncertainty:
* If Risk is low - Perform normal Substantive Procedures.
* If Risk is high - Perform normal + additional procedures.

Additional procedures for Significant Audit Risk:
> Enquire with management - reasonableness of assumptions and methods chosen and rejection of others.
> Check Management’s intention and ability to implement FRF requirements:
* Auditor to develop point of estimate / range of estimate where required, based on appropriate assumptions.
* Ask management to re-consider estimation based on point/ range of estimate, if required.

Summary of the above:
1. Understand applicable FRF.
2. Enquire with management
3. Identify & Assess with respect to Uncertainty
4. Perform normal and additional Substantive Audit Procedures.
5. Ensure application of methods / assumptions appropriately and consistently.
6. Ensure Measurement & Disclosure is done as per FRF.
7. Check for management bias.
8. Get management representation for Management’s responsibility.

Documentation:
Document everything that you discuss with client and work on.