The audit implications of ISA 540 (revised) on the auditing of accounting estimates : a Maltese perspective

Abstract

Purpose: The primary objective of this study is to analyse the audit implications that the newly revised ISA will have on auditors and the issues that auditors face in this area from a local perspective. Design: Initially existing literature on the subject area was analysed. Subsequently semi-structured interviewees were carried out with high ranking officials from the Big Four accounting firms, medium-sized audit firms and a sole and a sole practitioner who is also an approved accountancy board external quality assurance reviewer. Findings: The findings confirmed that accounting estimates have a material and usually a pervasive effect on the financial statements thus a key area for in every audit. The previous ISA 540 failed to provide sufficient guidance on potential management bias, uncertainty, variability, inherent risk, limited knowledge, professional scepticism and the auditor’s responsibility on all of these issues. A recurring problem here was that the concept presented by the standard would be understood but there would be insufficient guidance on how to implement the concept from the standard into practice. The study delved into the specific changes made by the revised ISA 540. The separate assessment of inherent risk and the spectrum of inherent risk are beneficial to the auditor can allocate this resources more efficiently. The concept of scalability was a breath of fresh air for auditors as this enhances flexibility in the audit procedures however further guidance and clarification is needed in this regard. The additional emphasis placed on the need for specialised knowledge and skills was noted, however the auditor has to be careful to not overly rely on the work done by the specialist as ultimately the responsibility is still of the auditor. Conclusions: The study shed light on the overall effectiveness of the new revision and it was concluded that the revision did successfully address certain issues, however the area is still challenging for the auditor as it is based on uncertainty and judgement, which are inherent to accounting estimates. Value: The study analysed the difficulties that auditors face when auditing accounting estimates, identified the changes brought about by the revised ISA 540 and analysed the effectives of the newly revised standard from a local perspective.