Canadian Public Accountability Board says IAASB revised accounting estimates standard has only partially met its objectives

The Canadian Public Accountability Board submitted a comment letter to the International Auditing and Assurance Standards Board’s post-implementation review of ISA 540 Revised on auditing accounting estimates and related disclosures, concluding that the revised standard has improved expectations for risk assessment, professional skepticism and the evaluation of audit evidence, but has only partially achieved its objectives in practice. CPAB said inspection work continues to show application challenges, particularly at smaller audit firms and in audits of smaller entities where management may have limited expertise and less developed estimation processes and controls. Drawing on its risk-based inspections and an updated publication, Strengthening Audit Quality – Auditing Accounting Estimates, CPAB highlighted recurring weaknesses in how auditors deal with estimation uncertainty. These include failing to require management to address uncertainty, insufficiently challenging management’s judgments and potential bias, using auditor-developed point estimates or ranges without adequately understanding management’s process, weak consideration of contradictory audit evidence and stand-back assessments, and poor linkage between identified risks, controls and audit responses. CPAB said auditors can default too quickly to their own point estimate, which can reduce scrutiny of management’s methods, assumptions and data. CPAB urged the IAASB to consider targeted amendments to ISA 540 Revised or non-authoritative guidance to clarify misunderstood areas, including estimation uncertainty, the use of auditor-developed estimates, and the relationship between risk assessment, skepticism and audit procedures. It also said practical, scalable guidance linked to firms’ systems of quality management under ISQM 1 could help smaller firms apply the standard more consistently.