Existing paragraph 4 is amended to read as follows and footnote 5 is inserted:
This Auditing Standard requires a separate assessment of inherent risk for identified risks of material misstatement at the assertion level.[5] purposes of assessing the risks of material misstatement at the assertion level for accounting estimates. In the context of ASA 540 (Revised), and Ddepending 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 ASA 200,[6] 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 ASA as the spectrum of inherent risk. (Ref: Para. A8–A9, A65–A66, Appendix 1)
As a result of the footnote insertion above, subsequent footnotes of this Auditing Standard are re-numbered and references to these footnotes are updated accordingly.
Existing paragraph 5 is amended to read as follows:
This ASA refers to relevant requirements in ASA 315 and ASA 330, and provides related guidance, to emphasise the importance of the auditor’s decisions about controls relating to accounting estimates, including decisions about whether:
There are controls relevant to the audit required to be identified by ASA 315 , 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.
Existing paragraph 6 is amended to read as follows:
This ASA 315 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 plan to tests the operating effectiveness of controls, or does not intend to rely on the operating effectiveness of controls, the auditor’s assessment of the risk of material misstatement at the assertion level control risk cannot be reduced for the effective operation of controls with respect to the particular assertion is such that the assessment of the risk of material misstatement is the same as the assessment of inherent risk.6 (Ref: Para. A10)
Section Amendments to ASA 540 - Auditing Standard ASA 2020-1 Amendments to Australian Auditing Standards - Amendments to ASA 540 | Zoe
Existing paragraph 8 is amended to read as follows:
The exercise of professional scepticism 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 scepticism is important when there is greater susceptibility to misstatement due to management bias or fraud other fraud risk factors insofar as they affect inherent risk. (Ref: Para. A11)
Existing paragraph 13 is amended to read as follows:
When obtaining an understanding of the entity and its environment, the applicable financial reporting framework and including the entity’s system of internal control, as required by ASA 315,[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 obtain audit evidence that provides an appropriate basis for the identification and assessment of risks of material misstatement at the financial statement and assertion levels. (Ref: Para. A19–A22)
Obtaining an Understanding of tThe Entity and Its Environment and the Applicable Financial Reporting Framework
The entity’s transactions and other events orand conditions that may give rise to the need for, or changes in, accounting estimates to be recognised or disclosed in the financial report. (Ref: Para. A23)
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, the inherent risk factors affect susceptibility to misstatement of assertions. (Ref: Para. A24–A25)
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Obtaining an Understanding of tThe Entity’s System of Internal Control
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(h) The entity’s information system as it relates to accounting estimates, including:
How information relating to accounting estimates and related disclosures for significant classes of transactions, account balances or disclosures flows through the entity’s information system The classes of transactions, events and conditions, that are significant to the financial report and that give rise to the need for, or changes in, accounting estimates and related disclosures; and (Ref: Para. A34–A35)
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(i) Identified controls in the control activities component[9] 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)
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Existing paragraph 16 is amended to read as follows:
In identifying and assessing the risks of material misstatement relating to an accounting estimate and related disclosures at the assertion level, including separately assessing inherent risk and control risk at the assertion level, as required by ASA 315,[10] 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)
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Existing paragraph 17 is amended to read as follows:
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 judgement, a significant risk.[11] If the auditor has determined that a significant risk exists, the auditor shall identify controls that obtain an understanding of the entity’s controls, including control activities, relevant to address that risk,.[12] and evaluate whether such controls have been designed effectively, and determine whether they have been implemented.[13] (Ref: Para. A80)
Existing paragraph 19 is amended to read as follows:
As required by ASA 330,17 the auditor shall design and perform tests to obtain sufficient appropriate audit evidence as to the operating effectiveness of relevant controls, if:
Existing paragraph A8 is amended to read as follows:
Inherent risk factors are characteristics of conditions and events orand conditions that may affect the susceptibility of an assertion to misstatement, whether due to fraud or error, of an assertion about a class of transactions, account balance or disclosures, before consideration of controls.[32] 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 report.
Existing paragraph A9 is amended to read as follows:
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 When assessing the risks of material misstatement at the assertion level[33], in addition to estimation uncertainty, complexity, and subjectivity, the auditor also takes into account the degree may include the extent to which inherent risk factors included in ASA 315, (other than estimation uncertainty, complexity, and subjectivity), affect susceptibility to misstatement of assertions to misstatement about the accounting estimate. Such additional inherent risk factors include 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 other fraud risk factors insofar as they affect inherent risk, in making the accounting estimate.
Uncertainty, other than estimation uncertainty.
Existing paragraph A10 is amended to read as follows:
An important consideration for the auditor iIn assessing control risk at the assertion level in accordance with ASA 315, the auditor takes into account is the effectiveness of the design of the controls that whether the auditor intends plans to rely test on the operating effectiveness of controls. and the extent to which the controls address the assessed inherent risks at the assertion level. When the auditor is considering whether to test the operating effectiveness of controls, Tthe auditor’s evaluation that controls are effectively designed and have been implemented supports an expectation, by the auditor, about the operating effectiveness of the controls in determining whether establishing the plan to test them.
Existing title under the section heading Risk Assessment Procedures and Related Activities is amended to read as follows:
Obtaining an Understanding of the Entity and Its Environment, the Applicable Financial Reporting Framework, and the Entity’s System of Internal Control (Ref: Para. 13)
Existing paragraph A19 is amended to read as follows:
Paragraphs 1911–2724 of ASA 315 require the auditor to obtain an understanding of certain matters about the entity and its environment, the applicable financial reporting framework and including the entity’s system of internal control. The requirements in paragraph 13 of this ASA relate more specifically to accounting estimates and build on the broader requirements in ASA 315.
Existing paragraph A20 is amended to read as follows:
The nature, timing, and extent of the auditor’s procedures to obtain the understanding of the entity and its environment, including the applicable financial reporting framework, and the entity’s system of 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 or 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 judgements, 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 identified controls in the control activities component relevant to the audit. If so, the auditor’s risk identification and assessment procedures are likely to be less extensive and may be obtained primarily through enquiries of management with appropriate responsibilities for the financial report, such as and simple walk-throughs of management’s process for making the accounting estimate (including when evaluating whether identified controls in that process are designed effectively and when determining whether the control has been implemented).
Existing title under the section heading The Entity and Its Environment is amended to read as follows:
The entity’s transactions and other events and or conditions (Ref: Para. 13(a))
Existing paragraph A24 is amended to read as follows:
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 theose requirements of the applicable financial reporting framework 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.34
Existing section heading after paragraph A27 has been amended to read as The Entity’s System of Internal Control Relevant to the Audit
Existing paragraph A28 is amended to read as follows:
In applying ASA 315,[35] 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 of as it relates to whether:
Management, with the oversight of those charged with governance, has created and maintained a culture of honesty and ethical behaviour; and
The strengths in the entity’s control environment elements collectively provides an appropriate foundation for the other components of the system of internal control considering the nature and size of the entity; and whether
those other components are undermined by cControl deficiencies identified in the control environment undermine the other components of the system of internal control.
Existing paragraph A32 is amended to read as follows:
Understanding how the entity’s risk assessment process identifies and addresses risks relating to accounting estimates may assist the auditor in considering changes in:
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The entity’s information systems or IT environment; and
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Existing paragraph A34 is amended to read as follows:
The significant classes of transactions, events and conditions within the scope of paragraph 13(h) are the same as the significant classes of transactions, events and conditions relating to accounting estimates and related disclosures that are subject to paragraphs 25(a)18(a) and (d) of ASA 315. In obtaining the understanding of the entity’s information system as it relates to accounting estimates, the auditor may consider:
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Existing paragraph A35 is amended to read as follows:
During the audit, the auditor may identify classes of transactions, events and or conditions that give rise to the need for accounting estimates and related disclosures that management failed to identify. ASA 315 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 considering the implications for the auditor’s evaluation of the entity’s risk assessment process.[38]
Existing paragraph A39 is amended to read as follows:
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. When complexity in relation to models is present, controls over data integrity are also more likely to be identified controls in accordance with ASA 315 relevant to the audit. Factors that may be appropriate for the auditor to consider in obtaining an understanding of the model and of related identified controls activities relevant to the audit include the following:
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Existing paragraph A44 is amended to read as follows:
Matters that the auditor may consider in obtaining an understanding of how management selects the data on which the accounting estimates are based include:
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The complexity of IT applications or other aspects of the entity’s IT environment the information technology systems used to obtain and process the data, including when this involves handling large volumes of data.
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Existing section heading before paragraph A50 has been amended to read Identified Controls Activities Relevant to the Audit Over Management’s Process for Making Accounting Estimates (Ref: Para 13(i))
Existing paragraph A50 is amended to read as follows:
The auditor’s judgement in identifying controls relevant to the auditin the controls activities component, 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 controls activities in relation to all the elements aspects of paragraph 13(h)(ii)., depending on the complexity associated with the accounting estimate.
Existing paragraph A51 is amended to read as follows:
As part of obtaining an understanding of identifying the controls activities relevant to the audit, and evaluating their design and determining whether they have been implemented, the auditor may consider:
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The effectiveness of the design of the controls. 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.
Existing paragraph A52 is amended to read as follows:
When management makes extensive use of information technology in making an accounting estimate, identified controls relevant to the audit in the control activities component are likely to include general IT controls and application information processing controls. Such controls may address risks related to:
Whether the IT applications or other aspects of the IT environment information technology system has the capability and is appropriately configured to process large volumes of data;
Complex calculations in applying a method. When diverse IT applications systems are required to process complex transactions, regular reconciliations between the IT applications systems are made, in particular when the IT applications systems do not have automated interfaces or may be subject to manual intervention;
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Existing paragraph A53 is amended to read as follows:
In some industries, such as banking or insurance, the term governance may be used to describe activities within the control environment, the entity’s process to monitor the system of internal control monitoring of controls, and other components of the system of internal control, as described in ASA 315.[40]
Existing paragraph A54 is amended to read as follows:
For entities with an internal audit function, its work may be particularly helpful to the auditor in obtaining an understanding of:
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The design and implementation of controls activities that address the risks related to the data, assumptions and models used to make the accounting estimates;
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Existing paragraph A59 is amended to read as follows:
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 risks of material misstatement in the current period.
Existing paragraph A60 is amended to read as follows:
A difference between the outcome of an accounting estimate and the amount recognised in the previous period’s financial report does not necessarily represent a misstatement of the previous period’s financial report. 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 report were finalised, 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 any plan to test related controls and the related assessment of control risk and or 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.
Existing paragraph A65 is amended to read as follows:
Paragraph A42 of ASA 200 states that the ASAs do not ordinarily refer to inherent risk and control risk separately typically refer to the “risks of material misstatement” rather than to inherent risk and control risk separately. However, this ASA 315 Auditing Standard 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 at the assertion level,[45] including significant risks, at the assertion level for accounting estimates in accordance with ASA 330.46
Existing paragraph A66 is amended to read as follows:
In identifying the risks of material misstatement and in assessing inherent risk for accounting estimates in accordance with ASA 315,[47] the auditor is required to take into account the degree to which the accounting estimate is subject to, or affected by, the inherent risk factors that affect susceptibility to misstatement of assertions, and how they do so 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:
Assessing the likelihood and magnitude of misstatement (i.e., Wwhere inherent risk is assessed on the spectrum of inherent risk); and
Determining Tthe 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.
Existing paragraph A68 is amended to read as follows:
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 close to the lower end of the spectrum of inherent risk.
Existing paragraph A70 is amended to read as follows:
Events occurring after the date of the financial report 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,[48] regardless of how the inherent risk factors affect susceptibility of assertions to misstatement relating to 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 report 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 close to 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.
Existing paragraph A79 is amended to read as follows:
The degree of subjectivity associated with an accounting estimate influences the susceptibility of the accounting estimate to misstatement due to management bias or fraud other fraud risk factors insofar as they affect inherent risk. 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.
Existing section heading before paragraph A85 has been amended to read as When the Auditor Intends to Rely on the Operating Effectiveness of Relevant Controls (Ref: Para: 19)
Existing paragraph A85 is amended to read as follows:
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 judgement 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.
As a result of the footnote insertion above, subsequent footnotes of this Auditing Standard are re-numbered and references to these footnotes are updated accordingly.
Existing footnote 49 in paragraph A104 is amended to read as follows:
See ASA 315, paragraph 816.
Existing footnote 58 in paragraph A137 is amended to read as follows:
See also ASA 315, paragraph 3137.
Existing footnote 65 in paragraph A149 is amended to read as follows:
See ASA 315, paragraphs 3238 and A152–A155A237–A241.