Auditors following global standards now have updated rules on how to audit accounting estimates, guidance that U.S. auditors have been awaiting for several years.
The International Auditing and Assurance Standards Board has finalized and published a revised International Standard on Auditing 540 to give auditors new direction on auditing estimates in a “rapidly evolving business environment.” The IAASB says the revisions are meant to assure the standard keeps pace with the changing market and fosters in auditors a more independent, skeptical mindset.
The guidance is especially responsive to rapid changes in banks, insurers, and other financial services firms, which have changed the way they deal with loan provisions and insurance contracts, the board says. Modeling is getting especially complex as financial institutions, both in the United States and abroad, follow new standards for taking a more forward-looking approach to measuring and recognizing loan losses in their portfolios.
The new standard features an enhanced approach to risk assessment, requiring auditors to consider complexity, subjectivity, and other inherent risk factors in addition to estimation uncertainty, the IAASB says. The idea there is to “drive auditors to think more deeply about the risks inherent to accounting estimates.”
The new standard also seeks to draw a closer link between the risk assessment and the methods, data, and assumptions used in making accounting estimates, including use of complex models. The IAASB says the new standard gives auditors guidance on how to scale the standard to all types of accounting estimates, and it emphasizes the importance of applying appropriate professional skepticism.
In the United States, the Public Company Accounting Oversight Board has been calling out problems through its inspection process with the audit of accounting estimates, including fair value, for several years. The board issued a concept paper in 2014 to seek input on revising its guidance, and then it issued a proposed standard in 2017.
Comments from major audit firms on the board’s 2017 proposal contained plenty of suggested revisions, but were generally supportive of the need for new standards. The current standard on auditing estimates dates back to 1988.
In a rare jab at the audit regulatory process evidenced by a major firm, PwC provided a lengthy response to its 2011 inspection, dated August 2012, calling on the board to accelerate its work on standards, especially those regarding the audit of fair-value measurements, estimates, and on the firms’ systems of quality control. “In our view, the consistency of audit execution, not only within a single firm but across the profession, can be greatly enhanced with standards that reflect the increasingly complex accounting and auditing environment in which we operate,” wrote Bob Moritz and Tim Ryan, then U.S. chairman and assurance leader, respectively.
The Securities and Exchange Commission replaced the entire five-member PCAOB at the end of 2017, and the board has so far has spent 2018 primarily in strategic planning. A June standard-setting update published by the PCAOB’s chief auditor’s office indicates the staff is developing a recommendation for the board’s consideration in the fourth quarter of this year. Marty Baumann resigned as the PCAOB’s chief auditor in May and has been appointed chairman of the IAASB, beginning in January.