SA 540 — Auditing Accounting Estimates (Revised)

Issued by ICAI AASB · Audit Evidence

Estimates with significant measurement uncertainty — risk assessment and substantive procedures.

Objective

To obtain sufficient appropriate audit evidence about whether accounting estimates and related disclosures are reasonable.

Key requirements

Inherent risk factors: estimation uncertainty, complexity, subjectivity, management bias
Identification of significant risks for estimates with high estimation uncertainty
Three procedural strands: (a) events after the date of the FS, (b) test the method, assumptions and data, (c) develop an auditor's point estimate or range
Specific consideration of disclosures and indicators of management bias
Retrospective review of prior-period estimates

Typical procedures

Walkthrough of the estimation process
Testing the data inputs and the method
Independent expectation / range development
Stress testing of the estimate against alternative reasonable assumptions

Common pitfalls

Accepting management's assumptions without independent challenge
Failing to address management bias in the documentation
No retrospective review of prior estimates

SA 540 in practice

SA 540 sits in the Audit Evidence phase of the audit. The Standards on Auditing are issued by the ICAI Auditing and Assurance Standards Board (AASB) and deemed to be prescribed by the Central Government under Section 143(10) of the Companies Act 2013. Compliance with SAs is mandatory for every audit conducted by a Chartered Accountant in India.

For authoritative text, refer to the ICAI AASB Compendium of Standards on Auditing at icai.org.

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