Implementation of ISA 540 (Revised)

Simon Rohde Pedersen

Student thesis: Master thesis


Accounting estimates is one of the most difficult areas to audit due to the inherent uncertainty and lack of precision and is therefore a focus area to auditors. Audit of accounting estimates, however, requires even more attention in 2020, not only because of the economic uncertainty caused by the global pandemic, but also because the auditing standard for auditing estimates, ISA 540, has been revised with effect for financial periods beginning 15 December 2019 or later. This thesis studies the changes from the former version of the auditing standard and the challenges auditors of small and medium-sized companies in Denmark will face in the implementation of the standard in order to understand which effect ISA 540 (Revised) will have on auditors of small and medium-sized companies in practice.
It concludes that the most significant changes relate to enhanced requirements for risk assessment, emphasized importance of internal controls, additional requirements when testing how Management made the accounting estimate, extended documentation requirements and emphasis on applying professional skepticism. Based on an analysis of the challenges this changes will cause for the auditors of small and medium-sized companies ,due to the characteristics of this type of entities, it is found that, starting with the most important, implementing ISA 540 (Revised) will have the following primary effects in practice:
➢ Documentation: The biggest impact on the auditors’ work in practice will be the extended documentation requirements. The auditors will need more detail in their documentation of risk assessment and internal controls as well as in the procedures performed to test how Management made the estimate. The effect of this will be that the requirements will be part of the auditors’ documentation tools and increased time consumption, which means they must negotiate larger fees.
➢ Auditor’s approach to the audit of estimates: In order to be more challenging and apply professional skepticism, it is expected that the use of historical, external and alternative data will be more prevalent. In addition, it is expected that the audit approach of preparing an independent point estimate will be used more. These changes are a result of the limitations in Management’s accounting competences, whereby Management often have no knowledge of the methods, assumptions, and data they have applied, which makes it difficult and, in some cases, impossible to challenge Management sufficiently.
Finally, it is concluded that there will be a difference in the way larger audit firms and smaller audit firms will approach the audit. The smaller ones are expected to focus primarily on the documentation requirements, whereas the larger ones are expected to spend more time changing the audit approach to accommodate the new requirements.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2020
Number of pages80