ISA 540 (Revised) Rich Sharko, IAASB Member and Chair of the ISA 540 Task Force Marek Grabowski, IAASB Member and Co-Chair of the ISA 540 Task Force June 18, 2018

Outreach IFIAR Clarify link between ISA 540 and ISA 500 with respect to work management’s expert Clarify relationship between ISA 540 and other standards (e.g. ISA 315 (Revised)) Why added significant in some places (e.g. significant data, significant assumptions) Professional Skepticism – what else will be done? Control testing Re-exposure

Outreach IOSCO FSB Roundtable Basel Committee Direction of travel on non-540 topics (sampling, experts) How will the ISA be aligned with revision of ISA 315 Reasonable ranges – guidance on multiples of materiality not sufficient Scalability Re-exposure FSB Roundtable Basel Committee

Concerns about scalability of the standard SMPC Letter Concerns about scalability of the standard Risk assessment (paragraph 12) Introductory sentence: prefers ‘to the degree relevant in the circumstances” over “to the extent necessary” Clarify expectation for accounting estimates with a low inherent risk Response to the assessed RoMM When testing how management made the accounting estimate, or develop an auditor’s point estimate or range, the required procedures are disproportionate for simple accounting estimates Effective date: Supportive of years beginning on or after December 15, 2019 (with early adoption permitted) Supportive of implementation working group Development of examples to illustrate scalability

Approach to IAASB Discussion Walk through of ISA 540 (Revised) (Agenda Item 2-B) Matter for IAASB Consideration #1 on professional skepticism (Agenda Item 2 – section 2) Walk through of the conforming and consequential amendments (Agenda Item 2- D.1) Matters for IAASB consideration #2 and #3 on the effective date (Agenda Item 2 – section 3)

Summary of Significant Changes to ISA 540 (Revised)

Introduction, Objective and Definitions Further aligned with the work of ISA 315 Task Force (paragraphs 3, 4 and 7) Updated based on April 24, 2018 teleconference Paragraph 2 has been clarified Former paragraph A1R relocated to paragraph 5 Objective No changes Definitions - Minor changes to the definition of an accounting estimate

Risk Assessment and Related Activities Paragraph 12 Changed lead-in wording to drive scalability Emphasis shifted from varying the extent of the understanding to varying the extent of the risk assessment procedures to obtain the understanding Clarified subparagraph 12(g) Understanding the entity’s risk assessment process may assist the auditor in understanding the effects of the IR factors Clarified subparagraph 12(h) based on April 24, 2018 teleconference

Identifying and Assessing the RoMM Paragraph 15 Application material added to Explain how the auditor can assess control risk as well as the relationship between control risk and control reliance (paragraph A70) Clarify the link between the inherent risk factors and the determination of whether any of the risks of material misstatement are a significant risk (paragraph A78) Paragraphs A74, A75, A76 were enhanced to clarify that the inherent risk factors are taken into account in assessing inherent risk (but not control risk) Paragraph 16 Application material added to explain ‘obtain an understanding of the entity’s controls’, as included in paragraph 16 (paragraph A79)

Responses to the Assessed RoMM Paragraph 17 Shortened and clarified the descriptions of the testing approaches Updated the last sentence based on April 24, 2018 teleconference and added application material (paragraph A82) to explain that it is not the intent for the auditor to do an exhaustive search to identify all possible source of audit evidence Paragraphs 18 and 19 Aligned with ISA 330 Added application material (paragraph A85) to signal the importance of testing the design, implementation and effectiveness of controls when inherent risk is assessed as higher on the spectrum of inherent risk

Responses to the Assessed RoMM (cont’d) Paragraph 20 Aligned wording with paragraph 17 Changed ‘shall evaluate’ to ‘shall consider’ The responses to the assessed RoMM (paragraphs 17-29) are about obtaining audit evidence, while the evaluation is done later (paragraphs 32-34) Paragraph 21 Changed the introductory wording Done to highlight that further audit procedures are designed and performed to obtain sufficient appropriate audit evidence to address the risks of material misstatement Introductory sentence to paragraphs 22, 23, 24 and 30 changed to “shall address” to highlight that the further audit procedures need to address certain matters

Responses to the Assessed RoMM (cont’d) Paragraph 23 Changed ‘to the extent such assumptions are known to the auditor’ to ‘based on the auditor’s knowledge obtained in the audit’ Similar to construct used in ISA 720 (Revised) Deleted the second part of paragraph 23(d) – application material sufficiently addresses the point Added application material to explain what is meant by ‘related assumptions used in other areas of the entity’s business activities’ (paragraph A108) Paragraph 24 Added application material which refers to ISA 500 to further explain what is meant by ‘relevant and reliable’ (paragraph A114)

Responses to the Assessed RoMM (cont’d) Paragraphs 27 and 28 Revised paragraph 27 into a single paragraph based on April 24, 2018 teleconference Clarified that the intent of the requirement is for the auditor to include further audit procedures to evaluate whether the methods, assumptions and data used in making the accounting estimates are appropriate in the context of the applicable financial accounting framework Paragraph 28(b) has been revised to be consistent with the wording in paragraphs 17 and 21 as described above Paragraph 29 Included reference to paragraphs 20-28, to clarify that this paragraph is applicable regardless of the testing approach selected Deleted paragraph A134A, which conveyed a similar message Added A129 to clarify that assumptions, data and methods that were made or identified by a management’s expert become management’s when used by management

Other Requirements Disclosures: Explained the interactions between paragraph 25, 30 and 34 in application material (paragraph A130) Stand-back Clarified paragraph 34 by referring to “each class of transactions, account balance, or disclosure that includes an accounting estimate” Added paragraph A138 to clarify that the determination in paragraph 34 is done at the assertion level Documentation Simplified the construct of the requirement by specifying what needs to be included in the audit documentation for accounting estimates, in addition to what is required by ISA 230 Aligned paragraph 37(b) more closely to ISA 330 and added AM to explain the requirement

Professional Skepticism

Professional Skepticism Task Force has used stronger wording (i.e., question or challenge) in application material to drive appropriate auditor behavior in the audit of accounting estimates, including the exercise of professional skepticism Retrospective review (Paragraph A59) Significant assumptions (Paragraph A97) Management bias (Paragraph A133) Overall evaluation based on audit procedures performed (A135 and A139) Changed the last sentence of paragraph 17 based on April 24, 2018 teleconference and added application material (paragraph A82) to explain that the auditor is not meant to do an exhaustive search to identify all possible source of audit evidence

Matters for IAASB Consideration The IAASB is asked whether it supports the changes made to enhance the exercise of professional skepticism

Proposed Conforming and Consequential Amendments

Other Matters – Conforming and Consequential Amendments ISA 500 Paragraph A33A: Included a reference to management’s expert’s potential use of an external information source Paragraph A33F: Reordered sentences to improve readability. Included reference to ISA 315 (Revised) to reflect that the bullets are not solely about responding to risk but are also about obtaining an understanding of the design and implementation of controls Paragraph A33H: Reordered the two examples to address the more common example first and also to improve the flow into paragraph A33Ga

Effective Date

Task Force had mixed views on the effective date Some TF members supported an effective date for audits beginning on or after December 15, 2019 (i.e., calendar 2020) Assuming Board approval at this meeting, earlier effective date would provide 6 to 10 months for implementation of the standard, before commencement of planning for larger engagements. Implementation period depends on whether firms await PIOB consideration of approval, scheduled for September. Firms need time to update their methodologies and audit tools, develop training materials, and train their staff Third-party providers of audit software for smaller practitioners need time to update the software and supporting materials Some national auditing standard setters need time to translate the standard

Effective Date Other TF members were in favor of an effective date for audits beginning on or after December 15, 2018 (i.e., calendar 2019) Given the significant number of inspection findings related to accounting estimates, it is in the public interest for the standard to be effective as soon as possible Financial institutions’ regulators have been urging the IAASB to have a revised auditing standard on accounting estimates closer to when IFRS 9 becomes effective A majority of the respondents to ED-540 supported an effective date for the standard for financial reporting periods ending approximately 18 months after the approval of a final ISA by the IAASB

Matter for IAASB Consideration 2. The IAASB is asked for its views and a decision on the most appropriate effective date of ISA 540 (Revised), taking into account the public interest considerations identified

Matter for IAASB Consideration 3. The IAASB is asked whether they agree with the Task Force conclusion that the final standard should be effective for audits of periods “beginning on or after” the chosen date