PSA 540 (Revised) Adoption

Professional Regulation Commission Resolution No. 21 Series of 2020

• This resolution concerns implementing the Philippine Standard on Auditing (PSA) 540 (Revised).
• Covers auditing accounting estimates, related disclosures, and conforming amendments to other Philippine standards arising from PSA 540 (Revised).
• The Auditing and Assurance Standards Council (AASC) approved and submitted PSA 540 (Revised) to the board for approval.
• The board found that the pronouncement contained in PSA 540 (Revised) is well-taken and instructive for compliance by Certified Public Accountants.
• The board resolves to adopt the pronouncement as part of the Philippine Auditing Standards.
• The resolution and pronouncement take effect 15 days after full publication in the Official Gazette or a general circulation newspaper in the Philippines.
• The resolution was done in Manila on June 18, 2020.
• Date of publication in the Daily Tribune was July 01, 2020.
• Official Gazette: July 01, 2020.
• Date of effectivity: July 17, 2020.

Philippine Standards on Auditing (PSA) 540 Preface

• The Auditing and Assurance Standards Council (AASC) approved the revised International Standard on Auditing (ISA) 540 on May 21, 2019.
• The International Auditing and Assurance Standards Board (IAASB) issued the revised ISA 540 in October 2018.
• PSA 540 (Revised) is effective for financial statement audits for periods beginning on or after December 15, 2020.

International Standard on Auditing 540 (Revised) Synopsis

• ISA 540 (Revised) addresses the auditor's responsibilities for accounting estimates and related disclosures in financial statement audits.
• The standard emphasizes the importance of the auditor's decisions about controls relating to accounting estimates, including evaluating their implementation and operating effectiveness.
• ISA 540 (Revised) requires a separate assessment of control risk when assessing the risks of material misstatement at the assertion level for accounting estimates.
• The auditor's further audit procedures must be responsive to the assessed risks of material misstatement at the assertion level, considering inherent risk factors and the auditor's control risk assessment.
• Professional skepticism increases in importance when accounting estimates have greater estimation uncertainty or are affected by complexity, subjectivity, or other inherent risk factors.
• The auditor must evaluate whether accounting estimates and related disclosures are reasonable or misstated in the context of the applicable financial reporting framework.
• The objective is to obtain sufficient appropriate audit evidence about whether accounting estimates and related disclosures are reasonable within the financial reporting framework.
• An accounting estimate is a monetary amount in financial statements subject to estimation uncertainty per accounting framework requirements.
• Estimation uncertainty entails a susceptibility to an inherent lack of precision in measurement.
• ISA 540 (Revised) is effective for periods beginning on or after December 15, 2019.
• When understanding the entity and its environment, the auditor must consider transactions, events, and conditions that may create or change accounting estimates.
• The auditor must also understand the financial reporting framework requirements for accounting estimates including recognition criteria,bases, and disclosure requirements.
• Regulatory factors, the entity's internal control, and how management identifies the need for specialists are important considerations.
• The auditor should review previous accounting outcomes or re-estimations to identify risks in the current period.
• The degree to which an accounting estimate is subject to uncertainty and complexity affects inherent risk.
• If risks are significant, the auditor must grasp the entity’s controls relevant to those risks.
• Auditors actions should involve obtaining evidence of events up to the auditor's report date or testing how management arrived at the estimate.
• The auditor needs to evaluate if evidence sufficiently addresses misstatement risks relating to accounting estimates.
• Further audit procedures by auditor, should address whether significant assumptions and data is appropriate per reporting framework

Nature of Accounting Estimates

• Accounting estimates vary because monetary amounts can't always be directly observed.
• This process involves selecting a method using assumptions and data, which can be complex and subjective.
• These estimates can include items like inventory obsolescence, depreciation, valuation of assets, outcomes of litigation, provisions for losses, and employee benefits liabilities.
• A method may involve a computational tool or model applying assumptions, data, and considering relationships between them.
• Assumptions involve judgments about interest rates, discount rates, or future conditions, which may be selected from a range of alternatives.
• Data can be obtained from direct observation, external parties, or analytical techniques.

Key Concepts

• The assessment of inherent risk depends on how inherent risk factors affect the likelihood or magnitude of misstatement.
• It is important to weigh up the auditor's decisions about controls relating to accounting estimates.
• Separate assessment of control risk is needed when assessing risks of material misstatement at the assertion level.
• Professional skepticism is affected by considering inherent risk factors.
• Is necessary to assess whether in the context of the reporting financial Estimates and relevant disclosures are reasonable or misstated

Implementation Guidance

• The nature, timing, and scope of audit procedures may depend on how much individual matters apply in the circumstances.
• A retrospective can help provide support that the identification and the risks of material misstatement are accurate in the current period.
• Must evaluate if specialists’ in the team are required to help determine what is not specified by the applicable reporting framework