Explanatory Statement
ASA 540 Auditing Accounting Estimates and Related Disclosures and
ASA 2018-1 Amendments to Australian Auditing Standards
Issued by the Auditing and Assurance Standards Board
Obtaining a Copy of this Explanatory Statement
The Explanatory Statement, ASA 540 and ASA 2018-1 are available free-of-charge on the Auditing and Assurance Standards Board (AUASB) website: www.auasb.gov.au
Contact Details
Auditing and Assurance Standards Board Podium Level 14, 530 Collins Street Melbourne Victoria 3000 AUSTRALIA | Phone: (03) 8080 7400 E‑mail: enquiries@auasb.gov.au Postal Address: PO Box 204, Collins Street West Melbourne Victoria 8007 AUSTRALIA |
Reasons for Issuing Auditing Standard ASA 540 Auditing Accounting Estimates and Related Disclosures
The AUASB issues Auditing Standard ASA 540 Auditing Accounting Estimates and Related Disclosures pursuant to the requirements of the legislative provisions and the Strategic Direction explained below.
The AUASB is a Non‑corporate Commonwealth Entity of the Australian Government established under section 227A of the Australian Securities and Investments Commission Act 2001, as amended (ASIC Act). Under section 336 of the Corporations Act 2001, the AUASB may make Auditing Standards for the purposes of the corporations legislation. These Auditing Standards are legislative instruments under the Legislation Act 2003.
Under the Strategic Direction given to the AUASB by the Financial Reporting Council (FRC), the AUASB is required, inter alia, to develop auditing standards that have a clear public interest focus and are of the highest quality.
The Auditing Standard conforms with ISA 540 Auditing Accounting Estimates and Related Disclosures issued by the International Auditing and Assurance Standard Board.
Purpose of Auditing Standard ASA 540 Auditing Accounting Estimates and Related Disclosures and Auditing Standard ASA 2018-1 Amendments to Australian Auditing Standards
ASA 540 Auditing Accounting Estimates and Related Disclosures (December 2018) represents the Australian equivalent of revised ISA 540 Auditing Accounting Estimates and Related Disclosures (October 2018) and replaces the current ASA 540 issued by the AUASB in October 2009 (as amended).
ASA 2018-1 makes amendments to the requirements and/or application and other explanatory material and/or appendices of Australian Auditing Standards as a result of the issuance of ASA 540 Auditing Accounting Estimates and Related Disclosures.
Main Features
The revision of ASA 540 reflects recent enhancement to auditing accounting estimates and related disclosures developed by the International Auditing and Assurance Standards Board (IAASB). The improvements include:
- Addressing evolving audit risks relating to accounting estimates due to a more complex business environment;
- Addressing audit quality for accounting estimates and fostering improved exercise of professional scepticism; and
- Realising public interest benefits through improved communication and transparency.
ASA 2018-1 makes conforming and consequential amendments to Australian Auditing Standards as a result of the issuance of ASA 540.
Operative Date
ASA 540 Auditing Accounting Estimates and Related Disclosures and ASA 2018-1 Amendments to Australian Auditing Standards are operative for financial reporting periods commencing on or after 15 December 2019. Early adoption of ASA 540 and ASA 2018-1 is permitted prior to this date.
Process of making Australian Auditing Standards
The AUASB’s Strategic Direction, inter alia, provides that the AUASB develop Australian Auditing Standards that:
- have a clear public interest focus and are of the highest quality;
- use the International Standards on Auditing (ISAs) of the International Auditing and Assurance Standards Board (IAASB) as the underlying standards;
- conform with the Australian regulatory environment; and
- are capable of enforcement.
Consultation Process prior to issuing the Auditing Standards
The AUASB has consulted publicly as part of its due process in developing the Auditing Standards. Exposure Draft ED 03/18 Proposed Auditing Standard ASA 540 Auditing Accounting Estimates and Related Disclosures and Exposure Draft ED 04/18 Proposed ASA 2018-2 Amendments to Australian Auditing Standards were issued in August 2018 with a 70-day comment period.
Submissions were received by the AUASB and these were considered as part of the development and finalisation of the Auditing Standard.
Regulatory Impact Statement
A Regulatory Impact Statement Preliminary Assessment (RIA) has been prepared in connection with the preparation of ASA 540 Auditing Accounting Estimates and Related Disclosures. The RIA has been cleared by the Office of Best Practice Regulation (OBPR).
STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 Legislative Instruments: Auditing Standard ASA 540 Auditing Accounting Estimates and Related Disclosures (December 2018)
Auditing Standard ASA 2018-1 Amendments to Australian Auditing StandardsThese Legislative Instruments are compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. Overview of the Legislative InstrumentsBackground The AUASB is a Non‑corporate Commonwealth Entity of the Australian Government established under section 227A of the Australian Securities and Investments Commission Act 2001, as amended (ASIC Act). Under section 336 of the Corporations Act 2001, the AUASB may make Auditing Standards for the purposes of the corporations legislation. These Auditing Standards are legislative instruments under the Legislation Act 2003. Purpose of Auditing Standard ASA 540 The purpose of ASA 540 is to conform with the equivalent revised international standard on auditing, ISA 540; and to replace the pre‑existing auditing standard. The purpose of ASA 2018-1 is to make consequential and conforming amendments to Australian Auditing Standards as a result of the issuance of ASA 540. Main Features The revision of ASA 540 include: - Addressing evolving audit risks relating to accounting estimates due to a more complex business environment;
- Addressing audit quality for accounting estimates and fostering improved exercise of professional scepticism; and
- Realising public interest benefits through improved communication and transparency.
Human Rights ImplicationsThe Auditing Standards are issued by the AUASB in furtherance of the objective of facilitating the Australian economy. The standards do not diminish or limit any of the applicable human rights or freedoms, and thus do not raise any human rights issues. Conclusion The Legislative Instruments are compatible with human rights as it does not raise any human rights issues due to the nature and content of the revised auditing standard. |
Overview
The Auditing and Assurance Standards Board (AUASB) has issued Auditing Standard ASA 540 Auditing Accounting Estimates and Related Disclosures (December 2018) and ASA 2018-1 Amendments to Australian Auditing Standards to align with the International Standard on Auditing (ISA) 540, addressing the evolving risks associated with accounting estimates in a complex business environment. These standards, established under the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001, aim to enhance audit quality and the exercise of professional scepticism, while also improving communication and transparency for the public interest. The AUASB, guided by the Financial Reporting Council, ensures that these standards are of high quality and have a clear public interest focus, reflecting the underlying ISAs of the International Auditing and Assurance Standards Board. The new standards, effective for financial reporting periods commencing on or after 15 December 2019, allow for early adoption and have undergone a thorough consultation process, including a 70-day comment period for the exposure drafts. Additionally, a Regulatory Impact Statement has been prepared and cleared by the Office of Best Practice Regulation, confirming the standards' compatibility with human rights as recognised in international instruments.
Scope and Application
The Auditing and Assurance Standards Board (AUASB) issues Auditing Standard ASA 540 Auditing Accounting Estimates and Related Disclosures (ASA 540) and ASA 2018-1 Amendments to Australian Auditing Standards pursuant to the Corporations Act 2001, which empowers the AUASB to make auditing standards for corporations legislation. These standards are legislative instruments under the Legislation Act 2003. ASA 540 is applicable to auditors who are responsible for the audit of financial reports and other information of entities, and it aims to ensure that accounting estimates and related disclosures in financial reports are prepared in accordance with the applicable financial reporting framework. ASA 2018-1 makes consequential and conforming amendments to Australian Auditing Standards as a result of the issuance of ASA 540. The standards apply across Australia and are operative for financial reporting periods commencing on or after 15 December 2019, with early adoption permitted. There are no stated exclusions or thresholds in these standards, and they are not extended or restricted through subordinate instruments.
Key Provisions
Auditing Standard ASA 540 Auditing Accounting Estimates and Related Disclosures (ASA 540), along with ASA 2018-1 Amendments to Australian Auditing Standards (ASA 2018-1), are key provisions established by the Auditing and Assurance Standards Board (AUASB) to ensure the quality and integrity of auditing accounting estimates. ASA 540 (section 1) replaces the previous ASA 540 and aligns with the revised International Standard on Auditing (ISA) 540, while ASA 2018-1 (section 2) makes necessary amendments to other Australian Auditing Standards to reflect the changes introduced by ASA 540. The operative date for these standards is for financial reporting periods beginning on or after 15 December 2019, although early adoption is permitted (section 3).
The AUASB imposes specific obligations on auditors and audit firms governed by these standards. Auditors must address evolving audit risks related to accounting estimates, which have become more complex due to the changing business environment (section 4). They are also required to enhance audit quality for accounting estimates and exercise greater professional scepticism (section 5). Additionally, auditors must ensure that their communications and disclosures are transparent and meet the public interest, thereby realising public interest benefits (section 6). These requirements are designed to maintain the highest standards of auditing practices in Australia.
Breaches of these standards may result in various consequences. The AUASB, as a legislative instrument under the Legislation Act 2003, has the authority to enforce compliance (section 7). While specific penalties are not detailed in the explanatory statement, non-compliance could potentially lead to disciplinary actions against the auditors or audit firms, impacting their professional standing and ability to practice. It is important for auditors to adhere to these standards to avoid any adverse effects on their professional reputation and the integrity of the financial reporting process (section 8).