The FRC has launched a consultation on the proposed revision of its UK standard (ISA (UK) 540) – Auditing Accounting Estimates and Related Disclosures. The FRC’s changes reflect revisions made by the International Auditing and Assurance Standards Board (IAASB), and addresses issues arising from evolving financial reporting frameworks, particularly the move to accounting for financial instruments on an expected loss basis which is of particular significance for banks. The FRC has strongly supported the IAASB’s work.
The FRC’s proposals will ensure the quality of auditing of management estimates and disclosures in the UK keeps pace with developments in financial reporting. This has evolved to be more forward looking, leading to an increase in the volume and complexity of accounting judgements and related disclosures.
The revised standard requires better risk assessment and greater work effort on the part of auditors who will also need to apply a higher benchmark in assessing the adequacy of disclosures. This will not only be important to financial services audits, when auditing expected credit losses, but also in dealing with new accounting standards for revenue recognition and insurance contracts, where applicable.
When finalised, the revised UK standard is proposed to be effective, in line with the international standard, for audits of financial statements for periods beginning on or after 15 December 2019. Early of adoption of the revised standard will be permitted and is encouraged.
In issuing the revised ISA (UK) 540 for consultation, the FRC is not proposing to add any new UK requirements, given that the IAASB has addressed concerns raised by the FRC in its comment letter on the IAASB’s Exposure Draft. However, the FRC has carried over additional material added to ISA (UK) 540 in June 2016, to comply with requirements in the EU Audit Regulation and Directive.
Melanie Hind, the FRC’s Executive Director of Audit and Actuarial Regulation said:
The UK supports the development and adoption of high quality global standards for corporate reporting and audit, enabling the UK to attracting high quality global investment. Changes to accounting standards have increased the significance of estimates in financial statements. This standard provides a comprehensive and principles-based approach to delivering audits of estimates and related disclosures to a standard that meets the needs of users, and protects the public interest
The FRC is at the same time consulting on conforming amendments to other UK standards.