TWSA540 AUDITING ACCOUNTING ESTIMATES AND RELATED DISCLOSURES

Status

Revised by Auditing Standards Committee in Taiwan on 28 March, 2023

Summary

This Standard deals with the auditor’s responsibilities relating to accounting estimates and related disclosures in an audit of financial statements.
Accounting estimates vary widely in nature and are required to be made by management when the monetary amounts cannot be directly observed. The measurement of these monetary amounts is subject to estimation uncertainty, which reflects inherent limitations in knowledge or data. These limitations give rise to inherent subjectivity and variation in the measurement outcomes. The process of making accounting estimates involves selecting and applying a method using assumptions and data, which requires judgment by management and can give rise to complexity in measurement. The effects of complexity, subjectivity or other inherent risk factors on the measurement of these monetary amounts affects their susceptibility to misstatement.
As required by TWSA 315, the auditor shall obtain an understanding of the entity and its environment, the applicable financial reporting framework and the entity’s system of internal control related to the entity’s accounting estimates. The auditor’s procedures to obtain the understanding shall be performed to the extent necessary to obtain audit evidence that provides an appropriate basis for the identification and assessment of risks of material misstatement at the financial statement and assertion levels.
The auditor shall review the outcome of previous accounting estimates, or, where applicable, their subsequent re-estimation to assist in identifying and assessing the risks of material misstatement in the current period.
In identifying and assessing the risks of material misstatement relating to an accounting estimate and related disclosures at the assertion level, as required by TWSA 315, the auditor shall separately assess inherent risk and control risk at the assertion level. The auditor shall determine whether any of the risks of material misstatement identified and assessed are a significant risk. If the auditor has determined that a significant risk exists, the auditor shall identify controls that address that risk, and evaluate whether such controls have been designed effectively, and determine whether they have been implemented.
As required by TWSA 330, the auditor’s further audit procedures shall be responsive to the assessed risks of material misstatement at the assertion level, considering the reasons for the assessment given to those risks. The auditor’s further audit procedures shall include one or more of the following approaches:
(a) Obtaining audit evidence from events occurring up to the date of the auditor’s report;
(b) Testing how management made the accounting estimate; or
(c) Developing an auditor’s point estimate or range.
For a significant risk relating to an accounting estimate, the auditor’s further audit procedures shall include tests of controls in the current period if the auditor plans to rely on those controls. When the approach to a significant risk consists only of substantive procedures, those procedures shall include tests of details.
The auditor shall design and perform further audit procedures to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement at the assertion level for disclosures related to an accounting estimate. When the auditor’s further audit procedures include testing how management made the accounting estimate or developing an auditor’s point estimate or range, the auditor shall obtain sufficient appropriate audit evidence about the disclosures that describe estimation uncertainty.
The auditor shall evaluate whether judgments and decisions made by management in making the accounting estimates included in the financial statements, even if they are individually reasonable, are indicators of possible management bias. When indicators of possible management bias are identified, the auditor shall evaluate the implications for the audit. Where there is intention to mislead, management bias is fraudulent in nature.
In applying TWSA 330 to accounting estimates, the auditor shall evaluate, based on the audit procedures performed and audit evidence obtained, whether:
(a)The assessments of the risks of material misstatement at the assertion level remain appropriate, including when indicators of possible management bias have been identified;
(b)Management’s decisions relating to the recognition, measurement, presentation and disclosure of these accounting estimates in the financial statements are in accordance with the applicable financial reporting framework; and
(c)Sufficient appropriate audit evidence has been obtained.
The auditor shall request written representations from management and, when appropriate, those charged with governance about whether the methods, significant assumptions and the data used in making the accounting estimates and the related disclosures are appropriate to achieve recognition, measurement or disclosure that is in accordance with the applicable financial reporting framework. The auditor shall also consider the need to obtain representations about specific accounting estimates, including in relation to the methods, assumptions, or data used.

Effective date

This Standard is effective for audits of financial statement for periods ending on or after December 31, 2023.