Auditing and Assurance Standards and Guidance

Auditing Standards (Ireland)

FRC ISAs (UK and Ireland) applicable for periods beginning on or after 15 December 2010 but before 17 June 2016

ISA (UK and Ireland) 540 Auditing, accounting estimates, including fair value accounting estimates, and related disclosures

Application and Other Explanatory Material

Risk Assessment Procedures and Related Activities (Ref: Para. 8 )

Obtaining an Understanding of How Management Identifies the Need for Accounting Estimates (Ref: Para. 8(b) )

The preparation of the financial statements requires management to determine whether a transaction, event or condition gives rise to the need to make an accounting estimate, and that all necessary accounting estimates have been recognized, measured and disclosed in the financial statements in accordance with the applicable financial reporting framework.

A17.	Management's identification of transactions, events and conditions that give rise to the need for accounting estimates is likely to be based on:

Management's knowledge of the entity's business and the industry in which it operates.

Management's knowledge of the implementation of business strategies in the current period.

Where applicable, management's cumulative experience of preparing the entity's financial statements in prior periods.

In such cases, the auditor may obtain an understanding of how management identifies the need for accounting estimates primarily through inquiry of management. In other cases, where management's process is more structured, for example, when management has a formal risk management function, the auditor may perform risk assessment procedures directed at the methods and practices followed by management for periodically reviewing the circumstances that give rise to the accounting estimates and re-estimating the accounting estimates as necessary. The completeness of accounting estimates is often an important consideration of the auditor, particularly accounting estimates relating to liabilities.

A18.

The auditor's understanding of the entity and its environment obtained during the performance of risk assessment procedures, together with other audit evidence obtained during the course of the audit, assist the auditor in identifying circumstances, or changes in circumstances, that may give rise to the need for an accounting estimate.

A19.	Inquiries of management about changes in circumstances may include, for example, inquiries about whether:

The entity has engaged in new types of transactions that may give rise to accounting estimates.

Terms of transactions that gave rise to accounting estimates have changed.

Accounting policies relating to accounting estimates have changed, as a result of changes to the requirements of the applicable financial reporting framework or otherwise.

Regulatory or other changes outside the control of management have occurred that may require management to revise, or make new, accounting estimates.

New conditions or events have occurred that may give rise to the need for new or revised accounting estimates.

A20.

During the audit, the auditor may identify transactions, events and conditions that give rise to the need for accounting estimates that management failed to identify. ISA (UK and Ireland) 315 deals with circumstances where the auditor identifies risks of material misstatement that management failed to identify, including determining whether there is a significant deficiency in internal control with regard to the entity's risk assessment processes.¹¹

¹¹ ISA (UK and Ireland) 315, paragraph 16.