Annual Audit Manual
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7074 Completion Procedures
Sep-2020
In This Section
Communication with Those Charged with Governance, Management or Other Relevant Parties
CAS Requirement
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 (CAS 540.37).
CAS Guidance
Written representations about specific accounting estimates may include representations (CAS 540.A145):
- That the significant judgments made in making the accounting estimates have taken into account all relevant information of which management is aware.
- About the consistency and appropriateness in the selection or application of the methods, assumptions and data used by management in making the accounting estimates.
- That the assumptions appropriately reflect management’s intent and ability to carry out specific courses of action on behalf of the entity, when relevant to the accounting estimates and disclosures.
- That disclosures related to accounting estimates, including disclosures describing estimation uncertainty, are complete and are reasonable in the context of the applicable financial reporting framework.
- That appropriate specialized skills or expertise has been applied in making the accounting estimates.
- That no subsequent event requires adjustment to the accounting estimates and related disclosures included in the financial statements.
- When accounting estimates are not recognized or disclosed in the financial statements, about the appropriateness of management’s decision that the recognition or disclosure criteria of the applicable financial reporting framework have not been met.
OAG Guidance
When dealing with accounting estimates, we may use management’s written representation to formalize oral representations made by management. For example, when management has indicated its intention to retain or sell a specific asset, and this is relevant to our audit of an impairment estimate, we seek specific representation from management on this intention. This would supplement, but not stand in the place of, procedures performed to obtain sufficient, appropriate audit evidence about management’s intent and ability to carry out a particular course of action (examples of procedures that might be performed to obtain this evidence are included in the section Assess Consistency of Significant Assumptions in OAG Audit 7073.5).
CAS Requirement
In applying CAS 260 and CAS 265, the auditor is required to communicate with those charged with governance or management about certain matters, including significant qualitative aspects of the entity’s accounting practices and significant deficiencies in internal control, respectively. In doing so, the auditor shall consider the matters, if any, to communicate regarding accounting estimates and take into account whether the reasons given to the risks of material misstatement relate to estimation uncertainty, or the effects of complexity, subjectivity or other inherent risk factors in making accounting estimates and related disclosures. In addition, in certain circumstances, the auditor is required by law or regulation to communicate about certain matters with other relevant parties, such as regulators or prudential supervisors (CAS 540.38).
CAS Guidance
In applying CAS 260, the auditor communicates with those charged with governance the auditor’s views about significant qualitative aspects of the entity’s accounting practices relating to accounting estimates and related disclosures. Appendix 2 includes matters specific to accounting estimates that the auditor may consider communicating to those charged with governance (CAS 540.A146).
CAS 265 requires the auditor to communicate in writing to those charged with governance significant deficiencies in internal control identified during the audit. Such significant deficiencies may include those related to controls over (CAS 540.A147):
(a) The selection and application of significant accounting policies, and the selection and application of methods, assumptions and data;
(b) Risk management and related systems;
(c) Data integrity, including when data is obtained from an external information source; and
(d) The use, development and validation of models, including models obtained from an external provider, and any adjustments that may be required.
In addition to communicating with those charged with governance, the auditor may be permitted or required to communicate directly with regulators or prudential supervisors. Such communication may be useful throughout the audit or at particular stages, such as when planning the audit or when finalizing the auditor’s report. For example, in some jurisdictions, financial institution regulators seek to cooperate with auditors to share information about the operation and application of controls over financial instrument activities, challenges in valuing financial instruments in inactive markets, expected credit losses, and insurance reserves while other regulators may seek to understand the auditor’s views on significant aspects of the entity’s operations including the entity’s costs estimates. This communication may be helpful to the auditor in identifying, assessing and responding to risks of material misstatement (CAS 540.A148).
Communications with Those Charged with Governance (CAS 540 Appendix 2)
Matters that the auditor may consider communicating with those charged with governance with respect to the auditor’s views about significant qualitative aspects of the entity’s accounting practices related to accounting estimates and related disclosures include:
(a) How management identifies transactions, other events and conditions that may give rise to the need for, or changes in, accounting estimates and related disclosures.
(b) Risks of material misstatement.
(c) The relative materiality of the accounting estimates to the financial statements as a whole.
(d) Management’s understanding (or lack thereof) regarding the nature and extent of, and the risks associated with, accounting estimates.
(e) Whether management has applied appropriate specialized skills or knowledge or engaged appropriate experts.
(f) The auditor’s views about differences between the auditor’s point estimate or range and management’s point estimate.
(g) The auditor’s views about the appropriateness of the selection of accounting policies related to accounting estimates and presentation of accounting estimates in the financial statements.
(h) Indicators of possible management bias.
(i) Whether there has been or ought to have been a change from the prior period in the methods for making the accounting estimates.
(j) When there has been a change from the prior period in the methods for making the accounting estimate, why, as well as the outcome of accounting estimates in prior periods.
(k) Whether management’s methods for making the accounting estimates, including when management has used a model, are appropriate in the context of the measurement objectives, the nature, conditions and circumstances, and other requirements of the applicable financial reporting framework.
(l) The nature and consequences of significant assumptions used in accounting estimates and the degree of subjectivity involved in the development of the assumptions.
(m) Whether significant assumptions are consistent with each other and with those used in other accounting estimates, or with assumptions used in other areas of the entity’s business activities.
(n) When relevant to the appropriateness of the significant assumptions or the appropriate application of the applicable financial reporting framework, whether management has the intent to carry out specific courses of action and has the ability to do so.
(o) How management has considered alternative assumptions or outcomes and why it has rejected them, or how management has otherwise addressed estimation uncertainty in making the accounting estimate.
(p) Whether the data and significant assumptions used by management in making the accounting estimates are appropriate in the context of the applicable financial reporting framework.
(q) The relevance and reliability of information obtained from an external information source.
(r) Significant difficulties encountered when obtaining sufficient appropriate audit evidence relating to data obtained from an external information source or valuations performed by management or a management’s expert.
(s) Significant differences in judgments between the auditor and management or a management’s expert regarding valuations.
(t) The potential effects on the entity’s financial statements of material risks and exposures required to be disclosed in the financial statements, including the estimation uncertainty associated with accounting estimates.
(u) The reasonableness of disclosures about estimation uncertainty in the financial statements.
(v) Whether management’s decision relating to the recognition, measurement, presentation and disclosure of the accounting estimates and related disclosures in the financial statements are in accordance with the applicable financial reporting framework.
OAG Guidance
CAS Requirement
The auditor shall include in the audit documentation (CAS 540.39):
(a) Key elements of the auditor’s understanding of the entity and its environment, including the entity’s internal control related to the entity’s accounting estimates;
(b) The linkage of the auditor’s further audit procedures with the assessed risks of material misstatement at the assertion level, taking into account the reasons (whether related to inherent risk or control risk) given to the assessment of those risks;
(c) The auditor’s response(s) when management has not taken appropriate steps to understand and address estimation uncertainty;
(d) Indicators of possible management bias related to accounting estimates, if any, and the auditor’s evaluation of the implications for the audit, as required by paragraph 32; and
(e) Significant judgments relating to the auditor’s determination of whether the accounting estimates and related disclosures are reasonable in the context of the applicable financial reporting framework, or are misstated.
CAS Guidance
CAS 315 and CAS 330 provide requirements and guidance on documenting the auditor’s understanding of the entity, risk assessments and responses to assessed risks. This guidance is based on the requirements and guidance in CAS 230. In the context of auditing accounting estimates, the auditor is required to prepare audit documentation about key elements of the auditor’s understanding of the entity and its environment related to accounting estimates. In addition, the auditor’s judgments about the assessed risks of material misstatement related to accounting estimates, and the auditor’s responses, may likely be further supported by documentation of communications with those charged with governance and management (CAS 540.A149).
In documenting the linkage of the auditor’s further audit procedures with the assessed risks of material misstatement at the assertion level, in accordance with CAS 330, this CAS requires that the auditor take into account the reasons given to the risks of material misstatement at the assertion level. Those reasons may relate to one or more inherent risk factors or the auditor’s assessment of control risk. However, the auditor is not required to document how every inherent risk factor was taken into account in identifying and assessing the risks of material misstatement in relation to each accounting estimate (CAS 540.A150).
The auditor also may consider documenting (CAS 540.A151):
- When management’s application of the method involves complex modeling, whether management’s judgments have been applied consistently and, when applicable, that the design of the model meets the measurement objective of the applicable financial reporting framework.
- When the selection and application of methods, significant assumptions, or the data is affected by complexity to a higher degree, the auditor’s judgments in determining whether specialized skills or knowledge are required to perform the risk assessment procedures, to design and perform procedures responsive to those risks, or to evaluate the audit evidence obtained. In these circumstances, the documentation also may include how the required skills or knowledge were applied.
Paragraph A7 of CAS 230 notes that, although there may be no single way in which the auditor’s exercise of professional skepticism is documented, the audit documentation may nevertheless provide evidence of the auditor’s exercise of professional skepticism. For example, in relation to accounting estimates, when the audit evidence obtained includes evidence that both corroborates and contradicts management’s assertions, the documentation may include how the auditor evaluated that evidence, including the professional judgments made in forming a conclusion as to the sufficiency and appropriateness of the audit evidence obtained. Examples of other requirements in this CAS for which documentation may provide evidence of the exercise of professional skepticism by the auditor include CAS 540.A152):
- Paragraph 13(d), regarding how the auditor has applied an understanding in developing the auditor’s own expectation of the accounting estimates and related disclosures to be included in the entity’s financial statements and how that expectation compares with the entity’s financial statements prepared by management;
- Paragraph 18, which requires further audit procedures to be designed and performed to obtain sufficient appropriate evidence in a manner that is not biased toward obtaining audit evidence that may be corroborative or towards excluding audit evidence that may be contradictory;
- Paragraphs 23(b), 24(b), 25(b) and 32, which address indicators of possible management bias; and
- Paragraph 34, which addresses the auditor’s consideration of all relevant audit evidence, whether corroborative or contradictory.
OAG Guidance
We use the procedures available in the audit working paper software to document our application of the requirements of CAS 540 and OAG Audit 7070. In addition, we use the Audit Planning Template to document the conclusions reached from our inherent and control risk assessments.
Our documentation of the procedures performed in respect of accounting estimates is to reflect the varying nature, timing and extent of audit procedures that will be performed for different estimates based on factors such as our assessment of inherent risk factors.
In accordance with the guidance in OAG Audit 1141, we also consider whether any matters arising in relation to management’s accounting estimates are to be documented as Significant Matters.