AICPA Proposes New SAS on Auditing Accounting Estimates

The AICPA’s Auditing Standards Board (ASB) has issued the Exposure Draft, Proposed Statement on Auditing Standards: Auditing Accounting Estimates and Related Disclosures. The comment deadline is November 22, 2019.

The ASB developed the Exposure Draft as part of its Enhancing Audit Quality Initiative project to enhance the auditing standards relating to auditing accounting estimates. As noted in the Background discussion in the Exposure Draft, the ASB intends the project “to enable auditors to appropriately address the increasingly complex scenarios that arise from new accounting standards that include estimates and related disclosures and to enhance the auditor’s focus on factors driving estimation uncertainty and potential management bias.” Further, global regulators have identified “accounting estimates as a key area where enhancing standards was needed to improve audit performance.” The Initiative has noted that nonconformity in accounting for audit estimates “is the most common audit issue detected by practice monitoring programs worldwide.”

IAASB and PCAOB Standards

Other standard-setters and audit regulators have been working on projects related to the auditing of accounting estimates, including the International Auditing and Assurance Standards Board (IAASB) and the Public Company Accounting Oversight Board (PCAOB). The ASB has been monitoring these projects and has based its Exposure Draft on the IAASB’s new standard for auditing accounting estimates, International Standard on Auditing (ISA) 540 (Revised), Auditing Accounting Estimates and Related Disclosures. The PCAOB adopted their related Auditing Standard (AS) No. 2501, Auditing Accounting Estimates, Including Fair Value Measurements, and Amendments to PCAOB Auditing Standards (PCAOB Release No. 2018-005) in December.

The proposed SAS converges the AICPA’s standard with that of the IAASB, with language changes to follow usage in the U.S. The proposed SAS, if adopted as proposed, would supersede SAS 122, Statements on Auditing Standards: Clarification and Recodification, as amended, section 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures (AU-C section 540). The ASB used elements of the PCAOB’s AS 2501 as well.

Fundamental Provisions of the Proposed Estimate Standard

The proposed SAS:

  • Explains the nature of estimation uncertainty;
  • Provides guidance on scalability of the requirements, so that the provisions can be used for all types of accounting estimates, whether simple or complex;
  • Requires separate assessment of inherent risk and control risk;
  • Provides enhanced risk assessment requirements tailored to estimates, with special focus on “how complexity, subjectivity, and estimation uncertainty are taken into account in identifying and assessing risks of material misstatement”;
  • Requires that further audit procedures must respond to the reasons for the assessed risks of material misstatement;
  • Refers to requirements in AU-C section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, and AU-C section 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained;
  • Discusses the exercise of professional skepticism and how it is affected by the auditor’s evaluation of inherent risk factors;
  • Requires the auditor to evaluate whether the accounting estimates and related disclosures are reasonable; and
  • Includes appendices to the proposed SAS that provide application and explanatory material.

Effective Date

If adopted in its proposed form, the proposed SAS would be effective for audits of financial statements for periods ending on or after December 15, 2022.


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