ISA 540 (revised) - Accounting manipulation

Student thesis: Master thesis (including HD thesis)

  • Daniyal Hussain
  • Ekram Hussain
  • Patrick Nafie Bidstrup
4. term, Business Economics and Auditing, Master (Master Programme)
This thesis provides a critical view on how the updated ISA 540 has an effect on the handling of ISA 240, as accounting estimates is assumed to have a relation to accounting manipulation.

There is a fundamental difference in what is required of auditing skills, when it comes to auditing and verifying account balances compared to auditing accounting estimates.
In 2020, auditing of accounting estimates required even more attention, not only because of the economic uncertainty, caused by the global pandemic, but also because the ISA standard for auditing estimates, ISA 540, has been revised.

This thesis examines what annotations the auditors and the auditing firms have received from the audit inspections in Denmark and in the United Kingdom.
In relation to this, the thesis goes into detail with the areas that, from an inspection point of view, have been the most erroneous and complex area, comprising accounting estimates.
Accounting estimates are one of the most difficult areas to audit due to the inherent uncertainty and lack of precision.

Subsequently, based on interviews and comparative analysis, some challenges have been identified, where a comprehensive analysis of these has been carried out. We consider some of the challenges identified in the current ISA 240 standard derived by the revised ISA 540, which is particularly noteworthy. In fact, the auditors may somehow have difficulty assessing, whether it’s an optimistic estimate or if it’s related to accounting manipulation due to management bias, either intentionally or unintentionally. Based on the effects on ISA 240, caused by the revised ISA 540, there have been prepared proposals for changes and a follow-up assessment had been made as to whether ISA 240 should be revised.

To illustrate the identified observations, a fictional case has been prepared in the thesis, which exemplifies these by demonstrating, how challenging it can be to determine an accurate estimate, when there is an abundant uncertainty related to estimates. The review focus on the impact of the revised standard, in order to understand the effects, it has on auditors and for management in practice.

The form pin of this thesis is to identify how to avoid or reduce the risk of errors in the audit of accounting estimates, as well as to prevent accounting manipulation associated with this.
Publication date3 Jan 2022
Number of pages122
ID: 457153043