Audit of Accounting Estimates and Judgements - Expected Credit Losses – Ind AS 109

NFRA AUDITOR - AC INTERACTION SERIES 1 (PART 1)

Some of these could be complex, requiring special attention by the Preparers, AC and the Auditors.

Preparation and presentation of financial statements requires the Management to make estimates and judgements in the recognition/ measurement of assets, liabilities, income and expenses.

Such areas could be impairment of non-financial assets, Expected Credit Loss (“ECL”) for financial assets, provisions for liabilities, recognition/ measurement of deferred tax assets and so on.

The need:

Illustrative Areas Requiring Management To Make Estimates and Judgments

Ind AS 109 - Financial Instruments, prescribes recognition and measurement of ECL whereas related disclosure requirements and overall credit risk related disclosures are addressed by Ind AS 107 - Financial Instruments: Disclosures.

The directive:

Auditors and AC - Illustrative discussion points on this topic:

  • Entity’s approach for ECL recognition and measurement meeting the fundamental principles of the Ind AS 109.

Meeting the fundamental principles of the Ind AS 109:

  • Changes and trends in the opening and closing balances, reversals and charges to P&L on account of ECL.

Unusual movements:

Recognition and measurement approach for financial assets:

  • Appropriateness of ECL recognition and measurement approach adopted by the management for different classes of financial assets.

Impact of regulations:

  • Auditor’s responsibility to consider the guidance notes of relevant regulators or standard-setters or relevant prudential regulators e.g. Reserve Bank of India, and impact of regulatory developments and policy directions.
  • Internal control systems including credit risk management system.
  • Observation by Auditor of any unusual features in the loans, advances or receivables granted by the company which may need to be considered while evaluating the appropriateness of ECL.
  • Observation by Auditor of any loans, advances or receivables from the related parties (including promoters or promoters related entities) and Auditor’s responsibilities in relation to the same.
  • Loans, advances or receivables to or from promoters or promoters related entities originating in the books of the subsidiaries or associates.

Loans and advances, investments and receivables:

Subject matter experts:

  • Auditor’s responsibility to check if the entity has adequate subject matter experts such as credit risk experts or recovery specialists, data and IT systems commensurate with the complexity of the credit risk profile of its financial assets and other items subject to ECL requirements.
SA 540
Auditing and Accounting Estimates,
Including Fair Value Accounting Estimates, and Related Disclosures
SA 701
Communicating Key Audit Matters in the Independent Auditor's Report
SA 260 (Revised)
Communication with Those Charged with Governance 

Key SAs that are relevant to accounting estimates and judgments:

Series 1 (Part 1)
Ind AS
SAs