ACCA Advanced Audit and Assurance (AAA) Practice Exam

The primary objective of ISA 540 is to obtain sufficient appropriate audit evidence that accounting estimates are reasonable. When auditors assess the reasonableness of accounting estimates, they focus on how well management has applied their judgments and assumptions during the estimation process. This involves evaluating the methods used, the data underlying those estimates, and any relevant changes in the circumstances surrounding the estimates.

This is particularly crucial because accounting estimates can be inherently subjective, involving a level of uncertainty that can significantly affect the financial statements. The auditor's role is to challenge management's assumptions and the processes used to develop these estimates, ensuring they are in alignment with applicable financial reporting frameworks and that they reflect a true and fair view of the company's financial position.

In contrast, while preparing accounting estimates is a function of management, assessing their reasonableness is the auditor’s responsibility. Likewise, compliance with tax regulations, as well as evaluating the effectiveness of internal controls, are relevant but separate matters not directly tied to the core objective of ISA 540. Thus, the emphasis on obtaining sufficient appropriate evidence about accounting estimates resonates with the auditor's duty to ensure the integrity of financial reporting.