Portrait of Josee Delli Colli

Implementing CAS 540 revised standards during COVID-19: Q&A with Josee Delli Colli

The revised standard, CAS 540, includes several changes that auditors will need to understand and implement. Josee Delli Colli, CPA, CA, of Richter, discusses how they are implementing these changes during a pandemic, including where scalability may arise.

With over 15 years of accounting and auditing experience, concentrating on auditing issues in the professional practice group, Josee Delli Colli has experience in audits of private and public companies in the manufacturing, apparel, and franchise sectors. Josee also plays an important role in the administration, design and direction of the firm's audit programs, and is a key resource for all auditing and accounting matters. She also specializes in the proper application of accounting principles to complex transactions, whether under Canadian or U.S. accounting principles.

This makes Josee a great practitioner to speak with regarding the recent changes to CAS 540, Auditing Accounting Estimates and Related Disclosures.

Applicable for financial statement periods beginning on or after December 15, 2019, CAS 540 includes several changes that auditors will need to understand and implement. With this standard being effective during a pandemic, there may be anxiety around implementing the revised standard, especially with regards to scalability concerns.

In general, auditing accounting estimates has always been a challenging area, given they may be based on complex models or usually involve judgments made by management. With the potential for misstatements in today's economy, it is important for auditors to understand the requirements properly and how they will impact their work effort.

Background: Scalability in CAS 540

Revised CAS 540 has been written to be scalable to estimates with low risk. Specifically, the International Auditing and Assurance Standards Board (IAASB)'s Basis for Conclusions describes how the revised standard addresses scalability concerns:

  • The standard introduced a spectrum of inherent risk concept, where the assessment of inherent risk depends on the degree to which the inherent risk factors affect the likelihood or magnitude of misstatement and varies on a scale.
  • The nature, timing, and extent of the risk assessment and further audit procedures will vary in relation to the estimation uncertainty and the assessment of the related risks of material misstatement associated with the accounting estimate.
  • Consistent with CAS 330, the auditor's further audit procedures shall take into account that the higher the assessed risk of material misstatement, the more persuasive the audit evidence needs to be.

These concepts are further explained throughout the application material (paragraphs A20 - A22, A63, A67, and A84 of CAS 540). For example, factors that may impact the degree to which the accounting estimate is subject to inherent risk factors (i.e. estimation uncertainty, complexity, subjectivity, or other) may include:

  • whether the entity has few or many transactions
  • whether those transactions are complex
  • whether the accounting estimates require significant judgments
  • the processes for making those accounting estimates are complex

The assessed risks of material misstatement affect the persuasiveness of the audit evidence needed and influence the approach the auditor selects to audit an accounting estimate. The standard's application material (paragraphs A67 - A70 of CAS 540) also includes examples that may be relevant in practice when it comes to issues of scalability (e.g. expected credit losses, obsolescence provision, litigation).

To summarize the concept of scalability in an easy-to-understand comparative table, visit our recently issued Practitioner Implementation Tool.


Josee gives us her opinion on how she is implementing the revised standard in her practice, including where scalability may arise.

CPA Canada: The spectrum of inherent risk—this is intended to aid in scalability. How might firms use this concept in practice (i.e. identify likelihood and magnitude of misstatements)?

Josee Delli Colli: Some firms may have already adopted the concept of the spectrum of inherent risk in their audit methodologies as they generally perform more work on financial statement line items that have a higher risk of material misstatement (e.g. those with higher likelihood and magnitude of misstatements and hence a higher degree of inherent risk). In these cases, the firms may already be applying this concept to accounting estimates.

The spectrum of inherent risk will help auditors choose the audit procedures that are most responsive to the assessed risks of material misstatement. The spectrum of inherent risk is also relevant at the end of the audit when we apply the new concept of our overall evaluation based on audit procedures performed (“stand back”). It will make it easier to take a step back and determine whether our risk assessment is still appropriate, and enough work has been performed on the accounting estimates to obtain sufficient appropriate audit evidence. We do this by looking at each accounting estimate in comparison to one another to see where they lie on the spectrum. This will allow auditors to determine if more work was performed on those items with a higher likelihood and magnitude of misstatements.

Are there estimates that might be treated differently under the revised standard compared to the previous standard?

I don’t think the revised standard will revolutionize the way in which we audit less complex accounting estimates, such as allowance for doubtful accounts and inventory obsolescence. These estimates in our client base generally have a lesser degree of complexity, subjectivity and estimation uncertainty, and the methods, data, or assumptions used are generally more straightforward.

The standards have always required that the higher the assessed risk of material misstatement, the more persuasive the audit evidence needs to be. The biggest change will probably involve accounting estimates that have a higher degree of estimation uncertainty, complexity, and subjectivity. The revised standard includes additional guidance on what is required in understanding management’s methods, data, and assumptions. This may result in additional work effort by auditors for those complex accounting estimates, and in more complex situations auditors may need the help of experts with specialized skills.

Are there particular challenges in identifying indicators of management bias?

It’s not always obvious at the onset of an audit engagement what management’s bias may be. Sometimes the bias only becomes apparent midway through the audit as more procedures are being performed on the financial statement line items, when all accounting estimates are looked at in total, or when you audit that accounting estimate over a number of periods. That being said, the application material includes examples of indicators of possible management bias with respect to accounting estimates:

  • changes in an accounting estimate, or the method for making it, when management has made a subjective assessment that there has been a change in circumstances
  • selection or development of significant assumptions or the data that yield a point estimate favourable for management objectives
  • selection of a point estimate that may indicate a pattern of optimism or pessimism

Under COVID-19, does the revised standard help in addressing the challenges in auditing accounting estimates?

COVID-19 will make auditing accounting estimates more challenging. Management will be faced with more challenges in determining an accounting estimate as their original assumptions, data, methods, and models may no longer be appropriate under the current circumstances. There is so much unknown that the degree of estimation uncertainty, and subjectivity will no doubt be higher. Taking into account the increase in professional judgment needed by management, the exercise of the auditor’s professional judgment and professional skepticism will also need to be heightened. The auditors will also be faced with more challenges, as the impact of the pandemic could also have an impact on all aspects of designing and performing procedures with respect to accounting estimates and related disclosures, from risk assessment procedures through to implications for the auditor’s report. The IAASB has published a staff audit practice alert on Auditing Accounting Estimates in the Current Evolving Environment Due to COVID-19 that shows how the revised standard can help.

Next steps:

Get additional resources on CAS 540

As all auditors will be affected by the above changes, CPA Canada has prepared free CAS 540 guidance materials to help you implement changes and advise your clients on their impact, including a:

  • Practitioner Alert
  • Audit Client Briefing
  • Practitioner Implementation Tool
  • Frequently Asked Questions (coming soon)

Keep the conversation going

How have the inherent risk factors helped with your assessment of risks of material misstatement? Do you think the revised standard has helped in addressing challenges of auditing estimates under COVID-19? Post a comment below or email us directly.

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The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.