The International Standard on Auditing (ISA) 315, revised in 2019, outlines the requirements for auditors to identify and assess the risks of material misstatement in a financial statement audit.
This standard is an important part of the auditing process as it helps auditors to focus their efforts on the areas of the financial statements that are most likely to contain material misstatements.
Scope of this ISA The ISA 315 applies to all audits of financial statements performed in accordance with ISAs. This standard applies to all types of entities, including public and private entities, and all types of financial statements, including standalone financial statements and consolidated financial statements.
Key Concepts
The key concepts in ISA 315 include the following:
- Scalability: The ISA 315 is designed to be scalable, which means that the extent of the auditor’s risk assessment procedures will depend on the size and complexity of the entity and the financial statements being audited.
- Effective Date: The revised ISA 315 became effective for audits of financial statements for periods ending on or after December 15, 2019.
Objective The objective of the ISA 315 is to assist the auditor in identifying and assessing the risks of material misstatement in the financial statements.
This objective is achieved by requiring the auditor to obtain an understanding of the entity and its environment, the applicable financial reporting framework, and the entity’s system of internal control, and then to use this understanding to identify and assess the risks of material misstatement.
Definitions of Key Terms
Some of the key terms defined in the ISA 315 include the following:
- Material misstatement: A material misstatement is an error or omission in a financial statement that could influence the economic decisions of users of the financial statements.
- Financial reporting framework: A financial reporting framework is the set of guidelines and rules that entities use to prepare and present financial statements.
Requirements
The Requirements of ISA 315 (Revised 2019) can be divided into four main areas:
- Obtaining an Understanding of the Entity and Its Environment, the Applicable Financial Reporting Framework, and the Entity’s System of Internal Control: This requirement involves the auditor obtaining a comprehensive understanding of the entity, its environment, the financial reporting framework applicable to the entity, and the entity’s system of internal control. This includes understanding the entity’s operations, financial reporting process, business environment, financial reporting framework, and internal control over financial reporting. The auditor should also consider the entity’s objectives and strategies and the risks that may impact the entity’s ability to achieve these objectives.
- Identifying and Assessing the Risks of Material Misstatement: In this requirement, the auditor must identify the areas of the financial statements that are most likely to contain material misstatements and assess the likelihood and potential impact of these misstatements. This involves considering the entity’s operations, financial reporting process, business environment, and internal control over financial reporting. The auditor should also consider the entity’s objectives and strategies and the risks that may impact the entity’s ability to achieve these objectives. The auditor should also consider fraud risks, including the risk of management override of internal controls.
- Risk Assessment Procedures and Related Activities: In this requirement, the auditor must perform risk assessment procedures to determine the nature, timing, and extent of further audit procedures that are necessary to respond to the assessed risks of material misstatement. This may involve performing substantive procedures, tests of controls, or a combination of both. The auditor should also consider the results of their previous audits and any changes in the entity or its environment since the previous audit.
- Documentation: This requirement involves the auditor documenting the procedures performed and the results obtained in accordance with ISA 230, Audit Documentation. The documentation should include a description of the entity and its environment, the applicable financial reporting framework, the entity’s system of internal control, the risks of material misstatement and the auditor’s risk assessment procedures, and the auditor’s conclusions. The auditor should also document the results of their risk assessment procedures, including any misstatements identified and the auditor’s response to these misstatements. The documentation should provide evidence of the auditor’s compliance with the requirements of ISA 315.
In summary, the Requirements of ISA 315 (Revised 2019) are designed to assist the auditor in identifying and assessing the risks of material misstatement in the financial statements.
The auditor should obtain an understanding of the entity and its environment, the applicable financial reporting framework, and the entity’s system of internal control and use this understanding to identify and assess the risks of material misstatement.
The auditor should then perform risk assessment procedures and document the procedures performed and the results obtained in accordance with ISA 230.
What is the Key Chang of ISA 315 (Revised 2019)?
The fundamental changes of ISA 315 (Revised 2019) are:
- Emphasis on the Role of Professional Skepticism: The revised standard emphasizes the importance of exercising professional skepticism throughout the entire audit process, including in identifying and assessing risks of material misstatement.
- Clarification of Key Terms: The revised standard clarifies critical terms such as “risk,” “significant risk,” “control,” and “information system” to promote a common understanding among auditors.
- Enhanced Requirements for the Assessment of Risks of Material Misstatement: The revised standard emphasizes the auditor’s assessment of risks of material misstatement, including the need to understand the entity and its environment and to identify and assess and assess the risks of material misstatement.
- Consideration of Fraud: The revised standard requires the auditor to consider the risk of fraud in identifying and assessing risks of material misstatement.
- Increased Emphasis on Entity-Level Controls: The revised standard emphasizes the assessment of entity-level controls, including the tone at the top, ethical values, and governance structures.
- Clarification of Requirements for Communication with Those Charged with Governance: The revised standard provides more explicit guidance on the content, timing, and format of the communication with those charged with governance.
What Are the Key Challenging for Audit Firms to Implement ISA 315 (Revised 2019)?
The critical challenges for audit firms to implement ISA 315 (Revised 2019) are:
- Developing and Maintaining a Culture of Professional Skepticism: The revised standard emphasizes the importance of professional skepticism throughout the audit process. However, it can be challenging to develop and maintain a culture of professional skepticism, as it requires a mindset shift and may go against established norms and practices.
- Obtaining Sufficient and Appropriate Evidence: The revised standard emphasizes obtaining sufficient and appropriate evidence to support the auditor’s assessment of the risks of material misstatement. However, obtaining such evidence can be challenging, especially in complex and rapidly changing business environments.
- Identifying and Assessing Risks of Material Misstatement: The revised standard requires the auditor to understand the entity and its environment and to identify and assess the risks of material misstatement. This requires a higher level of professional judgment and may be challenging, especially when dealing with new or emerging risks.
- Evaluating the Design and Operating Effectiveness of Controls: The revised standard emphasizes the assessment of entity-level controls, including the tone at the top, ethical values, and governance structures. Evaluating controls’ design and operating effectiveness can be challenging, especially in entities with complex and decentralized control environments.
- Communicating with Those Charged with Governance: The revised standard provides clearer guidance on the content, timing, and format of the communication with those charged with governance. However, communicating with those charged with governance can be challenging, especially when there are differences in views or expectations.
