ISA 315 – Identifying and assessing the risk of material misstatement

Question 1

What were the key revisions made in the 2020 update of ISA 315?

Answer 1

The 2020 revision of ISA 315 focused on enhancing the auditor’s risk assessment by introducing scalability for entities of varying complexities, improving discussion on IT systems and data analytics usage in audits, increasing emphasis on professional scepticism, and providing more guidance on utilizing internal audits.

Question 2

What are some core audit concepts defined in ISA 315?

Answer 2

Core concepts include:
1. Objectives of an audit
2. Inherent Risks
3. Going Concern
4. Types of Audit Reports
5. Materiality (Performance Materiality, Clearly Trivial)
6. Sufficient Appropriate Audit Evidence
7. Substantive Procedures (Tests of Details, Tests of Controls, Substantive Analytical Procedures)
8. Audit Premise
9. Ethics
10. Letter of Engagement
11. Assertions

Question 3

Can you explain ‘Inherent Risks’ and ‘Going Concern’ as per ISA 315?

Answer 3

‘Inherent Risks’ are the susceptibility of an assertion about a transaction or balance to misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.

‘Going Concern’ refers to the assumption that an entity will continue its operations in the foreseeable future and is not expected to liquidate or to cease operations.

Question 4

What does ISA 315 say about audit evidence and substantive procedures?

Answer 4

ISA 315 covers the need for obtaining ‘Sufficient Appropriate Audit Evidence’ through various means including Substantive Procedures.

This includes ‘Tests of Details’ focusing on specific financial transactions, balances, and disclosures, and ‘Tests of Controls’ to assess the effectiveness of an entity’s controls over risks.

Question 5

What are ‘Controls’ according to ISA 315?

Answer 5

Controls are policies or procedures established by an entity to achieve management or governance objectives. Policies are guidelines of what should or should not be done within the entity, while procedures are actions to implement these policies.

Question 6

What are ‘General IT Controls’ as defined in ISA 315?

Answer 6

General IT controls refer to controls over the IT processes that support the proper operation of an IT environment. This includes ensuring the effective functioning of information processing controls and maintaining the integrity of information within the entity’s information system.

Question 7

What are ‘Information Processing Controls’ in ISA 315?

Answer 7

Information processing controls are specific to IT applications or manual processes within an entity’s information system. They directly address risks to the integrity of information, ensuring completeness, accuracy, and validity of transactions and other data.

Question 8

What are ‘Inherent Risk Factors’ as per ISA 315?

Answer 8

Inherent risk factors are characteristics of events or conditions that affect the susceptibility to misstatement, due to fraud or error, of an assertion about transactions, account balances, or disclosures. These factors can be qualitative or quantitative, such as complexity, subjectivity, and susceptibility to management bias.

Question 9

What constitutes the ‘IT Environment’ according to ISA 315?

Answer 9

The IT environment includes IT applications, infrastructure, and the processes managed by IT personnel. Applications initiate and process transactions, the infrastructure comprises the network and related hardware/software, and IT processes manage access and changes to the IT environment.

Question 10

What are ‘Relevant Assertions’ in ISA 315?

Answer 10

Relevant assertions are those about transactions, account balances, or disclosures that have an identified risk of material misstatement. The relevance of an assertion is assessed based on inherent risk before considering any controls.

Question 11

What are the risks arising from the use of IT as defined in ISA 315?

Answer 11

Risks from IT usage include the potential for information processing controls to be poorly designed or operated, or risks to the integrity of information due to ineffective IT controls.

Question 12

What defines a ‘Significant Class of Transactions, Account Balance or Disclosure’ in ISA 315?

Answer 12

A significant class of transactions, account balance, or disclosure is one for which there is one or more relevant assertions identified due to potential material misstatements.

Question 13

Why is understanding the risks faced by a business important for an auditor?

Answer 13

Understanding the risks is crucial as it helps the auditor identify potential areas where misstatements could occur. This knowledge is essential for designing and performing targeted risk assessment procedures that provide a basis for identifying and assessing risks of material misstatement at both the financial statement and assertion levels.

Question 14

What are the objectives of risk assessment procedures in an audit?

Answer 14

The objectives are to obtain audit evidence for:
i) Identifying and assessing risks of material misstatement, whether due to fraud or error;
ii) Designing further audit procedures as per ISA 330 to respond to identified risks.

Question 15

What should the auditor understand about the entity and its environment?

Answer 15

The auditor needs to understand:
i) The entity’s organizational structure, ownership, governance, and business model, particularly the extent to which the business model integrates of IT;
ii) Industry, regulatory, and other external factors;
iii) Internal and external measures of financial performance.

Question 16

What should the auditor assess regarding the entity’s financial reporting framework and accounting policies?

Answer 16

The auditor should obtain an understanding of the applicable financial reporting framework and the entity’s accounting policies, including any changes. This includes evaluating whether the entity’s accounting policies are appropriate and consistent with the financial reporting framework.

Question 17

How should inherent risk factors be considered in audit planning?

Answer 17

The auditor should assess how inherent risk factors affect the susceptibility of assertions to misstatement. This involves evaluating the degree of risk associated with assertions in the financial statements, based on an understanding of the entity and its environment as well as its accounting practices.

Question 18

What are the key aspects of the control environment that the auditor needs to understand?

Answer 18

The auditor needs to assess how management’s oversight responsibilities are carried out, the independence and oversight by Those Charged With Governance (TCWG), the entity’s authority and responsibility structures, personnel competence, and accountability mechanisms.

Question 19

What does the auditor evaluate about the control environment’s culture and structure?

Answer 19

The auditor evaluates whether management and TCWG have fostered a culture of honesty and ethical behavior, if the control environment supports other internal control components given the entity’s complexity, and if any identified control deficiencies undermine the system of internal control.