ISA 315 - (Revised) Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment

Question 1

ISA 315: (Revised) Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment:

Answer 1

> After identifying, Based on the materiality Auditor will respond to assessed Risk as per ISA 330.
This helps the Auditor to Plan the further Audit Procedure - Risk Assessment Process.

Question 2

ISA 315: Risk Assessment Process:

Answer 2

> Identify and Assess Inherent Risk and Control Risk.
Inherent Risk + Control Risk = Risk of Material Misstatement (ROMM)

> To understand Inherent Risk, we need to understand Entity and its environment.

> To understand Control Risk, we need to understand Internal Control of the Entity.

Question 3

ISA 315: Risk Assessment Procedure (RAP):

Answer 3

> Is a Process designed to understand:
- Entity,
- Entity’s environment, and
- Entity’s Internal Control.

> For the purpose of Identifying and Assessing Risk of Material Misstatement at Financial Statement and Assertion level.

> Financial Statement Level:
- Misstatement having pervasive effect on the Financial Statement.

> Assertion Level:
- Misstatement in specific Assertion, eg Valuation, Measurement, etc.

Understanding Inherent Risk:
> Understand Entity and its environment.
> Acquire business knowledge (Relevant Industry, Regulatory Authority)
> Nature of Business, Ownership, Capital structure of Entity, business operation, etc.
> Accounting Policies - Application and disclosures.
> Objectives and Strategies.
> Review of Financial Position, that is the Balancesheet position and the Profit and Loss achieved.

Understanding Conttol Risk:
> Study the Internal Control System.
> Every Control Relevant for Audit is connected to Financial Reporting but every Control of Financial Reporting is not relevant to the Audit.

Question 4

ISA 315: Methods to Perform Risk Assessment Procedure:

Answer 4

1. Enquiry
2. Inspection
3. Analytical Procedures

• Understand the Entity and it’s environment and identify the Risk.
• Observe the Impact of the Risk on the Financial Statement.
• Look into areas that are likely to incur significant risk: ie

> Complex transactions
Case of estimations
Related Party transactions.
Understand the Inter Control System of the Entity.

What is Control?:
> It is a Process that is designed, implemented, and maintained.
> By the Management, TCWG and employees of the organization.
> To obtain Reasonable Assurance that Entity will achieve it’s objectives.

Objectives: Accronom - “CARE”
C: Compliance of Laws and Regulations.
A: Safeguarding Assets
R: Reliability of Financial Reporting
E: Effectiveness and efficiency of Entity’s operations.

Need of Controls:
> For Data Reliability.
> Assurance that Data is recorded correctly.
> Accountability and proper Authorization of records.
> Safeguarding of Assets and no unauthorized access.
> Records must match the actual Data.

Controls should help to prevent, detect, and correction of the errors.

What makes up Control? (5):
1) Control Environment.
2) Entity’s Risk Assessment Procedure
3) Information System
4) Control Activity
5) Supervising/ Monitoring the Controls.

ISA 315: Identify and evaluate the Controls.

ISA 260 & ISA 265: Auditor to communicate the Deficiency in Controls to Management and TCWG.

Question 5

ISA 315: Risk in CIS environment

Answer 5

> Control Systems can sometimes be overridden, data can be tempered with, data can be deleted or edited, etc.

Question 6

ISA 315: Documentation:

Answer 6

> Discussion with team regarding understanding of Risk.
Understanding about Entity
Identified and Assessment of Risk at Financial Statement Level and Assertion Level.
Identified Risk and related Controls.