Scribd
Upload
12 views8 pages

ISA 315: Risk Assessment in Auditing

The document outlines ISA 315 (Revised 2019), which focuses on identifying and assessing risks of material misstatement in financial statements. It details the steps auditors must take, including understanding the entity, evaluating accounting policies, and identifying significant risks, while emphasizing the importance of risk assessment procedures. Additionally, it highlights the need for auditor discussions and understanding the entity to effectively design audit responses and mitigate risks.

Uploaded by

zubair
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
12 views8 pages

ISA 315: Risk Assessment in Auditing

The document outlines ISA 315 (Revised 2019), which focuses on identifying and assessing risks of material misstatement in financial statements. It details the steps auditors must take, including understanding the entity, evaluating accounting policies, and identifying significant risks, while emphasizing the importance of risk assessment procedures. Additionally, it highlights the need for auditor discussions and understanding the entity to effectively design audit responses and mitigate risks.

Uploaded by

zubair
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

ACCA F8 – ISA 315

IDENTIFYING & ASSESSING RISKS OF MATERIAL


MISSTATEMENT
(Complete, Detailed Teaching Notes with Examples)

1. INTRODUCTION (ISA 315 – Revised 2019)


Relevant Standard

ISA 315 (Revised 2019): Identifying and Assessing the Risks of Material Misstatement

Key Objective (VERY IMPORTANT)

The auditor must:

 Identify and
 Assess
the risks of material misstatement due to fraud or error, at:
 Financial statement level, and
 Assertion level

� This forms the basis for designing audit responses under ISA 330.

Exam Tip

ISA 315 = Risk identification


ISA 330 = Risk response

2. STEPS IN IDENTIFYING & ASSESSING RISKS


(CORE EXAM AREA)
Step 1: Perform Risk Assessment Procedures

The auditor designs and performs procedures to understand:

1. The entity and its environment


2. The financial reporting framework & accounting policies
3. Inherent risk factors

Definition: Inherent Risk Factors

Characteristics of events or conditions that make an assertion susceptible to misstatement


before considering controls.

Examples:

 Complex transactions
 Estimation uncertainty
 Management judgement
 Susceptibility to fraud

Step 2: Evaluate Accounting Policies

Auditor assesses whether accounting policies are:

 Appropriate
 Consistent
 In line with IFRS / applicable framework

Example

Capitalising research costs instead of expensing → risk of overstatement

Step 3: Understand Internal Control

Auditor obtains understanding of:

 Control environment
 Risk assessment process
 Information system
 Control activities
 Monitoring

(Links with Chapter 9)


Step 4: Identify Risks of Material Misstatement (RoMM)

Risks are identified at:

 Financial statement level


 Assertion level

Step 5: Identify Significant Risks

Significant risks often arise from:

 Fraud
 Complex transactions
 Significant judgement
 Unusual transactions

Step 6 (Optional): Assess Control Risk

Only if auditor plans to test controls

Step 7: Design Audit Responses (ISA 330)

Audit procedures are designed to:

 Reduce audit risk to an acceptably low level

3. RISK ASSESSMENT PROCEDURES (VERY


EXAMINABLE)
Definition

Audit procedures designed to identify and assess risks of material misstatement.

Types of Risk Assessment Procedures


(a) Inquiry

Asking questions of:

 Management
 TCWG
 Employees
 Internal audit
 Legal counsel
 IT staff

(b) Observation

Watching:

 Operations
 Behaviour of management
 Control activities

Example

Observing an audit committee meeting.

(c) Inspection

Reviewing:

 External sources (industry reports)


 Internal documents
 Accounting records
 Premises and facilities

(d) Analytical Procedures

Comparisons of:

 Current vs prior years


 Budgets vs actual
 Ratios & trends
 Financial vs non-financial data
Purpose

Identify unusual trends or relationships

4. AUDIT TEAM DISCUSSIONS (ISA REQUIREMENT)


Purpose

Senior team members discuss:

 Where misstatements may occur


 Fraud risks
 High-risk areas

Key Point

✔ Must be documented

Benefits

 Sharing experience
 Better risk awareness
 Better audit planning

Example Explained: WWQ Co

 Worsening liquidity + rapid growth → Going concern risk


 Expansion into real estate → Revenue recognition & capitalisation risk
 Debt-financed project → Valuation & disclosure risk

� Auditor adjusts nature, timing and extent of procedures.

5. SOURCES OF INFORMATION
Audit evidence obtained from:

 Client
 Prior audits
 Acceptance procedures
 Third parties (e.g. regulators)

6. WHY UNDERSTANDING THE ENTITY IS REQUIRED


(EXAM GOLD)
Understanding helps the auditor to:

 Identify risks
 Set materiality
 Detect non-compliance with laws
 Assess accounting policies
 Design analytical procedures
 Assess going concern
 Apply professional scepticism
 Design audit procedures
 Evaluate audit evidence

� This list is frequently tested

7. INFORMATION REQUIRED UNDER ISA 315


Auditor must understand:

 Business model
 Ownership & governance
 Industry & regulations
 Performance measures
 Financial reporting framework
 Accounting policies
 Inherent risk factors

8. ACCOUNTING POLICIES – RISK AREA


Risk increases when:

 Transactions are complex


 New standards apply
 Policies change
 Lack of guidance exists

Example

Incorrect application of a new IFRS → material misstatement risk

9. USING PRIOR YEAR INFORMATION


Key Rule

Prior information can be used only if still relevant and reliable

Auditor reviews:

 Past misstatements
 Internal control effectiveness
 Complex transactions
 Changes in business

Example

Future regulatory changes may cause going concern risk

10. AUDIT RISK – CONCEPT (ISA 200)


Definition

Audit risk = risk of issuing an inappropriate audit opinion

Reasonable Assurance

Audit provides reasonable, not absolute assurance

11. RISK OF MATERIAL MISSTATEMENT (RoMM)


Two Levels

(a) Financial Statement Level


Pervasive risks affecting many assertions.

Examples:

 Going concern issues


 Weak management oversight

(b) Assertion Level

Risks affecting specific balances or transactions:

 Existence
 Completeness
 Valuation
 Cut-off
 Presentation

You might also like