ISA 315 is an international standard on auditing that deals with identifying and assessing the risks of material misstatement in financial statements. It was revised in 2019 and became effective for audits of financial statements for periods beginning on or after December 15, 2021.
The main changes introduced by the revised ISA 315 are:
- A new approach to understanding the entity and its environment, based on a spectrum of inherent risk factors that affect different aspects of the entity, such as its business model, objectives, strategies, performance measures, governance structure, internal control system, and external factors.
- A new requirement to identify and assess the risks of material misstatement at the financial statement level and at the assertion level for classes of transactions, account balances, and disclosures.
- A new requirement to document the reasons for the assessment given to each risk of material misstatement, as well as the sources of information and the relevant controls that support the assessment.
- A new requirement to design and perform further audit procedures that are responsive to the assessed risks of material misstatement, taking into account the nature, timing, and extent of those procedures.
The revised ISA 315 aims to enhance the auditor’s ability to identify and assess the risks of material misstatement in financial statements, and to design and perform appropriate audit procedures to address those risks. It also aims to promote a more consistent and robust application of the risk assessment process across different audits and jurisdictions.
The impact of the revised ISA 315 on the audit of your financial statements may vary depending on the nature and complexity of your entity and its environment, as well as the extent of changes required in your auditor’s current risk assessment methodology and documentation. However, some possible impacts are:
- Your auditor may request more information from you about your entity and its environment, such as your business model, objectives, strategies, performance measures, governance structure, internal control system, and external factors.
- Your auditor may perform more inquiries and analytical procedures to obtain a deeper understanding of your entity and its environment, and to identify and assess the risks of material misstatement in your financial statements.
- Your auditor may document more details about their risk assessment process, such as the reasons for their assessment of each risk of material misstatement, the sources of information and the relevant controls that support their assessment, and how they have addressed any significant risks identified.
- Your auditor may design and perform more tailored audit procedures that are responsive to the assessed risks of material misstatement in your financial statements, taking into account the nature, timing, and extent of those procedures.
Conclusion
The revised ISA 315 is expected to improve the quality and effectiveness of audits of financial statements by enhancing the auditor’s ability to identify and assess the risks of material misstatement in financial statements, and to design and perform appropriate audit procedures to address those risks. It may also result in more efficient audits by reducing unnecessary work or duplication of efforts. However, it may also increase the time and cost involved in performing audits of financial statements, especially in the initial year of implementation.
If you have any questions or concerns about how the revised ISA 315 may affect your audit of financial statements, please get in touch.