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Transcript of ISA 315 (Revised) - Final_0 AAA

IFAC Board

Final PronouncementMarch 2012

International Standard on Auditing

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

The International Auditing and Assurance Standards Board (IAASB) develops auditing and assurance standards and guidance for use by all professional accountants under a shared standard-setting process involving the Public Interest Oversight Board, which oversees the activities of the IAASB, and the IAASB Consultative Advisory Group, which provides public interest input into the development of the standards and guidance. The objective of the IAASB is to serve the public interest by setting high-quality auditing, assurance, and other related standards and by facilitating the convergence of international and national auditing and assurance standards, thereby enhancing the quality and consistency of practice throughout the world and strengthening public confidence in the global auditing and assurance profession. -------------------The structures and processes that support the operations of the IAASB are facilitated by the International Federation of Accountants (IFAC). The mission of the International Federation of Accountants (IFAC) is to serve the public interest by: contributing to the development, adoption and implementation of high-quality international standards and guidance; contributing to the development of strong professional accountancy organizations and accounting firms, and to high-quality practices by professional accountants; promoting the value of professional accountants worldwide; speaking out on public interest issues where the accountancy professions expertise is most relevant. International Standards on Auditing, International Standards on Assurance Engagements, International Standards on Review Engagements, International Standards on Related Services, International Standards on Quality Control, International Auditing Practice Notes, Exposure Drafts, Consultation Papers, and other IAASB publications are published by, and copyright of, IFAC. The IAASB and IFAC do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this publication, whether such loss is caused by negligence or otherwise. The IAASB logo, International Auditing and Assurance Standards Board, IAASB, International Standard on Auditing, ISA, International Standard on Assurance Engagements, ISAE, International Standards on Review Engagements, ISRE, International Standards on Related Services, ISRS, International Standards on Quality Control, ISQC, International Auditing Practice Note, IAPN, the IFAC logo, International Federation of Accountants, and IFAC are trademarks and service marks of IFAC. Copyright March 2012 by the International Federation of Accountants (IFAC). All rights reserved. Permission is granted to make copies of this work provided that such copies are for use in academic classrooms or for personal use and are not sold or disseminated and provided that each copy bears the following credit line: Copyright March 2012 by the International Federation of Accountants (IFAC). All rights reserved. Used with permission of IFAC. Contact permissions@ifac.org for permission to reproduce, store or transmit this document. Otherwise, written permission from IFAC is required to reproduce, store, transmit, or make other similar uses of this document, except as permitted by law. Contact permissions@ifac.org. ISBN: 978-1-60815-118-9

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INTERNATIONAL STANDARD ON AUDITING 315 (REVISED) IDENTIFYING AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT THROUGH UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT(Effective for audits of financial statements for periods ending on or after December 15, 2013) CONTENTS Paragraph Introduction Scope of this ISA ......................................................................................................... Effective Date .............................................................................................................. Objective ............................................................................................................................... Definitions.............................................................................................................................. Requirements Risk Assessment Procedures and Related Activities ................................................. The Required Understanding of the Entity and Its Environment, Including the Entitys Internal Control ......................................................................... Identifying and Assessing the Risks of Material Misstatement ................................... Documentation ............................................................................................................ Application and Other Explanatory Material Risk Assessment Procedures and Related Activities ................................................. The Required Understanding of the Entity and Its Environment, Including the Entitys Internal Control ......................................................................... Identifying and Assessing the Risks of Material Misstatement ................................... Documentation ............................................................................................................ Appendix 1: Internal Control Components Appendix 2: Conditions and Events That May Indicate Risks of Material Misstatement International Standard on Auditing (ISA) 315 (Revised), Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, should be read in conjunction with ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing. A1-A23 A24-A117 A118-A143 A144-A147 5-10 11-24 25-31 32 1 2 3 4

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ISA 315 (REVISED), IDENTIFYING AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT THROUGH UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT

IntroductionScope of this ISA 1. This International Standard on Auditing (ISA) deals with the auditors responsibility to identify and assess the risks of material misstatement in the financial statements, through understanding the entity and its environment, including the entitys internal control.

Effective Date 2. This ISA is effective for audits of financial statements for periods ending on or after December 15, 2013.

Objective3. The objective of the auditor is to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels, through understanding the entity and its environment, including the entitys internal control, thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement.

Definitions4. For purposes of the ISAs, the following terms have the meanings attributed below: (a) Assertions Representations by management, explicit or otherwise, that are embodied in the financial statements, as used by the auditor to consider the different types of potential misstatements that may occur. Business risk A risk resulting from significant conditions, events, circumstances, actions or inactions that could adversely affect an entitys ability to achieve its objectives and execute its strategies, or from the setting of inappropriate objectives and strategies. Internal control The process designed, implemented and maintained by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of an entitys objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations. The term controls refers to any aspects of one or more of the components of internal control. Risk assessment procedures The audit procedures performed to obtain an understanding of the entity and its environment, including the entitys internal control, to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels. Significant risk An identified and assessed risk of material misstatement that, in the auditors judgment, requires special audit consideration.

(b)

(c)

(d)

(e)

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ISA 315 (REVISED), IDENTIFYING AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT THROUGH UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT

RequirementsRisk Assessment Procedures and Related Activities 5. The auditor shall perform risk assessment procedures to provide a basis for the identification and assessment of risks of material misstatement at the financial statement and assertion levels. Risk assessment procedures by themselves, however, do not provide sufficient appropriate audit evidence on which to base the audit opinion. (Ref: Para. A1A5) The risk assessment procedures shall include the following: (a) Inquiries of management, of appropriate individuals within the internal audit function (if the function exists), and of others within the entity who in the auditors judgment may have information that is likely to assist in identifying risks of material misstatement due to fraud or error. (Ref: Para. A6A13) Analytical procedures. (Ref: Para. A14A17) Observation and inspection. (Ref: Para. A18)

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(b) (c) 7. 8. 9.

The auditor shall consider whether information obtained from the auditors client acceptance or continuance process is relevant to identifying risks of material misstatement. If the engagement partner has performed other engagements for the entity, the engagement partner shall consider whether information obtained is relevant to identifying risks of material misstatement. Where the auditor