Key Changes to ISA 315 (Revised 2019)
Key Changes to ISA 315 (Revised 2019)
Enhanced Risk Assessment Procedures:
- The revised ISA 315 places greater emphasis on the risk assessment procedures and their linkage to the design and implementation of responses to assessed risks of material misstatement.
Expanded Consideration of IT:
- Reflecting the increased use of information technology by entities, the revised standard requires auditors to understand how IT affects the entity’s internal controls.
More Rigorous Approach to Internal Controls:
- Auditors are expected to gain a deeper understanding of the entity’s internal control, specifically the control environment, the entity’s risk assessment process, the information system, including related business processes relevant to financial reporting, and communication.
Focus on Professional Skepticism:
- The revised standard underlines the necessity for auditors to apply professional skepticism when identifying and assessing risks of material misstatement, particularly those risks associated with complex or unusual transactions.
Clarification of ‘Significant Risks’:
- Definitions and guidance regarding significant risks have been updated, providing a clearer basis for auditors to determine what constitutes a significant risk.
Revised Definitions:
- The standard includes revised definitions to improve clarity and consistency in its application, such as the definition of relevant assertions and inherent risk factors.
New Terminologies in ISA 315 (Revised 2019)
Spectrum of Inherent Risk:
- Acknowledges that inherent risk is not a binary concept and introduces the notion that risk varies along a spectrum.
Inherent Risk Factors:
- Introduces factors that influence the assessment of inherent risk, such as the complexity of transactions, judgment needed to record them, and susceptibility to fraud or error.
Scalability:
- This term is used to describe how the requirements of the standard can be applied to audits of entities of all sizes and complexities.
Automated Tools and Techniques:
- Recognizes the increased use of automated tools and techniques in performing audit procedures and the implications for risk assessment.
Stand Back Requirement:
- A new requirement for auditors to take an overall perspective at the end of the risk assessment process to evaluate whether any additional risks of material misstatement remain.
These changes in terminology and the broader revisions to ISA 315 are designed to make the audit risk assessment process more dynamic and responsive to the entity’s characteristics and the environment in which it operates. They emphasize the importance of a thorough understanding of the entity and its internal controls to identify and assess the risks of material misstatement in the financial statements effectively.
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