Revised ISA 315- Identifying and Assessing the Risks of Material Misstatement, UK Perspective

Revised ISA 315- Identifying and Assessing the Risks of Material Misstatement, UK Perspective

Revised ISA 315- Identifying and Assessing the Risks of Material Misstatement, UK Perspective.

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ISA 315, Identifying and Assessing Risks of Material Misstatement in Auditing, was revised in 2019, with the Financial Reporting Council (FRC) in the UK providing guidance on the changes. The revised standard aims to improve risk assessments, promote professional skepticism, and enhance documentation requirements. The key revisions include clarifying the risk assessment process, understanding the financial reporting framework, distinguishing between direct and indirect control components, emphasizing professional skepticism, and strengthening documentation requirements. The standard also introduces principles-based requirements with a focus on scalability and proportionality.

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The revisions require auditors to revise their approach to risk assessment for all financial statement audits starting from December 15, 2021. The changes are significant and pose practical challenges for auditors. The updated standard introduces more robust risk identification and assessment, necessitating changes in auditors' risk assessment approaches.

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The revisions highlight the need for auditors to assess inherent and control risks separately, evaluate controls' design and implementation, and consider a range of inherent risk factors such as subjectivity, complexity, uncertainty, change, and susceptibility to misstatement due to management bias or fraud. The introduction of a "stand-back" requirement ensures the evaluation of the completeness of significant classes of transactions, account balances, and disclosures at the end of the risk assessment process.

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The revisions also introduce new inherent risk factors, including complexity, subjectivity, change, uncertainty, management bias, other fraud risk factors, and past history of misstatements and control deficiencies. The standard defines "significant" risks as those close to the upper end of the inherent risk spectrum based on the likelihood and potential magnitude of material misstatement.

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Auditors will need to adjust their audit programs to accommodate the more granular risk assessment and consider the implications for methodology and software providers. The new definition of significant risks improves on the previous circular definition, but ensuring consistency in evaluating significant risks will be crucial.

The revised ISA requires auditors to obtain an understanding of control activities, including controls addressing significant risks, controls over journal entries, controls planned for testing operating effectiveness, and other appropriate controls. Auditors must assess inherent risk and control risk separately and gain an understanding of information processing activities and IT controls.

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The new stand-back requirement calls for the evaluation of material classes of transactions, balances, and disclosures that are not assessed as significant to determine the appropriateness of that determination. The revised standard provides specific considerations and examples for both less and more complex entities to support scalability.

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Auditors must consider the likelihood and magnitude of potential misstatements, and the revisions introduce a spectrum of inherent risks to drive focused responses. However, the initial use of the inherent risk spectrum may result in less consistency across audits, requiring firms to monitor audit quality.

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To prepare for the changes, auditors are encouraged to read the new standard, understand key concepts and definitions, and have early conversations about incorporating the changes into their methodology and training.

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The key revisions include the introduction of five new inherent risk factors, the establishment of a risk spectrum with significant risks at the higher end, the requirement for sufficient and appropriate evidence in risk assessment procedures, more focus on IT controls, more guidance on controls relevant to the audit and their design and implementation, the integration of considerations for smaller entities into the main body of the text, and the requirement to assess inherent and control risks separately.

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The changes will have far-reaching effects and require auditors of all sizes to revise their risk assessment approaches. The emphasis on professional skepticism, control assessment, and documentation underscores the commitment to enhancing audit quality and providing reliable financial information to stakeholders.

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The Financial Reporting Council of Nigeria (FRCN) is expected to provide similar guidance specific to the Nigerian environment, and auditors must stay updated and continuously train to comply with the revised ISA 315.

For more insightful articles on topical issues regarding financial reporting, assurance, and tax practice, stay tuned to KCP. For inquiries, please reach out to [email protected] or [email protected]. Visit our social media pages on LinkedIn: KCP, Instagram: KCP_NG, Facebook: KCP NG, or our website: www.kcp.com.ng.

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