Identifying and Assessing the Risks of Material Misstatement

Current Status Next Steps

Exposure draft being developed.

Third quarter of 2018 – Exposure draft to be approved.

OBJECTIVE AND SCOPE OF THIS PROJECT

There are challenges involved in identifying and assessing audit risks for entities — in particular, those that vary in size and nature. Clearer or additional guidance is needed to help address these challenges.

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As a result, the International Auditing and Assurance Standards Board (IAASB) is proposing revisions to ISA 315, Identifying and Assessing the Risks of Material Misstatement through Understanding of the Entity and its Environment.

The IAASB proposal includes establishing more robust requirements and appropriately detailed guidance to drive auditors to perform appropriate risk assessment procedures in accordance with the size and nature of the entity. This would be done by focusing on enhancing the auditor’s approach to understanding the entity and risk assessment activities in light of the changing environment.

It is anticipated that the IAASB will consider whether and how ISA 315, in organization and structure, can be modified to promote a more effective risk assessment.

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PROJECT NEWS & DECISION SUMMARIES

AASB Decision Summary – March 5-6, 2018
The Board provided input to the CPA Canada nominee on the IAASB on issues related to the IAASB’s project to amend ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, including:

  • the inclusion of introductory paragraphs;
  • the definition of inherent risk factors; and
  • requirements related to identifying and assessing the risks of material misstatement, including a separate assessment of inherent and control risks.

The IAASB expects to approve an exposure draft of revised ISA 315 in June 2018. The Board anticipates approving a Canadian exposure draft shortly thereafter.

AASB Decision Summary – December 4-5, 2017
The Board provided input to the CPA Canada nominee on the IAASB on issues related to the IAASB’s project to amend ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, including:

  • changes to key definitions such as “qualitative inherent risk factors” and “significant class of transactions, account balance or disclosure”;
  • requirements related to understanding each component of internal controls; and
  • requirements to identify and assess the risks of material misstatement, including inherent and control risks.

AASB Decision Summary – October 16-18, 2017
The Board provided input to the CPA Canada nominee on the IAASB on issues related to the IAASB’s project to amend ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, including:

  • proposed definitions for “internal controls” and “controls”;
  • proposed changes relating to enhancing the auditor’s considerations of IT, in particular, as related to identifying and understanding general IT controls; and
  • the requirement to obtain an understanding of the entity and its environment and the applicable financial reporting framework.

AASB Decision Summary – September 14-15, 2017
The Board provided input to the CPA Canada nominee on the IAASB on issues related to the IAASB’s project to amend ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, including:

  • new and revised definitions for terms such as “internal controls”, “controls” and “significant risk”;
  • proposed changes to the definitions of the five components of internal controls; and
  • identification and assessment of the risk of material misstatement, in particular the separation of the requirements relating to the assessment of inherent risk and the assessment of control risk.

AASB Decision Summary – March 6-7, 2017
The AASB provided input to the CPA Canada nominee on the IAASB on issues related to the IAASB’s project to amend ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, including:

  • how to identify internal controls relevant to the audit;
  • whether there should be a separate or combined assessment of inherent and control risks; and
  • the working definition of significant risks.

AASB Decision Summary – November 28-29, 2016
The AASB provided input to the CPA Canada nominee on the IAASB on issues related to the IAASB’s project to amend ISA 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, including:

  • identifying significant accounts and inherent risks;
  • classes of risks and terminology to describe them;
  • use of qualitative factors in identification and assessment of inherent risks;
  • exploration of including a “spectrum of risk”; and
  • understanding how internal controls impact the risk assessment.

AASB Decision Summary – September 12-13, 2016
The AASB discussed issues related to the IAASB’s project to amend ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, including:

  • the components of internal control relevant to the audit;
  • assessment of the risk of material misstatement; and
  • whether risks should be assessed on a “spectrum of risk”.

The AASB strongly supports this project and intends to setup an advisory group to assist staff and the AASB identify Canadian issues.

AASB Decision Summary – June 13-14, 2016
The AASB provided input to the CPA Canada nominee on the IAASB regarding issues related to the IAASB’s early-stage initiative to consider revisions to ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment, including:

  • the possible objectives to be set out in the project proposal;
  • considering what drives risk;
  • identification of controls relevant to the audit;
  • how a walkthrough might be considered within the standard; and
  • the relationship between ISA 240, The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements, and ISA 330, The Auditor’s Responses to Assessed Risks, with the proposed project.

The AASB strongly supports the IAASB commencing a project to revise ISA 315 (Revised). Reflecting the importance of the project to a broad range of Canadian practitioners, the AASB decided that an advisory group would be established to assist staff and the AASB by providing Canadian insights on issues raised during the project.

 

Disclaimer: This project summary has been prepared for information purposes only. Decisions reported are tentative and reflect only the current status of discussions on this project, which may change after further Board deliberations. Decisions to publish Handbook material are final only after a formal ballot process.