ISA 315
ISA 315 is one of the International Standards on Auditing issued by the International Federation of Accountants (IFAC) through the International Auditing and Assurance Standards Board (IAASB). The standards sets out guidelines for the auditor towards identifying the risk that an entity’s financial statements are materially misstated prior to the audit, by understanding the aspects of the entity’s activities and its environment. [ISA 200: par.13].
Material misstatement could arise from:
- Misstatement in the financial statements (statement of profit, loss and other comprehensive income, statement of financial position, statement of cashflow and statement of changes in equity).
- Misstatement resulting from omission or errors in disclosure.
Understanding the entity and its environment.[edit]
ISA 315 sets out 5 aspects for the auditor to obtain an understanding of with respect to the entity, in order to adequately identify and assess the risk of material misstatement. These are:
1. Industry, regulations and other external factors.
This involves the auditor gaining insight into the industry in which the entity operates. This includes understanding the market, competition, activity cycle in the industry, level of implementation of technology among other factors. The auditor should also assess the impact of macroeconomic factors on the industry and the resulting effect specific to the entity’s performance in the period of audit.
2. The nature of the entity and the applicable accounting policies and framework.
The auditor must obtain an understanding of the entity’s operations, ownership and governance structure, investment portfolio and financing structure.
The auditor is auditor is further expected to evaluate the appropriateness of the entity’s accounting policies with respect to business activities of the entity and the policies consistency with the applicable financial reporting framework.
3. Objectives, strategies and business related risks.
Auditors should assess the objectives of the organization and factors that could hinder the achievement of these objectives (known business related risks). The auditor uses professional judgement to evaluate the possibility that these business risks could lead to possible risks of material misstatement.
4. Internal controls of the entity.
The auditor is expected to obtain an understanding of the entity’s controls over its internal operations including controls related to financial reporting and external factors such as compliance to laws and regulations. The auditor must evaluate the adequacy and appropriateness of these controls and determine whether they have been implemented.
5. Measurement and review of the entity’s financial performance.
The auditor should aim to understand the financial performance measures which those charged with governance consider to be of importance, and use professional judgement to determine the possibility of the financial performance and objectives for the period under audit leading possible risk of material misstatement.
References[edit]
- ISA 315 IFAC.org
- Nick A. Dauber (6th April 2009). The Complete Guide to Auditing Standards and Other Professional Standards for Accountants
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