ISA 315 (Revised)
The objectives of the project are to:
(a) Propose revisions to ISA 315 (Revised), establishing more robust requirements and appropriately detailed guidance to drive auditors to perform appropriate risk assessment procedures in a manner commensurate with the size and nature of he entity. It is anticipated that these revisions will focus on enhancing the auditor’s approach to understanding the entity, its environment (including its internal control) and risk assessment activities in light of the changing environment.
(b) Determine whether and how ISA 315 (Revised), in its organization and structure, can be modified to promote a more effective risk assessment.
(c) Propose consequential amendments to other standards that may be necessary as a result of revisions to ISA 315 (Revised) (such as ISA 220, ISA 240, ISA 330 ISA 540 and ISA 600).
(d) Determine what non-authoritative guidance and support tools should be developed by the IAASB, or others, to supplement revisions to ISA 315 (Revised) thereby aiding its effective implementation. Non-authoritative guidance and support tools may include International Auditing Practice Notes (IAPNs), Staff publications, project updates, or illustrations / examples to provide assistance on how ISA 315 (Revised) could be applied, in particular to address concerns by auditors of SMEs.
In early 2016 the IAASB established a working group (WG) to explore issues with respect to ISA 315 (Revised). The WG commenced its work in early March 2016, which included consideration of the results of the IAASB's Post-Implementation Review of the Clarified ISAs and outreach activities to identify issues involving ISA 315 (Revised) to further inform its preliminary thinking. These outreach activities included leadership of the WG and staff discussions with representatives of the International Federation of Accountants (IFAC) Small and Medium Practices (SMP) Committee, the International Forum of Independent Audit Regulators’ (IFIAR) Standards Coordination Working Group (SCWG) and the Institute of Chartered Accountants of England and Wales (ICAEW). The consideration of the results of the IAASB's Post-Implementation Review of the Clarified ISA, the results of outreach activities, the input received at the March 2016 and June 2016 IAASB meetings and the March 2016 IAASB Consultative Advisory Group (CAG) meeting, and the WG’s discussions to date, have informed the WG’s thinking through the information gathering stage of the project.
The IAASB approved a project proposal to revise ISA 315 (Revised). Consistent with the Board’s discussions at its September 2016 meeting, the IAASB believes a revision of ISA 315 (Revised) is necessary to revise and enhance specific requirements and revise and develop application material, and develop other non-authoritative guidance, to respond to the issues and concerns raised. Such revisions and enhancements will address matters such as the need for ISA 315 (Revised) to:
(a) Not only reflect the current business and audit environment, but also be sufficiently adaptable to deal with the rapidly changing business and audit environment (in particular the increased use of technology);
(b) Be more effectively applied by auditors in the private and public sectors applying the standard in audits of entities of various sizes;
(c) Set an enhanced foundation for other standards that have more specific risk assessment requirements (such as ISA 540 and ISA 600); and
(d) Enhance the application of professional skepticism by auditors in framing their judgments when performing risk assessment procedures.
While revisions to ISA 315 (Revised) are clearly necessary, feedback has also indicated that more support (such as the development of non-authoritative guidance) would be helpful to achieve the intended objectives of this project. The IAASB will firstly seek to revise and enhance the requirements so that they are robust, yet sufficiently flexible, to drive appropriate risk assessments. The IAASB will also revise and develop appropriate application and other explanatory material to be included in the revised standard. The IAASB recognizes that more specific guidance in particular circumstances (that would not be appropriate to include in a standard intended to apply to audits of all sizes) may be necessary (to be developed by the IAASB or by others (such as national auditing standard setters)). This could include, for example, guidance on using data analytics in performing risk assessments and illustrative examples of how the risk-based approach to the ISAs could be applied to audits of smaller entities. The development of additional guidance is expected to help with the implementation of the standard and will therefore help drive audit quality, which is in the public interest.
MEETING HIGHLIGHTS - JUNE 2018
After making amendments in response to the Board’s comments received during the meeting, the Board approved the ISA 315 (Revised), Identifying and Assessing the Risk of Material Misstatement, Exposure Draft (ED) for public exposure. The ED will be issued in mid-July for comment by November 2, 2018. In finalizing the ED, the Board continued to express concern about the complexity and scalability of the standard, in particular that the linear approach to the standard (including the flowcharts) did not illustrate the iterative nature of the standard. On balance, however, the Board agreed that stakeholder views were needed to determine whether the proposals could be effectively implemented. The Board also discussed how scalability was presented, in particular how the term ‘smaller and less complex’ was used to highlight these aspects.
The Board also asked for further clarification of the required evaluation of the design of the ‘information system relevant to financial reporting,’ to better distinguish this requirement from the understanding of the control activities component. The Board further supported the Task Force’s recommendation to include a specific question in the Explanatory Memorandum on the stand-back requirement (in conjunction with the requirement of ISA 330, The Auditor’s Responses to Assessed Risks, paragraph 18), because of mixed views relating to whether this requirement was needed.
The conforming amendments to ISA 540 (Revised) arising from the ISA 315 (Revised) ED were approved by the IAASB on July 17, 2018.
MEETING HIGHLIGHTS - JUNE 2019
The Board discussed a full version of the standard reflecting the new drafting approach that was broadly supported with the Board at its March 2019 meeting. The Board broadly supported specific aspects of this approach, in particular the enhanced flow and understandability of the requirements, as well as the separate presentation or signposting of examples and scalability paragraphs in the application material.
Notwithstanding broad support for the overall approach, concern was expressed about the change to move certain material (primarily criteria or terms previously included in requirements relating to the understanding of the system of internal control) to definitions. It was also highlighted that this could cause challenges in navigating the standard. The Board was presented with a revised approach to drafting the requirements for the understanding the system of internal control, which reconnected the definitions, and the Board broadly supported moving forward.
Specific other areas discussed and agreed include revisions to the definitions of significant risk and the inherent risk factors, specifically in relation to how fraud is presented within the inherent risk factors.