The FRC is consulting on proposals to revise International Standard on Auditing (UK) 315 – Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and the Environment.
This has been driven by revisions to international audit standards by the International Auditing and Assurance Standards Board (IAASB) in December 2019.
The revisions aim to establish a more robust identification and assessment process, enhancing the basis upon which auditors design and perform audit procedures to respond to the risks of material misstatement. The process should enable sufficient appropriate audit evidence to be obtained for the audit opinion to be provided.
The main revisions proposed are:
- Modernising and updating the audit standard to reflect an evolving business environment. This requires a clear delineation between understanding the IT used by the entity being audited and identifying the risks arising from the use of IT and IT applications.
- Introducing a new requirement for the auditor to consider all audit evidence obtained from risk assessment procedures performed (whether corroborative or contradictory) and evaluate whether the evidence provides an appropriate basis for the identification and assessment of the risks of material misstatement. This is accompanied with more explicit language to reinforce the importance of applying “professional scepticism” throughout the risk assessment process.
- Clarifying that the aim of performing risk assessment procedures is to obtain audit evidence that may help identify and assess the risk of material misstatement.
- Introducing “inherent risk factors” as a concept to assist with the identification of events or conditions that may impact the susceptibility of assertions made about classes of transactions, account balances or disclosures to misstatement.
- Explaining how control risk is assessed when the audit does not propose to test the operating effectiveness of controls.
- Enhancing documentation requirements for the auditor’s work in evaluating the design of controls and determining whether those controls have been implemented.
- Enhancing application material with examples of areas that could be documented to show the exercise of professional scepticism.
The FRC has confirmed that it strongly supports the IAASB’s revisions, and believes the associated public interest benefits of enhancing the quality of audit will outweigh any costs of implementing changes to audit methodologies. The FRC is not proposing to add any new UK requirements.
The consultation is open for comments until 4 April 2020. It is expected that the revised UK standards will be effective for audits of financial statements for periods beginning on or after 15 December 2021, to coincide with implementation of the international standards.
