One of the key changes to the International Standard on Auditing (ISA) 315 (Revised 2019) Identifying and Assessing the Risks of Material Misstatement has been to tighten up the audit requirements to clarify the methodology for identifying and assessing risk to improve audit quality.

The revision also emphasises the importance of identifying potential fraud, for example if companies try to distort the figures to improve business performance or intentionally misstate the financial statements. This requires that strict controls are put in place, for example to ‘identify fraud of any magnitude that involves senior management’.

The tougher approach will require auditors to design and perform risk assessment procedures to obtain audit evidence that provides an appropriate basis for the identification and assessment of risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels. This will also entail amendments to a number of ISAs to ensure continuity, including to the design of further audit procedures as set out in ISA 330 Auditor’s Response to Assessed Risks.

The standard states that ‘the auditor shall design and perform risk assessment procedures in a manner that is not biased towards obtaining audit evidence that may be corroborative or towards excluding audit evidence that may be contradictory’.

There is also a recognition that auditors can come under pressure from boards and company management, particularly when it comes to potential fraudulent behaviour or misstatement, for example through incorrect financial reporting, or distorted use of revenue recognition for example. There is specific requirement ‘to consider risk factors such as susceptibility to misstatement due to management bias or other fraud risk factors insofar as they affect inherent risk’.

The standard has been rewritten with a focus on improving understandability and reducing complexity with enhancements and clarifications to encourage a more consistent and robust risk assessment. It also strengthens the rules on how auditors should gather ‘sufficient and appropriate audit evidence’.

‘ISA 315 (Revised 2019) is foundational to the audit – the core of the audit is undertaking work to obtain sufficient appropriate audit evidence to address the risks of material misstatement, and the changes made to ISA 315 (Revised 2019) recognise the importance of a robust and consistent risk assessment in driving an appropriate and effective response to those risks,’ says Tom Seidenstein, IAASB chair. 

As this is such a critical change to the standard, with the standard running to 202 pages, the IAASB will undertake activities to support effective and consistent application of the changes. This will include the release of a number of additional supporting documents in Q1 2020 including flowcharts, a first-time implementation guide and fact sheets, written Q&As and a webinar.

Focused education sessions will be held across all geographic regions from March to June 2020, targeted at national standard setters, regulators and software providers involved in making changes to audit software methodologies.

An implementation plan has been developed which lays out the planned activities and estimated timing. This will include the release of flowcharts where relevant,

ISA 315 (Revised 2019) will be effective for financial statement audits for periods beginning on or after 15 December 2021.

International Standard on Auditing (ISA) 315 (Revised 2019), issued 19 Dec 2019