Changes to ISA (UK) 315 identifying and assessing the risks of material misstatement

  • Mercia Group
  • 9 March 2021 10:02

In this article, we highlight some of the revisions made to ISA (UK) 315 on Identifying and Assessing the Risks of Material Misstatement and how this impacts you.

Effective period

The July 2020 version of ISA (UK) 315 is mandatory for periods beginning on or after 15 December 2021, although early adoption is permitted. In most cases, December 2022 year ends will be the first audits under the revised standard.

Whist this may seem like quite some time off, given the significance of the changes, preparation will be key in ensuring a smooth transition to the revised ISA.

Key changes

The revisions to ISA (UK) 315 are extensive. Key changes include:

  • Greater focus on professional scepticism
    The revised ISA includes a greater emphasis on professional scepticism – in particular the need not to bias work toward obtaining evidence that is corroborative or excluding evidence that is contradictory. It also incorporates strengthened documentation requirements in this regard.

  • Increased focus on information technology
    The standard has been updated and modernised for an evolving business environment. There is, therefore, considerably more focus on the need for an auditor to understand an entity’s use of IT in its business and new requirements in relation to IT general controls and other aspects of the IT environment more widely. The ISA has also been updated to reflect increasing use of automated tools and techniques by some auditors – examples of where and how these may be used have been added to the application guidance of the standard.

  • Understanding the entity and its environment
    Requirements in relation to understanding the entity and its environment have been restructured and expanded. The importance of understanding the applicable financial reporting framework has also been elevated.

  • Entity’s system of internal control
    New requirements have been added with respect to the entity’s control environment, including more on controls relevant to the audit and on the design and implementation testing required to be undertaken.

  • Expansion of application material
    The application material has been significantly expanded, with the introduction of new concepts, definitions and examples to aid in applying the standard.

  • Inherent risk factors
    Five inherent risk factors, (complexity, subjectivity, change, uncertainty and susceptibility to misstatement due to management bias or other fraud risk factors insofar as they affect inherent risk) have been added to assist the auditor in undertaking the risk assessment process.

  • Spectrum of inherent risk
    The concept of a ‘spectrum of inherent risk’ has been introduced into ISA 315. The spectrum is based on the likelihood and magnitude of a possible misstatement. Significant risks lie at the upper end of this spectrum. The concept is not entirely new as it was introduced into the December 2018 version of ISA (UK) 540 Auditing Accounting Estimates and Related Disclosures which is effective for audits of financial statements for periods beginning on or after 15 December 2019 (eg. in most cases, applicable for December 2020 year ends).
  • Control risk and inherent risk
    Control risk and inherent risk should be considered separately. Clarification that the assessment of the risk of material misstatement is the same as the assessment of inherent risk where the auditor does not plan to test the operating effectiveness of controls.
  • Significant classes of transactions, account balances and disclosures
    A new concept of significant classes of transactions, account balances and disclosures has been introduced to assist with the identification and assessment of the risks of material misstatement.

  • Stand-back requirement
    For material classes of transactions, account balances or disclosures that have not been determined as significant, a new stand-back requirement has been introduced for the auditor to assess whether this determination remains appropriate.

Why this impacts you

Audit methodologies will require a significant update in order to address the requirements of the revised ISA.

In addition, audit staff will require training to get up to speed on the new requirements.

How Mercia can help

Throughout 2021 and 2022 our audit update courses will cover changes to ISA (UK) 315 with more detail in 2022, as well as changes to other requirements such as the move from International Standards on Quality Control (ISQCs) to International Standards on Quality Management (ISQMs).

In the meantime, if you would like to be involved in the development of the Mercia audit methodology in relation to ISA 315 please contact Jenny Faulkner (Head of Publications – Assurance and Financial Reporting).


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