Understanding ASA 315: Identifying and Assessing Risks of Material Misstatement

This study explores the concept, process, and applications of ASA 315 in auditing. Learn how to identify and assess risks of material misstatement.

Running Head: AUDITING
AUDITING
Name of the Student
Name of the University
Author Note

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Introduction
Auditing Standard ASA 315 refers to identification and assessment of the risks of
material misstatement through understanding the entity and its environment. Material
misstatement reflects any errors or omissions done in an entity’s financial report (Lutui &
Ahokovi 2018). The study aims to understand the concept, process and applications of ASA
315 in detail. Further, it has considered the revised document of Auditing Standard.
The Auditing and Assurance Standards Board (AUASB) has made the ASA 315
auditing standard in the year 2009 (Legislation.gov.au 2019). Various amendments have done
in ASA 315 by AUASB up to 1 December 2015 that has discussed accordingly in many
points under this study. The ASA 315 has increased the efficiency of a proper audit.
Scope
The ASA 315 deals with the responsibility of an auditor. It suggests them in
identifying the risks related to a material misstatement in the financial report and assess it
through proper understanding an entity and its environment.
Objective
The auditor has to identify the risk which is associated with the company and should
carry specific procedure to minimize the effect of the same in the financial report.
(Legislation.gov.au 2019).
Definitions (4)
Some terms have a specific meaning mentioned in point 4 for Auditing Standard that
has discussed below:

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 Assertions- It refers to those representations made by the management or accountant
which is there in the financial report that can used by the auditor, considering that
potential misstatement may occur (Wijesinghe 2015).
 Business risk- A risk is resulting from any events or occurrence that affects the
strategies and the ability of an entity to achieve its objectives.
 Internal control- The process which has been designed, maintained and implemented
to assure an entity can achieve its objectives concerning the secured financial
reporting, operations effectiveness and efficiency by following the required laws and
regulations (Contessotto & Moroney 2014).
 Risk assessment procedures- This means a method to perform an audit through
having an understanding of an entity and its environment along with the internal
control, also to identify all the risks and material misstatement in the financial report
and assertions.
Requirement
 Risk Assessment Procedures
1. The risk assessment procedure is a process for the effective performance of the audit
by identifying and assessing the risk (Sanderson 2014). Following are the points
included under it:
i. As per para. A9-A13, the auditor may find the required information within the
Entity through enquiring appropriate individuals that helps them to understand the
environment of the Entity and identifying certain risks occurrence due to any
fraud or error. It helps the auditor in representing a useful financial report of an
entity and audit.
ii. Analytical Procedure (Paragraph A14-A17) states that the procedure follows by an
auditor to find out the risk that is unknown to them. It may be the internal issue of

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an entity or an unusual transaction. It includes financial as well as non-financial
transactions. An auditor can understand and find the risks and evaluate the results.
iii. Paragraph A18 mentions that the observation and inspection help in supporting
the enquiries of the operation of the Entity, records, documents and financial
reports.
2. Relevant information needs considering that has gathered through process and
auditor’s client (Contessotto & Moroney 2014).
3. Engagement partner consider the information obtained helps identify the risk of
material misstatement as performed other engagement for Entity
4. As per para A19-A20, if the auditor has regarded as the previous audit information,
then he/she must determine the changes and the effect related to the current audit
5. Any susceptibility has to discuss with the engagement partners and any key team
members to any misstatement; as per para. A121-A124.
 Entity and its Environment
The auditor must have an understanding of the following under a body and its
environment:
1. (Para 11a) suggests knowing the industry, regulatory and the other external factors
and the framework of financial reporting
2. Entity's nature through its operations, ownership, types of investments, the structure
of an entity and how the Entity financed
3. Paragraph A36 includes Entity’s accounting policies application, selection and
including the reasons for changes if any
4. Any strategies or objectives or business risks that result in a material misstatement
5. Evaluation and review of the financial performance of an entity with the help of
budgets, forecasting (Siriwardane, Kin Hoi Hu & Low 2014).

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 Internal Control
It was conducted to identify the business risks that concerns;
o Reliable financial reporting
o Effective and efficient operation
o Accordance with laws and regulations
Limitations of Internal Control (A54-A56)
Through internal control, it is not possible to provide absolute assurance but can be
reasonable to achieve the objectives of financial reporting of an entity due to limitations
raised from the internal control. Thus, auditors must have tried to identify and assess the risk
with proper transactions, balance and disclosures (Lutui & Ahokovi 2018).
Application
 Identifying and Assessing the Risks of Material Misstatement (A122-A151)
The auditor has to find out the risks and has to assess the material misstatement risks as:
i. The proper study of the financial statement. Whether the Entity has appropriately
reported all the figures or not. To find any errors or omissions in the reports, whether
done unintentionally or through fraudulent activity. Any such mishappening can
create a false view of the reports and results in misguiding others to take a proper
decision (Siriwardane, Kin Hoi Hu & Low 2014).
ii. To identify the risk due to transaction error, account balance or any disclosures:
o Find risk while understanding the Entity and its environment
o Identify the risk and assess it
o Evaluate the impact of the assessed risk on the financial statement
o Check the identified risks as a level of going wrong and find a way to control it

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o Consider the material misstatement affecting the financial statements
 Special audit consideration required for such risk
If any identified risks consider as a significant risk, then the auditor has to understand the
entity control that includes any control activity to that risk (Koblianska 2015).
Example: risk of fraud. Transaction complexity, inappropriate financial information or
any unusual transaction.
 Revision of Risk Assessment (A151)
If an auditor finds any new evidence or information related to the assessed risk, then
he/she must have to modify the level of risk and plan procedure accordingly.
Thus, it has concluded that the revised ASA 315 has a positive impact on the auditors
and the entities. As it provides certain rules and procedures to identify and assess certain
material misstatement. It helps in reducing fraudulent activity and maintains transparency.

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References
Contessotto, C. and Moroney, R., 2014. The association between audit committee
effectiveness and audit risk. Accounting & Finance, 54(2), pp.393-418.
Contessotto, C. and Moroney, R., 2014. The association between audit committee
effectiveness and audit risk. Accounting & Finance, 54(2), pp.393-418.
Koblianska, G., 2015. methodics of audit export operations. European Cooperation, 4(4),
pp.36-48.
Legislation.gov.au 2019. ASA 315 - Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and Its Environment - October 2009. [online]
Legislation.gov.au. Available at: https://www.legislation.gov.au/Details/F2016C00028
[Accessed 29 Aug. 2019].
Lutui, R. and Ahokovi, T.A., 2018. The relevance of a good internal control system in a
computerized accounting information system.
Sanderson, J., 2014. Audit issues. SMSF Guide: Current Issues and Strategies for the Self-
Managed Superannuation Funds Adviser, p.377.
Siriwardane, H.P., Kin Hoi Hu, B. and Low, K.Y., 2014. Skills, Knowledge, and Attitudes
Important for Present‐Day Auditors. International Journal of Auditing, 18(3), pp.193-205.
Wijesinghe, M.C., 2015. Technical Update 2015.