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Auditing standard changes ‘challenging for firms’

Proposed changes to International Standard on Auditing 315, Identifying and Assessing the Risks of Material Misstatement, will require modifications to firms’ methodologies to ensure appropriate documentation is in place to record compliance, argues LSCA Technical Committee member Tim Gonzaga.

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Tim Gonzaga

October 2018

The International Auditing and Assurance Standards Board (IAASB) has released an Exposure Draft containing significant revisions to ISA 315 on risk assessment. This is the most significant revision of the standard since its introduction in the UK 12 years ago.

The revised standard aims to:

  • deliver a more appropriate risk assessment including a focus on scalability (ie, a standard that can be applied to very small audits as well as the largest and most complex)
  • deal with the changing business environment, namely advances in technology
  • clarify the nature and extent of the auditor’s understanding of internal control. 

The exposure draft (ED) has a 13-paragraph introduction of the risk assessment process and key concepts. One of the key changes is a requirement to separately assess inherent and control risk for each material misstatement at the assertion level. Requirements for understanding the entity and its environment have been expanded with consideration of the business model and the use of IT. This includes whether the entity has access to the source code of computer software.

Considerations specific to smaller entities have been removed but the text has largely been included in the main body of the text. Scalability matters are shown at the start of sections to more appropriately consider the material that follows. The IAASB has drafted detailed flowcharts to help users understand the revised standard.

The ED uses the term ‘automated tools and techniques’ to cover a range of new technology-driven tools available to auditors, which include data analytics. It includes examples of how such tools can be used as part of the risk assessment process but does not say that they must be used.

Overall, the revised standard is significantly longer than the existing one and will be challenging for firms to implement. Many of the additional steps will require modifications to firms’ methodologies to ensure appropriate documentation is in place to record compliance with the standard.

Comments on the ED are being sought by 2 November 2018. The IAASB plans to finalise the new standard in June 2019, effective for periods beginning on or after 15 December 2020 (ie, for 31 December 2021 year-ends).

Tim Gonzaga is Assistant Technical & Training Director at Kingston Smith and a member of the LSCA Technical Committee.

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