SA 315

IDENTIFYING THE RISK OF MATERIAL MISSTATEMENT THTOUGH

UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT
 SCOPE OF THIS SA

Understanding:
Entity, It’s
Environment &
Identify & Internal
Assess Controls
Risk of Material
Mis-Statement
OBJECTIVE

• To Identify and Assess the Risk of Material Mis-Statement, whether

due to fraud or error at Financial Statement & Assertion Levels
• understanding the Entity and it’s environment including entity’s
Internal Controls.
• providing a basis for Designing & Implementing responses of the
assessed risk of material mis-statements, which will help the auditor to
reduce Audit Risk to acceptably lower level
DEFINITIONS
• Assertions:
Representations by management, explicit or otherwise, that are embodied in the financial
statements, as used by auditor to consider different types of potential mis-statement that
may occur.
• Business Risk:
A risk resulting from significant activities that could adversely affect an entity’s ability to achieve its
objective and executing its strategies.
MIS-STATEMENT & POSSIBLE SOURCES

• SA 450 defines the meaning of Mis-Statement as a difference between the amounts, classification ,
presentation or disclosure of reported items and that is required for the item to be in accordance with
applicable financial reporting framework (‘FRF’ here onwards).
• It may result from:
 An inaccuracy in gathering or processing data from which the financial statements are prepared
 An omission of amount
 An omission of disclosure
 An Incorrect Accounting Estimate
 Selection of inappropriate Accounting Policies
RISK ASSESSMENT PROCEDURES (RAP)
• SA 315 defines RAP as audit procedures performed by auditor to obtain an understanding of the entity
and its environment including entity’s Internal Controls to identify and assess the risk of Material Mis-
Statement, whether due to fraud or error at financial statement level and assertion level
• RAP shall include following activities:
 Observation
 Inspection
 Inquiries
 Discussion with Engagement Team
 Analytical Procedures
• Engagement partner shall consider information obtained on other Audit Engagements if relevant to
obtain Risk of Material Mis-Statement. While doing so he shall determine the changes occurred and its
affect.
The audit evidences obtained by performing RAP are not sufficient and appropriate to draw reasonable
conclusion.
SIGNIFICANT RISKS THAT REQUIRE SPECIAL CONSIDERATION
• SA 315 defines Significant Risk as an identified and assessed Risk of Material Mis-Statement
that in auditor’s professional judgement requires special audit consideration.
• The auditor shall consider at least following parameters:
o Whether the risk is risk of fraud
o Whether the risk is related to recent changes in any significant accounting or regulatory
requirements
o The complexity of Transactions
o Whether the risk involves significant Related part transactions
o Significant Transactions that are outside the normal course of entity or otherwise appear to be
unusual
o The degree of Subjectivity involved in measurement of financial information (e.g. Accounting
Estimates)
UNDERSTANDING OF THE ENTITY & ITS
ENVIRONMENT, INCLUDING THE INTERNAL
CONTROL
• The auditor shall obtain the understanding of the following:
o Entity’s objective and strategies and those business risk that may result in material mis-statement.
o Nature of Entity & its operation,
o The financial structure of entity
o Ownership and governance structure
o The Investments that entity is making as well as planning to make
• The measurement and review of entity’s financial performance
• Relevant regulatory and other external factors including applicable FRF
• Selection & Application of Accounting policies, including the reason for changes there to.
ASSERTIONS TO CONSIDER DIFFERENT MIS-STATEMENTS
1. For Classes of Transactions and Events:
• Occurrence of transactions recorded
• Completeness that should have been recorded
• Accuracy in appropriate recording of transactions
• Classifications in proper accounts
• Cut off for the specific financial year
2. For Account Balance at year end:
• Existence as at balance sheet date
• Completeness that should have been recorded
• Rights to Assets & Obligations of Liability to the entity
• Valuation of appropriate amounts & Allocation adjustments appropriately recorded
3. For Presentation & Disclosure
• Occurrence of transactions recorded and Rights & Obligations for those pertain to entity
• Completeness that should have been recorded
• Accuracy in fair disclosure & VaMluation of appropriate amount
• Classification of presentation & Understandability of expression
RISK OF MATERIAL MISSTATEMENT AT
FINANCIAL STATEMENT LEVEL
• It refers to risk of material mis-statement that relate pervasively to the financial statement as
a whole and potentially affect many assertions at a time.
• It may derive from deficient control environment
• For example:
Management’s lack of competence may have more pervasive effect on financial statement and may
require an overall response by the auditor.
IDENTIFYING AND ASSESSING THE RISK OF MATERIAL MISSTATEMENT

For above mentioned purpose the auditor shall:

1. Identify risks throughout the process of obtaining an understanding of the entity and its
environment including relevant controls.
2. Assess the identified risk and evaluate whether they are more pervasively to the financial
statement as a whole and potentially affect many assertions.
3. Relate the identified risks to what can go wrong at assertion levels.
4. Consider the likelihood of misstatement, including the possibility of multiple mis-statement
and whether that mis-statement is of magnitude that’s good result in a material mis-
statement.
INTERNAL CONTROLS
• SA 315 defines Internal Control as a process designed, Implemented & Maintained by TCWG, Management and other
Personnel to provide reasonable assurance to entity’s objective with regards to:
o Efficiency and effectiveness of operations
o Compliance with applicable laws and regulations
o Safeguarding of assets
o Reliability of financial reporting
• Following are the components of Internal Controls:
o Control Environment
o Risk assessment process
o Information System
o Control Activities
o Monitoring of Controls
• Objectives of Internal Controls:
o Transactions are execute in accordance with management’s general or specific authorization
o Transactions are recorded promptly, accurately and in appropriate accounts and in proper period.
o Assets are safeguarded from unauthorised access, use or disposition
o Recorded assets are compared with existing assets at reasonable intervals and variances are dealt with.
INTERNAL CONTROLS (CONTINUED…)

1. Control Environment:
o The governance and management functions.
o The attitude, awareness and actions of TCWG and Management.
o It includes following elements:
- Organizational structure
- Assignment of authorities and responsibilities
- Communication and enforcement of integrity and ethical values
- Commitments to competence
- Participation by TCWG
- Management’s philosophy and operating style.
INTERNAL CONTROLS (CONTINUED…)

2. Entity’s Risk Assessment Process:

o Identify business risk relevant to financial reporting
o Estimating significance of risk
o Assessing the likelihood of their occurrence
o Deciding about actions to address these risks

3. Information System:
The Information system relevant to financial reporting objectives, which includes Accounting System consists of
procedures and records designed:
o To Initiate, Record, Process and Correct the transactions as necessary
o To transfer information from Transaction Processing System to General Ledger
o Report information in the financial statements
o Capture events and conditions that are significance to the financial statements
o Ensure financial reporting process in compliance with applicable FRF
o Exercise controls surrounding the Journal Entries
INTERNAL CONTROLS (CONTINUED…)

4. Control Activities:
Policies and Procedures that help to ensure that management directives are carried out and may pertain to following:
o Authorisation
o Information Processing
o Performance Reviews
o Physical Controls
o Segregation of Duties

5. Monitoring of Controls:
It is a process to assess effectiveness of Internal Control performance. It involves assessing on timely basis and taking remedial
actions.
It can be accomplished through:
o Ongoing Activities built into the normal recurring activities
o Separate Evaluations
o Both of the above
It also may include:
o Information from Communication to Customer and their complaints
o Comments from regulatory authorities like SEBI, RBI, etc.
that may indicate problems and highlight improvements required.
THANK YOU!
RAHUL SAH