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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Planning, materiality and assessing the risk of material misstatement

Brightwell Ltd, a retailer, has a long-established, stable inventory system with no changes. During planning, the auditor identifies that the inventory count is routine and that management override of the perpetual records is unlikely. Under ISA 315 (Revised 2019), what describes a 'significant risk'?

A significant risk is an identified risk of material misstatement where inherent risk is assessed close to the upper end of the spectrum, considering likelihood and magnitude of misstatement. It is not defined by balance size, IT use or the decision to test controls.

  1. AAny risk of material misstatement assessed at the upper end of the spectrum of inherent risk, requiring special audit considerationCorrect
  2. BAny risk arising in an account balance that exceeds overall materiality
  3. CAny risk relating to a class of transactions that is processed by an IT system
  4. DAny risk where the auditor decides to rely on tests of controls

Explanation

ISA 315 (Revised 2019) defines a significant risk as an identified risk of material misstatement for which the assessment of inherent risk is close to the upper end of the spectrum, based on likelihood and magnitude. Size of a balance alone or the use of IT does not make a risk significant. Reliance on controls is a separate decision.

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