ACCA Strategic Professional · Advanced Audit and Assurance (International) · Planning, materiality and assessing the risk of material misstatement
Early in the planning of Penrose Foods Ltd, the audit team learns the company is rapidly expanding into a new overseas market and has recently implemented a new ERP system. How should the auditor use this information under ISA 315 (Revised 2019)?
The information must be used in obtaining an understanding of the entity and its environment, and so feed into identifying and assessing risks of material misstatement. A new ERP system and overseas expansion are risk-relevant, and the engagement team should discuss the financial statements' susceptibility to misstatement.
- AAs part of understanding the entity and its environment, it should inform the identification and assessment of risks of material misstatement, and the engagement team should discuss the susceptibility of the financial statements to misstatementCorrect
- BIt should be ignored until final review because it relates to business strategy, not financial reporting
- CIt should be used only to set performance materiality, not to assess risks
- DIt should be reported to those charged with governance but not used in risk assessment
Explanation
ISA 315 (Revised 2019) requires the auditor to understand the entity, its environment and its business model, including changes such as new systems and markets, because they affect risks of material misstatement. The engagement team must also discuss the susceptibility of the financial statements to material misstatement. Using it only for materiality or ignoring it fails the standard.
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