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

Harbour Freight Ltd, a new audit client, operates container logistics. Before the audit team plans the risk assessment procedures, the engagement partner asks which of the following the auditor must obtain an understanding of under ISA 315 (Revised 2019) when understanding the entity and its environment. Which item falls within that required understanding?

The auditor must understand the entity's organisational structure, ownership, governance and business model, along with industry and regulatory factors and performance measures. Detailed substantive tests are designed afterwards in response to assessed risks, and fees and team investments are not part of understanding the entity.

  1. AThe entity's organisational structure, ownership, governance and business modelCorrect
  2. BThe detailed substantive tests to be run on each account balance
  3. CThe amount of the audit fee agreed with management
  4. DThe personal investment portfolio of each team member

Explanation

ISA 315 (Revised 2019) requires the auditor to understand the entity's organisational structure, ownership and governance, its business model, industry, regulatory and other external factors, and the measures used to assess financial performance. Substantive tests are a response to assessed risks, not part of understanding the entity. Fees and team members' investments are engagement acceptance or ethics matters.

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