ACCA Strategic Professional · Advanced Audit and Assurance (International) · Planning, materiality and assessing the risk of material misstatement
Lumen Pharma Co develops generic drugs and is reliant on a single regulator licence for its main product. During planning, the auditor learns that new legislation could withdraw the licence within 12 months, and the company has no alternative product. How should the auditor treat this under ISA 315 (Revised 2019) in understanding the entity and its environment?
The auditor treats the licence threat as an external regulatory factor giving rise to business risk, considers whether it creates risks of material misstatement, including going concern and impairment implications, and assesses them. It cannot be ignored, and disclosure to the regulator would breach confidentiality.
- AIgnore it, as external regulatory factors are the responsibility of management only
- BTreat it as an external factor that may give rise to business risks, consider whether it creates risks of material misstatement (including going concern implications), and assess themCorrect
- CRecord it only in the engagement letter and take no further audit action
- DReport it to the regulator immediately without discussing it with management
Explanation
The auditor must understand regulatory and other external factors and how they affect the entity's business risks. Business risks that may result in material misstatement, such as going concern or impairment effects, must be identified and assessed. The matter is not ignored, and reporting to the regulator is not the first step because of confidentiality.
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