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ISA 315

ISA 315. UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT. ISA 315. INTRODUCTION

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ISA 315

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  1. ISA 315 UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  2. ISA 315 INTRODUCTION The auditor should obtain an understanding of the entity and its environment, including its internal control, sufficient to identify and assess the risks of material misstatement of the financial statements whether due to fraud or error, and sufficient to design and perform further audit procedures. ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  3. ISA 315 The requirements of this standard: • Risk assessment procedures and sources of information about the entity and its environment, including its internal control. • Understanding the entity and its environment, including its internal control. • Assessing the risk of material misstatement. • Communicating with those charged with governance and management. • Documentation. ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  4. ISA 315 • Risk assessment procedures • Sources of information • The internal controls ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  5. IAS 315 Risk Assessment Procedures • Inquiries of management and others within the entity; • Analytical procedures; and • Observation and inspection • Other audit procedures ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  6. IAS 315 INQUIRIES • Management • Those in charge of governance • Internal audit • Employees in charge • In-house legal council • Marketing and sales personnel ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  7. IAS 315 Analytical Procedures may be helpful in identifying the existence of unusual transactions and events, and amounts, ratios, and trends that might indicate matters that have financial statement and audit implications. ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  8. IAS 315 OBSERVATION AND INSPECTION: • Observation of entity activities and operations • Inspection of documents e.g. business plans and strategies, records, and internal control manuals • Reading reports prepared by management • Visits to the entity’s premises and plant facilities • Tracing transactions…..”walk-through” ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  9. IAS 315 OTHER PROCEDURES • External legal council • Valuation experts • Reports of analysts, banks or rating agencies, trade or economic journals; or regulatory or financial publications ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  10. IAS 315 Using information about the entity and its environment obtained in prior periods….. Determining whether changes have occurred that may affect the relevance of such information in the current audit ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  11. IAS 315 Discussion Among the Engagement Team The members of the engagement team should discuss the susceptibility of the entity’s financial statements to material misstatements. ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  12. IAS 315 UNDERSTANDING THE ENTITY AND ITS ENIRONMENT, INCLUDING ITS INTERNAL CONTROL • Industry, regulatory and other external factors, including the applicable financial reporting framework ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  13. IAS 315 UNDERSTANDING THE ENTITY • Nature of the entity, including the entity’s selection and application of accounting policies ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  14. IAS 315 UNDERSTANDING THE ENTITY • Objectives and strategies and the related business risks that may result in a material misstatement of the financial statements ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  15. IAS 315 UNDERSTANDING THE ENTITY • MEASUREMENT AND REVIEW OF THE ENTITY’S FINANCIAL PERFORMANCE ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  16. IAS 315 UNDERSTANDING THE ENTITY • INTERNAL CONTROL ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  17. IAS 315 The nature, timing, and extent of the risk assessment procedures performed depend on the circumstances of the engagement such as the size and complexity of the entity and the auditor’s experience with it. ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  18. IAS 315 INTERNAL CONTROL The auditor should obtain an understanding of internal control relevant to the audit. ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  19. IAS 315 COMPONENTS OF INTERNAL CONTROL • The control environment • The entity’s risk assessment process • The information system, including the related business processes, relevant to financial reporting, and communication • Control activities • Monitoring of controls ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  20. IAS 315 • Controls relevant to the audit • materiality • size of entity • nature of business • diversity and complexity of operations • applicable legal and regulatory requirements • nature and complexity of systems of internal control ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  21. IAS 315 • Depth of Understanding of Internal Control • Manual and Automated Elements of Internal Controls Relevant to the Auditor’s Risk Assessment • Limitations of Internal Control ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  22. IAS 315 CONTROL ENVIRONMENT • Communication and enforcement of integrity and ethical values • Commitment and competence • Participation by those charged with governance • Management philosophy and operating style • Organization structure • Assignment of authority and responsibility • Human resource policies and practices ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  23. IAS 315 CONTROL ACTIVITIES • Authorization • Performance review • Information processing • Physical controls • Segregation of duties • Delegation of duties ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  24. IAS 315 Responding to Risks Arising From IT • Data center and network operations • System software acquisition, change and maintenance • Access security • Application system acquisition, development, and maintenance ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  25. IAS 315 MONITORING OF CONTROLS Who monitor controls? • Individuals • Departments • Divisions • Internal auditors • Executive management • Board of directors through board committee ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  26. IAS 315 Assessing the Risks of Material Misstatements – Road-Map • Identify risk • Relate it to what might go wrong at the assertion level • Consider whether such risks are of a magnitude that could result in a material misstatement of the financial statements • Could they result…… ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  27. IAS 315 Significant Risks that Require Special Audit Consideration: • Risk of fraud • Risk related to recent significant economic, accounting or other development • Complexity of transactions • Risk related to measurement uncertainty • Risks related to significant unusual transactions ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  28. IAS 315 Risks for which substantive procedures alone do not provide sufficient appropriate audit evidence • An entity that conducts its business using IT to initiate orders for the purchase and delivery of goods based on predetermined rules • An entity that provides services to its customers via electronic media ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  29. ISA 315 KNOWLEDGE OF BUSINESS RISK AND FRAUD PRACTICAL APPLICATION ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  30. IAS 315 TYPES OF KNOWLEDGE OF BUSINESS • Nature of business • Industry, regulatory and other external factors, including the applicable accounting framework • Objectives, strategies, and related business risks • Measurement and review of performance • Laws and regulations • Owner/director/key players • Management • Connected businesses ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  31. IAS 315 TYPES OF KNOWLEDGE OF BUSINESS • Other consultants and advisors • Bankers • Products/services/costs • Lawyers • Revenue overview • Major customers • Major suppliers ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  32. ISA 315 TYPES OF KNOWLEDGE OF BUSINESS • Performance • Market • Major financial items • Computer system • Service organizations • Previous public accountants ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  33. ISA 315 SOURCES OF INFORMATION What does it include? ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  34. ISA 315 SOURCES OF INFORMATION INCLUDES: • Inquiries of management • Inquiries of others in the organization • Meeting with the audit committee • Office and plant tours • Analytical procedures • Preliminary documentation • External sources • Reference from industry associations and others ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  35. ISA 315 EXAMPLES OF PRELIMINARY DOCUMENTATION? ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  36. IAS 315 • Strategic, business, and other plans • Organization charts and job descriptions • Financial statements and tax returns • Budget reports • Legal documents • Internal audit reports • Internal control policies and procedures manuals • Other auditor’s examination reports • Agreements with service organizations • Laws and regulations that have a direct effect on the clients financial statements ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  37. IAS 315 INHERENT RISK ASSESSMENT • High Risk – resulting in little or no reduction in substantive procedures • Medium Risk – resulting in some reduction in substantive procedures • Low Risk – resulting in minimum reduction in substantive audit procedures ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  38. IAS 315 INHERENT RISK INDICATORS: • Economy and industry in which the client operates • External factors that affect the entity • Management and their operating styles • Fraud risk characteristics • Effectiveness of governess • Results of the entity’s operations, and • Adequacy of its financing ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  39. IAS 315 FINANCIAL STATEMENT RISKS • Errors produced by the accounting systems • Fraudulent financial reporting • Misappropriation of assets • Errors in accounting for non-routine transactions • Errors in significant accounting estimates that are highly dependent upon management judgment • Entity cannot continue in existence ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  40. ISA 315 FRAUD ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  41. ISA 315 Fraudulent financial reporting may be accomplished by: • Manipulation, falsification or alteration of records or documents • Misrepresentation in or intentional omission from the financial statements of events, transactions, or other significant information • Intentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or disclosure ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  42. ISA 315 Misappropriation of assets may be accomplished by: • Embezzling receipts • Stealing assets • Causing the entity to pay for goods or services that have not been received ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

  43. IAS 315 • COMMUNICATIONS ABOUT POSSIBLE FRAUD • FRAUD DOCUMENTATION REQUIREMENTS • CONSIDERATIONS OF LAWS AND REGULAYIONS • ILLEGAL ACTS BY CLIENTS • CONSULTATION/Disclosure of fraud and illegal acts to outside parties ISA 2006 WORKSHOP by Sami F. Jarrous F.C.C.A

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