Auditing Standard ASA 315 Identifying And Assessing The .

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Compiled Auditing StandardASA 315(December 2015)Auditing Standard ASA 315Identifying and Assessing the Risks ofMaterial Misstatement throughUnderstanding the Entity and ItsEnvironmentThis compilation was prepared on 1 December 2015 taking into account amendments made byASA 2011-1, ASA 2013-2 and ASA 2015-1Prepared by the Auditing and Assurance Standards Board

Obtaining a Copy of this Auditing StandardThe most recently compiled versions of Auditing Standards, original Standards and amendingStandards (see Compilation Details) are available on the AUASB website: www.auasb.gov.auContact DetailsAuditing and Assurance Standards BoardPodium LevelLevel 14, 530 Collins StreetMelbourne Victoria 3000AUSTRALIAPhone: (03) 8080 7400E-mail: enquiries@auasb.gov.auPostal Address:PO Box 204Collins Street WestMelbourne Victoria 8007AUSTRALIACOPYRIGHT 2015 Commonwealth of Australia. The text, graphics and layout of this Auditing Standard are protected by Australiancopyright law and the comparable law of other countries. Reproduction within Australia in unaltered form (retaining thisnotice) is permitted for personal and non-commercial use subject to the inclusion of an acknowledgment of the source asbeing the Australian Auditing and Assurance Standards Board (AUASB).Requests and enquiries concerning reproduction and rights for commercial purposes within Australia should be addressed tothe Executive Director, Auditing and Assurance Standards Board, PO Box 204, Collins Street West, Melbourne,Victoria 8007 or sent to enquiries@auasb.gov.au. Otherwise, no part of this Auditing Standard may be reproduced, stored ortransmitted in any form or by any means without the prior written permission of the AUASB except as permitted by law.This Auditing Standard reproduces substantial parts of the corresponding International Standard on Auditing issued by theInternational Auditing and Assurance Standards Board (IAASB) and published by the International Federation ofAccountants (IFAC), in the manner described in the statement on Conformity with International Standards on Auditing. TheAUASB acknowledges that IFAC is the owner of copyright in the International Standard on Auditing incorporated in thisAuditing Standard throughout the world.All existing rights in this material are reserved outside Australia. Reproduction outside Australia in unaltered form (retainingthis notice) is permitted for personal and non-commercial use only.Further information and requests for authorisation to reproduce this Auditing Standard for commercial purposes outsideAustralia should be addressed to the Executive Director, Auditing and Assurance Standards Board, PO Box 204, CollinsStreet West, Melbourne, Victoria 8007 or sent to enquiries@auasb.gov.au. Any decision to approve a request may alsorequire the agreement of IFAC.ISSN 1833-4393ASA 315 - compiled-2-AUDITING STANDARD

Auditing Standard ASA 315Identifying and Assessing the Risks of Material Misstatement through Understanding the Entityand Its EnvironmentCONTENTSCOMPILATION DETAILSAUTHORITY STATEMENTCONFORMITY WITH INTERNATIONAL STANDARDS ON AUDITINGParagraphsApplication . Aus 0.1-Aus 0.2Operative Date . Aus 0.3IntroductionScope of this Auditing Standard .1Effective Date .2Objective .3Definitions .4RequirementsRisk Assessment Procedures and Related Activities. 5-10The Required Understanding of the Entity and its Environment, Including the Entity’sInternal Control . 11-24Identifying and Assessing the Risks of Material Misstatement . 25-31Documentation .32Application and Other Explanatory MaterialRisk Assessment Procedures and Related Activities.A1-A24The Required Understanding of the Entity and Its Environment, Including the Entity’sInternal Control .A25-A121Identifying and Assessing the Risks of Material Misstatement .A122-A151Documentation .A152-A155Appendix 1: Internal Control ComponentsAppendix 2: Conditions and Events That May Indicate Risks of Material MisstatementASA 315 - compiled-3-AUDITING STANDARD

Auditing Standard ASA 315Identifying and Assessing the Risks of Material Misstatement through Understanding the Entityand Its EnvironmentCOMPILATION DETAILSAuditing Standard ASA 315 Identifying and Assessing the Risks of MaterialMisstatement through Understanding the Entity and Its Environment (asAmended)This compilation takes into account amendments made up to and including 1 December 2015 and wasprepared on 1 December 2015 by the Auditing and Assurance Standards Board (AUASB).This compilation is not a separate Auditing Standard made by the AUASB. Instead, it is arepresentation of ASA 315 (October 2009) as amended by other Auditing Standards which are listedin the Table below.Table of StandardsStandardDate madeOperative DateASA 315[A]27 October 2009Financial reporting periodscommencing on or after1 January 2010ASA 2011-1[B]27 June 2011Financial reporting periodscommencing on or after1 July 2011ASA 2013-2[C]11 November 2013Financial reporting periodscommencing on or after1 January 2014ASA 2015-1[D]1 December 2015Financial reporting periodsending on or after15 December 2016[A]Federal Register of Legislative Instruments – registration number F2009L04079,12 November 2009[B]Federal Register of Legislative Instruments – registration number F2011L01379, 30 June 2011[C]Federal Register of Legislative Instruments – registration number F2013L01939,14 November 2013[D]Federal Register of Legislative Instruments – registration number F2015L02032,16 December 2015Table of AmendmentsParagraph affectedA26Appendix 1Para. 3Appendix 1Sub-heading above Para. 56(a)22ASA 315 - compiledHow affectedAmendedAmendedBy [paragraph]ASA 2011-1 [28]ASA 2011-1 [29]AmendedASA 2011-1 [30]AmendedAmendedASA 2013-2 [58]ASA 2013-2 [59]-4-AUDITING STANDARD

Auditing Standard ASA 315Identifying and Assessing the Risks of Material Misstatement through Understanding the Entityand Its EnvironmentParagraph affected2323 and Footnote 1Heading above paragraph A6A6-A7A7 and Footnote 5A8-A13A9 and Footnote 6A11 and Footnote 7Paragraph numbersFootnote referencesA79Heading above paragraph s A31.1A32A81A91Footnote 15A92A96A103A123A125 (pre-existing paragraph)A127Heading above paragraph A128A128Heading above paragraph A129A129A131Footnote 17A132A133Footnote 18Footnote 19A134Heading above paragraph A135A135Heading above paragraph A136A136Appendix 2ASA 315 - compiledHow onAdditionAdditionAdditionAdditionAmendedBy [paragraph]ASA 2013-2 [60]ASA 2013-2 [61]ASA 2013-2 [62]ASA 2013-2 [63]ASA 2013-2 [64]ASA 2013-2 [65]ASA 2013-2 [66]ASA 2013-2 [67]ASA 2013-2 [68] [70] [76]ASA 2013-2 [68]ASA 2013-2 [69]ASA 2013-2 [71]ASA 2013-2 [72]ASA 2013-2 [73]ASA 2013-2 [74]ASA 2013-2 [75]ASA 2015-1 [58]ASA 2015-1 [59]ASA 2015-1 [60]ASA 2015-1 [61]ASA 2015-1 [62-63]ASA 2015-1 [65]ASA 2015-1 [66]ASA 2015-1 [64]ASA 2015-1 [67]ASA 2015-1 [68]ASA 2015-1 [69 and 71]ASA 2015-1 [70]ASA 2015-1 [72-73]ASA 2015-1 [74]ASA 2015-1 [75-76]ASA 2015-1 [77]ASA 2015-1 [85]ASA 2015-1 [78]ASA 2015-1 [80]ASA 2015-1 [81]ASA 2015-1 [82]ASA 2015-1 [83-84]ASA 2015-1 [86]ASA 2015-1 [87]ASA 2015-1 [88]ASA 2015-1 [89 and 91]ASA 2015-1 [90]ASA 2015-1 [90]ASA 2015-1 [92-93]ASA 2015-1 [94]ASA 2015-1 [95-96]ASA 2015-1 [97]ASA 2015-1 [98-99]ASA 2015-1 [100]-5-AUDITING STANDARD

Auditing Standard ASA 315Identifying and Assessing the Risks of Material Misstatement through Understanding the Entityand Its EnvironmentAUTHORITY STATEMENTAuditing Standard ASA 315 Identifying and Assessing the Risks of Material Misstatementthrough Understanding the Entity and Its Environment (as amended to 1 December 2015) is setout in paragraphs Aus 0.1 to A155 and Appendices 1 and 2.This Auditing Standard is to be read in conjunction with ASA 101 Preamble to AustralianAuditing Standards, which sets out the intentions of the AUASB on how the Australian AuditingStandards, operative for financial reporting periods commencing on or after 1 January 2010, areto be understood, interpreted and applied. This Auditing Standard is to be read also inconjunction with ASA 200 Overall Objectives of the Independent Auditor and the Conduct of anAudit in Accordance with Australian Auditing Standards.Dated: 1 December 2015ASA 315 - compiled-6-AUDITING STANDARD

Auditing Standard ASA 315Identifying and Assessing the Risks of Material Misstatement through Understanding the Entityand Its EnvironmentConformity with International Standards on AuditingThis Auditing Standard conforms with International Standard on Auditing ISA 315 Identifying andAssessing the Risks of Material Misstatement through Understanding the Entity and Its Environmentissued by the International Auditing and Assurance Standards Board (IAASB), an independentstandard-setting board of the International Federation of Accountants (IFAC).Paragraphs that have been added to this Auditing Standard (and do not appear in the text of theequivalent ISA) are identified with the prefix “Aus”.Compliance with this Auditing Standard enables compliance with ISA 315.ASA 315 - compiled-7-AUDITING STANDARD

AUDITING STANDARD ASA 315The Auditing and Assurance Standards Board (AUASB) made Auditing Standard ASA 315Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and ItsEnvironment pursuant to section 227B of the Australian Securities and Investments CommissionAct 2001 and section 336 of the Corporations Act 2001, on 27 October 2009.This compiled version of ASA 315 incorporates subsequent amendments contained in other AuditingStandards made by the AUASB up to and including 1 December 2015 (see Compilation Details).AUDITING STANDARD ASA 315Identifying and Assessing the Risks of Material Misstatement throughUnderstanding the Entity and Its EnvironmentApplicationAus 0.1This Auditing Standard applies to:Aus 0.2(a)an audit of a financial report for a financial year, or an audit of a financialreport for a half-year, in accordance with the Corporations Act 2001; and(b)an audit of a financial report, or a complete set of financial statements, for anyother purpose.This Auditing Standard also applies, as appropriate, to an audit of other historicalfinancial information.Operative DateAus 0.3This Auditing Standard is operative for financial reporting periods commencing on orafter 1 January 2010. [Note: For operative dates of paragraphs changed or added by an AmendingStandard, see Compilation Details.]IntroductionScope of this Auditing Standard1.This Auditing Standard deals with the auditor’s responsibility to identify and assess the risksof material misstatement in the financial report, through understanding the entity and itsenvironment, including the entity’s internal control.Effective Date2.[Deleted by the AUASB. Refer Aus 0.3]Objective3.The objective of the auditor is to identify and assess the risks of material misstatement,whether due to fraud or error, at the financial report and assertion levels, throughunderstanding the entity and its environment, including the entity’s internal control, therebyproviding a basis for designing and implementing responses to the assessed risks of materialmisstatement.ASA 315 - compiled-8-AUDITING STANDARD

Auditing Standard ASA 315Identifying and Assessing the Risks of Material Misstatement through Understanding the Entityand Its EnvironmentDefinitions4.For the purposes of this Auditing Standard, the following terms have the meanings attributedbelow:(a)Assertions means representations by management and those charged with governance,explicit or otherwise, that are embodied in the financial report, as used by the auditorto consider the different types of potential misstatements that may occur.(b)Business risk means a risk resulting from significant conditions, events,circumstances, actions or inactions that could adversely affect an entity’s ability toachieve its objectives and execute its strategies, or from the setting of inappropriateobjectives and strategies.(c)Internal control means the process designed, implemented and maintained by thosecharged with governance, management and other personnel to provide reasonableassurance about the achievement of an entity’s objectives with regard to reliability offinancial reporting, effectiveness and efficiency of operations, and compliance withapplicable laws and regulations. The term “controls” refers to any aspects of one ormore of the components of internal control.(d)Risk assessment procedures means the audit procedures performed to obtain anunderstanding of the entity and its environment, including the entity’s internal control,to identify and assess the risks of material misstatement, whether due to fraud or error,at the financial report and assertion levels.(e)Significant risk means an identified and assessed risk of material misstatement that, inthe auditor’s judgement, requires special audit consideration.RequirementsRisk Assessment Procedures and Related Activities5.The auditor shall perform risk assessment procedures to provide a basis for the identificationand assessment of risks of material misstatement at the financial report and assertion levels.Risk assessment procedures by themselves, however, do not provide sufficient appropriateaudit evidence on which to base the audit opinion. (Ref: Para. A1-A5)6.The risk assessment procedures shall include the following:(a)Enquiries of management, of appropriate individuals within the internal audit function(if the function exists) and of others within the entity who in the auditor’s judgementmay have information that is likely to assist in identifying risks of materialmisstatement due to fraud or error. (Ref: Para. A6-A13)(b)Analytical procedures. (Ref: Para. A14-A17)(c)Observation and inspection. (Ref: Para. A18)7.The auditor shall consider whether information obtained from the auditor’s client acceptanceor continuance process is relevant to identifying risks of material misstatement.8.If the engagement partner has performed other engagements for the entity, the engagementpartner shall consider whether information obtained is relevant to identifying risks of materialmisstatement.9.Where the auditor intends to use information obtained from the auditor’s previous experiencewith the entity and from audit procedures performed in previous audits, the auditor shallASA 315 - compiled-9-AUDITING STANDARD

Auditing Standard ASA 315Identifying and Assessing the Risks of Material Misstatement through Understanding the Entityand Its Environmentdetermine whether changes have occurred since the previous audit that may affect itsrelevance to the current audit. (Ref: Para. A19-A20)10.The engagement partner and other key engagement team members shall discuss thesusceptibility of the entity’s financial report to material misstatement, and the application ofthe applicable financial reporting framework to the entity’s facts and circumstances. Theengagement partner shall determine which matters are to be communicated to engagementteam members not involved in the discussion. (Ref: Para. A21-A24)The Required Understanding of the Entity and its Environment, Including the Entity’s InternalControlThe Entity and Its Environment11.The auditor shall obtain an understanding of the following:(a)Relevant industry, regulatory, and other external factors and the applicable financialreporting framework. (Ref: Para. A25-A30)(b)The nature of the entity, including:(i)its operations;(ii)its ownership and governance structures;(iii)the types of investments that the entity is making and plans to make, includinginvestments in special-purpose entities; and(iv)the way that the entity is structured and how it is financedto enable the auditor to understand the classes of transactions, account balances, anddisclosures to be expected in the financial report. (Ref: Para. A31-A35)(c)The entity’s selection and application of accounting policies, including the reasons forchanges thereto. The auditor shall evaluate whether the entity’s accounting policiesare appropriate for its business and consistent with the applicable financial reportingframework and accounting policies used in the relevant industry. (Ref: Para. A36)(d)The entity’s objectives and strategies, and those related business risks that may resultin risks of material misstatement. (Ref: Para. A37-A43)(e)The measurement and review of the entity’s financial performance. (Ref: Para. A44-A49)The Entity’s Internal Control12.The auditor shall obtain an understanding of internal control relevant to the audit. Althoughmost controls relevant to the audit are likely to relate to financial reporting, not all controlsthat relate to financial reporting are relevant to the audit. It is a matter of the auditor’sprofessional judgement whether a control, individually or in combination with others, isrelevant to the audit. (Ref: Para. A50-A73)Nature and Extent of the Understanding of Relevant Controls13.When obtaining an understanding of controls that are relevant to the audit, the auditor shallevaluate the design of those controls and determine whether they have been implemented, byperforming procedures in addition to enquiry of the entity’s personnel. (Ref: Para. A74-A76)ASA 315 - compiled- 10 -AUDITING STANDARD

Auditing Standard ASA 315Identifying and Assessing the Risks of Material Misstatement through Understanding the Entityand Its EnvironmentComponents of Internal ControlControl environment14.The auditor shall obtain an understanding of the control environment. As part of obtainingthis understanding, the auditor shall evaluate whether:(a)Management, with the oversight of those charged with governance, has created andmaintained a culture of honesty and ethical behaviour; and(b)The strengths in the control environment elements collectively provide an appropriatefoundation for the other components of internal control, and whether those othercomponents are not undermined by control environment weaknesses.(Ref: Para. A77-A87)The entity’s risk assessment process15.The auditor shall obtain an understanding of whether the entity has a process for:(a)Identifying business risks relevant to financial reporting objectives;(b)Estimating the signifi

This Auditing Standard conforms with International Standard on Auditing ISA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment issued by the International Auditing and Assurance Standards Board (IAASB), an independent

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