PROFESSIONAL REGULATORY BOARD OF ACCOUNTANCY 32
PROFESSIONAL REGULATORY BOARD OF ACCOUNTANCYResolution No. 32Series of 2020PHILIPPINE STANDARD ON AUDITING 315 (Revised 2019)WHEREAS, the Auditing and Assurance Standards Council (AASC) has approved and submittedhereunder pronouncements to the Board for approval;1. Philippine Standard on Auditing 315 (Revised 2019) Identifying and Assessingthe Risks and Material Misstatement2. Conforming and Consequential Amendments to Other Philippine Standardsarising from Philippine Standard on Auditing 315 (Revised 2019)WHEREAS, after study and review of the provisions of the aboved-stated pronouncements asadopted by the AASC, the Board finds them to be well taken and instructive for compliance bypracticing Certified Public Accountants;WHEREFORE, the Board RESOLVES as it is hereby RESOLVED, to adopt the aboved-statedpronouncements as part of the Philippine Auditing Standards;RESOLVED FURTHER, that this Resolution and the aboved-stated pronouncements shall takeeffect fifteen (15) days following its full and complete publication in the Official Gazette or in anynewspaper of general circulation in the Philippines.Done in the City of Manila, this 7th day of September , 2020.NOE G. QUIÑANOLAChairmanTHELMA S. CIUDADANOVice-ChairmanARLYN S. VILLANUEVAMemberSAMUEL B. PADILLAMemberGERVACIO I. PIATORMemberGLORIA T. BAYSAMemberVACANTMemberATTESTED:DATE OF PUBLICATION IN THEBUSINESS WORLD : Nov. 20, 2020Date of Effectivity : Dec. 6, 2020ATTY. OMAIMAH E. GANDAMRAOIC, PRB Secretariat DivisionAPPROVED:TEOFILO S. PILANDO, JR.ChairmanYOLANDA D. REYESCommissionerJOSE Y. CUETO, JR.CommisionerNote: Attachment maybe downloaded at www.prc.gov.ph under PRB ofAccountancy Resolution. https://www.prc.gov.ph/accountancy
Philippine S andard on A di ing 315 (Re i ed2019)Iden if ing and Ae ing he Ri k of Ma erialMi a emenandConforming and Con eq en ial Amendmeno O her Philippine S andard Ari ing fromPhilippine S andard on A di ing 315 (Re i ed2019)
PHILIPPINE STANDARD ON AUDITING 315 (REVISED 2019)IDENTIFYING AND ASSESSING THE RISKS OF MATERIALMISTATEMENTANDCONFORMING AND CONSEQUENTIAL AMENDMENTS TOOTHER PHILIPPINE STANDARDS ARISING FROMPHILIPPINE STANDARD ON AUDITING 315 (REVISED 2019)ContentsAASC Preface to Philippine Standard on Auditing (PSA)315 (Revised 2019),Identifying and Assessing the Risks of Material Misstatement and,Conforming and Consequential Amendments to Other Philippine StandardsArising from PSA 315 (Revised 2019)IAASB International Standard on Auditing (ISA) 315 (Revised 2019),Identifying and Assessing The Risks Of Material Misstatement and,Conforming and Consequential Amendments to Other InternationalStandards Arising from ISA 315 (Revised 2019)2
AASC PREFACE TO PHILIPPINE STANDARD ON AUDITING (PSA) 315(REVISED 2019), IDENTIFYING AND ASSESSING THE RISKS OF MATERIALMISSTATEMENT, AND CONFORMING AND CONSEQUENTIALAMENDMENTS TO OTHER PHILIPPINE STANDARDS ARISINGFROM PSA 315 (REVISED 2019)1. The Auditing and Assurance Standards Council (AASC) has approved on March 2, 2020the adoption of International Standard on Auditing (ISA) 315 (Revised 2019), Identifyingand Assessing the Risks of Material Misstatement, and Conforming and ConsequentialAmendments to Other International Standards Arising from ISA 315 (Revised 2019)issued by the International Auditing and Assurance Standards Board (IAASB) inDecember 2019, as Philippine Standard on Auditing (PSA) 315 (Revised 2019),Identifying and Assessing the Risks of Material Misstatement, and Conforming andConsequential Amendments to Other Philippine Standards Arising from PSA 315(Revised 2019).2. This PSA is effective for audits of financial statements for periods beginning on or afterDecember 15, 2021.3
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F a PDbce e2019Ia2019)a SaaA315 (RISA 315 (Revised 2019)andConforming and ConsequentialAmendments to OtherInternational Standards Arisingfrom ISA 315 (Revised 2019)
About the IAASBThis document was developed and approved by the International Auditing and Assurance Standards Board.The objective of the IAASB is to serve the public interest by setting high-quality auditing, assurance, andother related standards and by facilitating the convergence of international and national auditing andassurance standards, thereby enhancing the quality and consistency of practice throughout the world andstrengthening public confidence in the global auditing and assurance profession.The IAASB develops auditing and assurance standards and guidance for use by all professionalaccountants under a shared standard-setting process involving the Public Interest Oversight Board, whichoversees the activities of the IAASB, and the IAASB Consultative Advisory Group, which provides publicinterest input into the development of the standards and guidance. The structures and processes thatsupport the operations of the IAASB are facilitated by the International Federation of Accountants (IFAC).For copyright, trademark, and permissions information, please see page 201.Page 2 of 202
CONTENTSPageISA 315 (Revised 2019) Identifying and Assessing the Risks of Material MisstatementConforming and Consequential Amendments to Other International StandardsPage 3 of 202.4.117
ISA 315 (REVISED 2019)INTERNATIONAL STANDARD ON AUDITING 315 (REVISED 2019)IDENTIFYING AND ASSESSING THE RISKS OF MATERIALMISSTATEMENT(Effective for audits of financial statements for periodsbeginning on or after December 15, 2021)CONTENTSParagraphIntroductionScope of this ISA.1Key Concepts.Scalability29Effective Date.Objective1011Definitions.12Requirements.Risk Assessment Pocedures and Related Activities.13 18Obtaining an Understanding of the Entity and Its Environment, the ApplicableFinancial Reporting Framework and the Entity's System of Internal Control.19 27Identifying and Assessing the Risks of Material Misstatement.28 37Documentation.38Definitions.A1 A10Risk Assessment Procedures and Related Activities.A11 A47Obtaining an Understanding of the Entity and Its Environment, the ApplicableFinancial Reporting Framework and the Entity's System of Internal Control.A48 A183Identifying and Assessing the Risks of Material Misstatement.A184 A236Documentation.A237 A241Application and Other Explanatory MaterialPage 4 of 202
ISA 315 (REVISED 2019)Appendix 1: Considerations for Understanding the Entity and its Business ModelAppendix 2: Understanding Inherent Risk FactorsAppendix 3: Understanding the Entit s S stem of Internal ControlAppendix 4: Considerations for Understanding an Entit s Internal Audit FunctionAppendix 5: Considerations for Understanding Information Technology (IT)Appendix 6: Considerations for Understanding General IT ControlsInternational Standard on Auditing (ISA) 315 (Revised 2019), IMa a Ma, should be read in conjunction with ISA 200, OIAaCa AAaIA.a Aa Obaa SaRaISA 315 (Revised 2019) has received the approval of the Public Interest Oversight Board (PIOB),which concluded that due process was followed in the development of the standard and that properregard was paid to the public interest.Page 5 of 202
ISA 315 (REVISED 2019)IntroductionScope of this ISA1.This International Standard on Auditing (ISA) deals with the auditor s responsibilit to identif andassess the risks of material misstatement in the financial statements.Key Concepts in this ISA2.ISA 200 deals with the overall objectives of the auditor in conducting an audit of the financialstatements,1 including to obtain sufficient appropriate audit evidence to reduce audit risk to anacceptably low level.2 Audit risk is a function of the risks of material misstatement and detection risk.3ISA 200 explains that the risks of material misstatement may exist at two levels: 4 the overall financialstatement level; and the assertion level for classes of transactions, account balances anddisclosures.3.ISA 200 requires the auditor to exercise professional judgment in planning and performing an audit,and to plan and perform an audit with professional skepticism recognizing that circumstances mayexist that cause the financial statements to be materially misstated. 54.Risks at the financial statement level relate pervasively to the financial statements as a whole andpotentially affect many assertions. Risks of material misstatement at the assertion level consist oftwo components, inherent and control risk:Inherent risk is described as the susceptibility of an assertion about a class of transaction,account balance or disclosure to a misstatement that could be material, either individually orwhen aggregated with other misstatements, before consideration of any related controls.Control risk is described as the risk that a misstatement that could occur in an assertion abouta class of transaction, account balance or disclosure and that could be material, eitherindividually or when aggregated with other misstatements, will not be prevented, or detectedand corrected, on a timely basis b the entit s s stem of internal control.5.ISA 200 explains that risks of material misstatement are assessed at the assertion level in order todetermine the nature, timing and extent of further audit procedures necessary to obtain sufficientappropriate audit evidence.6 For the identified risks of material misstatement at the assertion level, aseparate assessment of inherent risk and control risk is required by this ISA. As explained in ISA200, inherent risk is higher for some assertions and related classes of transactions, account balances1ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standardson Auditing2ISA 200, paragraph 173ISA 200, paragraph 13(c)4ISA 200, paragraph A365ISA 200, paragraphs 15 166ISA 200, paragraph A43a and ISA 330, TARPage 6 of 202AR, paragraph 6
ISA 315 (REVISED 2019)and disclosures than for others. The degree to which inherent risk varies is referred to in this ISA asthe spectrum of inherent risk.6.Risks of material misstatement identified and assessed by the auditor include both those due to errorand those due to fraud. Although both are addressed by this ISA, the significance of fraud is suchthat further requirements and guidance are included in ISA 240 7 in relation to risk assessmentprocedures and related activities to obtain information that is used to identify, assess and respond tothe risks of material misstatement due to fraud.7.The auditor s risk identification and assessment process is iterative and d namic. The auditor sunderstanding of the entity and its environment, the applicable financial reporting framework, and theentit s s stem of internal control are interdependent with concepts within the requirements to identifand assess the risks of material misstatement. In obtaining the understanding required by this ISA,initial expectations of risks may be developed, which may be further refined as the auditor progressesthrough the risk identification and assessment process. In addition, this ISA and ISA 330 require theauditor to revise the risk assessments, and modify further overall responses and further auditprocedures, based on audit evidence obtained from performing further audit procedures inaccordance with ISA 330, or if new information is obtained.8.ISA 330 requires the auditor to design and implement overall responses to address the assessedrisks of material misstatement at the financial statement level. 8 ISA 330 further explains that theauditor s assessment of the risks of material misstatement at the financial statement level, and theauditor s overall responses, is affected b the auditor s understanding of the control environment. ISA330 also requires the auditor to design and perform further audit procedures whose nature, timingand extent are based on and are responsive to the assessed risks of material misstatement at theassertion level.9Scalability9.ISA 200 states that some ISAs include scalability considerations which illustrate the application ofthe requirements to all entities regardless of whether their nature and circumstances are less complexor more complex.10 This ISA is intended for audits of all entities, regardless of size or complexity andthe application material therefore incorporates specific considerations specific to both less and morecomplex entities, where appropriate. While the size of an entity may be an indicator of its complexity,some smaller entities may be complex and some larger entities may be less complex.Effective Date10.This ISA is effective for audits of financial statements for periods beginning on or after December 15,2021.7ISA 240, T8ISA 330, paragraph 59ISA 330, paragraph 610ISA 200, paragraph A65aARbR aFaa APage 7 of 202F aa Sa
ISA 315 (REVISED 2019)Objective11.The objective of the auditor is to identify and assess the risks of material misstatement, whether dueto fraud or error, at the financial statement and assertion levels thereby providing a basis for designingand implementing responses to the assessed risks of material misstatement.Definitions12.11For purposes of the ISAs, the following terms have the meanings attributed below:(a)AssertionsRepresentations, explicit or otherwise, with respect to the recognition,measurement, presentation and disclosure of information in the financial statements which areinherent in management representing that the financial statements are prepared in accordancewith the applicable financial reporting framework. Assertions are used by the auditor toconsider the different types of potential misstatements that may occur when identifying,assessing and responding to the risks of material misstatement. (Ref: Para. A1)(b)Business risk A risk resulting from significant conditions, events, circumstances, actions orinactions that could adversel affect an entit s abilit to achieve its objectives and e ecute itsstrategies, or from the setting of inappropriate objectives and strategies.(c)Controls Policies or procedures that an entity establishes to achieve the control objectives ofmanagement or those charged with governance. In this context: (Ref: Para. A2 A5)(i)Policies are statements of what should, or should not, be done within the entity to effectcontrol. Such statements may be documented, explicitly stated in communications, orimplied through actions and decisions.(ii)Procedures are actions to implement policies.(d)General information technology (IT) controls Controls over the entit s IT processes thatsupport the continued proper operation of the IT environment, including the continued effectivefunctioning of information processing controls and the integrity of information (i.e., thecompleteness, accuracy and validity of information) in the entit s information s stem. Also seethe definition of IT environment.(e)Information processing controlsControls relating to the processing of information in ITapplications or manual information processes in the entit s information system that directlyaddress risks to the integrity of information (i.e., the completeness, accuracy and validity oftransactions and other information). (Ref: Para. A6)(f)Inherent risk factorsCharacteristics of events or conditions that affect susceptibility tomisstatement, whether due to fraud or error, of an assertion about a class of transactions,account balance or disclosure, before consideration of controls. Such factors may bequalitative or quantitative, and include complexity, subjectivity, change, uncertainty orsusceptibility to misstatement due to management bias or other fraud risk factors 11 insofar asthey affect inherent risk. (Ref: Para. A7 A8)ISA 240, paragraphs A24 A27Page 8 of 202
ISA 315 (REVISED 2019)(g)(i)An IT application is a program or a set of programs that is used in the initiation,processing, recording and reporting of transactions or information. IT applicationsinclude data warehouses and report writers.(ii)The IT infrastructure comprises the network, operating systems, and databases and theirrelated hardware and software.(iii)The IT processes are the entit s processes to manage access to the IT environment,manage program changes or changes to the IT environment and manage IT operations.(h)Relevant assertions An assertion about a class of transactions, account balance or disclosureis relevant when it has an identified risk of material misstatement. The determination of whetheran assertion is a relevant assertion is made before consideration of any related controls (i.e.,the inherent risk). (Ref: Para. A9)(i)Risks arising from the use of IT Susceptibility of information processing controls to ineffectivedesign or operation, or risks to the integrity of information (i.e., the completeness, accuracyand validit of transactions and other information) in the entit s information s stem, due toineffective design or operation of controls in the entit s IT processes (see IT environment).(j)Risk assessment procedures The audit procedures designed and performed to identify andassess the risks of material misstatement, whether due to fraud or error, at the financialstatement and assertion levels.(k)Significant class of transactions, account balance or disclosureA class of transactions,account balance or disclosure for which there is one or more relevant assertions.(l)Significant risk(m)12IT environmentThe IT applications and supporting IT infrastructure, as well as the ITprocesses and personnel involved in those processes, that an entity uses to support businessoperations and achieve business strategies. For the purposes of this ISA:An identified risk of material misstatement: (Ref: Para. A10)(i)For which the assessment of inherent risk is close to the upper end of the spectrum ofinherent risk due to the degree to which inherent risk factors affect the combination ofthe likelihood of a misstatement occurring and the magnitude of the potentialmisstatement should that misstatement occur; or(ii)That is to be treated as a significant risk in accordance with the requirements of otherISAs.12System of internal control The system designed, implemented and maintained by thosecharged with governance, management and other personnel, to provide reasonable assuranceabout the achievement of an entit s objectives with regard to reliabilit of financial reporting,effectiveness and efficiency of operations, and compliance with applicable laws andregulations. For the purposes of the ISAs, the system of internal control consists of five interrelated components:(i)Control environment;(ii)The entit s risk assessment process;ISA 240, paragraph 27 and ISA 550, Related Parties, paragraph 18Page 9 of 202
ISA 315 (REVISED 2019)(iii)The entit s process to monitor the s stem of internal control;(iv)The information system and communication; and(v)Control activities.RequirementsRisk Assessment Procedures and Related Activities13.The auditor shall design and perform risk assessment procedures to obtain audit evidence thatprovides an appropriate basis for: (Ref: Para. A11 A18)(a)The identification and assessment of risks of material misstatement, whether due to fraud orerror, at the financial statement and assertion levels; and(b)The design of further audit procedures in accordance with ISA 330.The auditor shall design and perform risk assessment procedures in a manner that is not biasedtowards obtaining audit evidence that may be corroborative or towards excluding audit evidence thatmay be contradictory. (Ref: Para. A14)14.The risk assessment procedures shall include the following: (Ref: Para. A19 A21)(a)Inquiries of management and of other appropriate individuals within the entit ,including individuals within the internal audit function (if the function e ists). (Ref:Para. A22 A26)(b)Anal tical procedures. (Ref: Para. A27 A31)(c)Observation and inspection. (Ref: Para. A32 A36)Information from Other Sources15.16.In obtaining audit evidence in accordance with paragraph 13, the auditor shall consider informationfrom: (Ref: Para. A37 A38)(a)The auditor s procedures regarding acceptance or continuance of the client relationship or theaudit e
the adoption of International Standard on Auditing (ISA) 315 (Revised 2019), Identifying and Assessing the Risks of Material Misstatement, and Conforming and Consequential Amendments to Other International Standards Arising from ISA 315 (Revised 2019) issued by the International Auditing and Assurance Standards Board (IAASB) in
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