TWSA315 Identifying and Assessing the Risks of Material Misstatement

Status

Revised by Auditing Standards Committee in Taiwan on 4 October, 2022

Summary

This Standard deals with the auditor’s responsibility to identify and assess the risks of material misstatement in the financial statements.

The objective of the auditor is to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement. The risks of material misstatement may exist at the overall financial statement level and the assertion level for classes of transactions, account balances and disclosures.

The auditor shall design and perform risk assessment procedures to obtain audit evidence that provides an appropriate basis for: (a) the identification and assessment of risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels；and (b) the design of further audit procedures in accordance with SAS No.49. The risk assessment procedures shall include inquiries of management or other appropriate individuals within the entity, analytical procedures, and observation and inspection.

The auditor shall perform risk assessment procedures to obtain an understanding of:

(a)  Certain aspects of the entity and its environment.

(b)  The applicable financial reporting framework, and the entity’s accounting policies and the reasons for any changes thereto; and

(c)  How inherent risk factors affect susceptibility of assertions to misstatement and the degree to which they do so, in the preparation of the financial statements in accordance with the applicable financial reporting framework.

The auditor shall obtain an understanding of components of the entity’s system of internal control (including control environment, the entity’s risk assessment process, the entity’s process to monitor the system of internal control, information system and communication, and control activities) through performing risk assessment procedure. Based on the auditor’s evaluation of each of the components of the entity’s system of internal control, the auditor shall determine whether one or more control deficiencies have been identified.

The auditor shall identify the risks of material misstatement and determine whether they exist at the financial statement level or the assertion level for classes of transactions, account balances and disclosures. Risks at the financial statement level relate pervasively to the financial statements as a whole and potentially affect many assertions. Risks of material misstatement at the assertion level consist of inherent risk and control risk.

In addition, the auditor shall determine the relevant assertions and the related significant classes of transactions, account balances and disclosures.

The auditor shall evaluate whether the audit evidence obtained from the risk assessment procedures provides an appropriate basis for the identification and assessment of the risks of material misstatement. If not, the auditor shall perform additional risk assessment procedures until audit evidence has been obtained to provide such a basis. If the auditor obtains new information which is inconsistent with the audit evidence on which the auditor originally based the identification or assessments of the risks of material misstatement, the auditor shall revise the identification or assessment.

Effective date

This Standard is effective for audits of financial statements for periods ending on or after December 31, 2022.