Wiley Practitioner's Guide to GAAS 2023, 2nd Edition

10AU-C 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement

• Scope
• Technical Alert
• Definitions of Terms
• Objectives of AU-C 315
• Overview
• Requirements
  • Step 1. Perform Risk Assessment Procedures
  • Step 2. Identification of Significant Risks
  • Step 3. Assessing the Risk of Material Misstatement
  • Documentation
  • Examples of Matters to Consider When Obtaining an Understanding of the Entity and Its Environment
  • The Economy
  • The Client's Industry
  • The Client's Business: New Client
  • The Client's Business: Continuing Client
  • Using a Risk-Based, Top-Down Approach to Evaluate Internal Control
  • Effect of IT on Internal Control
• AU-C 315 Illustrations

SCOPE

AU-C 315 provides guidance for the auditor to identify and assess the risks of material misstatements. The auditor does this by understanding the entity and its environment, including internal control. (AU-C 315.01)

TECHNICAL ALERT

Through the AICPA's initiative on Enhancing Audit Quality (EAQ), data surfaced that indicated firms often fail to perform appropriate risk assessments and link those risk assessments to their audit procedures in compliance with AU-C Section 315 and AU-C Section 330. As a result, the AICPA Peer Review Board developed stronger, more precise guidance. The Peer Review Board added a section in the Peer Review Manual, Evaluation of Noncompliance with the Risk Assessment Standards.

The Peer Review Board emphasizes that reviewers should be alert to these areas of common noncompliance: ...