## SA 315 — Identifying and Assessing Risks of Material Misstatement

SA 315 is titled "Identifying and Assessing the Risk of Material Misstatement".

### Objective

To identify and assess risks of material misstatement at two levels:

1. Financial statement level (pervasive risks affecting the whole FS)

2. Assertion level (specific risks at transaction class, balance, or disclosure level)

### Four Required Activities

For the purpose of identifying and assessing risks of material misstatement, the auditor shall:

Activity 1 — Identify Risks

Identify risks throughout the process of obtaining an understanding of the entity and its environment, including relevant controls
Consider classes of transactions, account balances, and disclosures in the financial statements

Activity 2 — Assess the Identified Risks

Evaluate whether the risk relates more pervasively to the financial statements as a whole
Assess if it could potentially affect many assertions

Activity 3 — Relate Risks to Assertion Level

Relate identified risks to what can go wrong at the assertion level
Take into account relevant controls the auditor intends to test

Activity 4 — Consider Likelihood and Magnitude

Consider the likelihood of misstatement, including the possibility of multiple misstatements
Assess whether the potential misstatement is of a magnitude that could result in a material misstatement

### Levels of Risk — Quick Recap

Level	What It Means
Financial Statement Level	Risk affects the entire set of financial statements (e.g., management integrity issues)
Assertion Level	Risk is specific to a transaction class, balance, or disclosure (e.g., existence of inventory)

Worked example

### Example 1

MD 1 (4M): The auditor of an entity must: (1) Identify risks while understanding the entity — e.g., a new product line creates new revenue recognition risks; (2) Assess whether these risks are pervasive (affect entire FS) or specific (affect only revenue); (3) Relate them to assertions — for a new product line, the 'completeness' and 'cut-off' assertions for revenue are at risk; (4) Consider likelihood — if the entity has no prior experience with the new product, the likelihood of misstatement is higher, and if the revenue is material, the magnitude threshold may be breached.

⚠️ Common exam mistakes

Listing only 2-3 activities instead of all four — SA 315 requires all four and exam questions expect completeness.
Confusing 'assessment of risk' (Activity 2 — pervasiveness) with 'likelihood and magnitude' (Activity 4) — they are separate steps.
Forgetting to mention 'relevant controls the auditor intends to test' in Activity 3 — this links risk assessment to the audit response.
Not distinguishing financial statement level risk from assertion level risk — this distinction is the core of SA 315.

Bare-Act text Objective (Para 3) · SA 315 — Identifying and Assessing the Risk of Material Misstatement · click to expand

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.

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SA 315 — Activities for Identifying and Assessing Risks of Material Misstatement

Worked example

⚠️ Common exam mistakes