A change in terminology – ISA 315 (Revised 2019)
The new ACCA syllabus is out. For AA, the big change revolves around the update of the auditing standard, ISA 315, Identifying and Assessing the Risk of Material Misstatements (2019 revised).
There are 2 key areas that ISA 315 will affect, the planning stage of an audit, and what the auditor does with regards to controls and systems. What is different? Mainly terminology tweaks which include the following:
| Then | Now |
| Understanding the entity and it’s environment | Understanding the entity, its environment and the applicable financial reporting framework |
| Internal control system | System of internal control |
| Cash control system | Bank and cash control system |
| Key controls and control strengths | Direct and Indirect controls |
| An element of a system of internal control was ‘the information system’ | Now referred to as Information systems and communication |
| Control activities updated… | Authorisation, reconciliation, verifications, physical or logical controls and segregation of duties |
These will largely affect the knowledge questions in the exam. However, the biggest impact to the AA exam lies in the introduction of the terms, Direct and Indirect controls. But what does it now mean for AA students:
| Direct controls | Indirect controls |
| Address the risk of material misstatements at the assertion level | Supports direct controls |
| Example Bank reconciliations performed on a weekly basis by someone other than who prepares the cashbook and reviewed by a responsible official | Example Bank reconciliations held in a file in date order once completed |
| Assertions – completeness and accuracy | Ensures the review can happen (does not address an assertion directly) |
In the AA exam we have seen a focus on requiring candidates to identify and explain ‘key controls’ in section B. The term ‘Direct controls’ replaces ‘Key Controls’ but what are they and how do you know if you have found one in the scenario?
The definition of a direct control is one that will address the risk of material misstatements at the assertion level. In simple terms, effective direct controls will reduce the risk of material misstatements in the financial statements. The direct control will address specific assertions rather than general controls. For example, they will help ensure completeness or accuracy of a balance in the financial statements.
Indirect controls are present to support the direct controls in doing their job. They strengthen the control system but do not address the assertions.
Let’s compare this to something completely different. Musical entertainment! If Ed Sheeran is on tour, there’s a lot of people wanting to come and see his shows. Expectations are high and he has to be efficient. He must perform. Every single night. Without him, the show is a disaster!
Ed is not alone on that stage. There are musicians and singers, sound technicians and support staff with them. They also have a critical role.
Venues can be moved and the performance will go ahead. Security teams can be changed. They are needed but they are indirect from the performance itself.
The performance is the financial statements. Success is attributable to the direct controls which ensure the assertions are achieved. After all, both the performance and financial statements need to exist. Indirect controls support this to ensure the system is as efficient as possible. They are important, but they are not the main act!