Slide 1:

~Introduction: Good afternoon, our report today will be all about Phil. Standard on Auditing
315 or Understanding the Entity and Its Environment and Assessing the Risk of Material
Misstatement.
So first, what is meant by PSA 315? PSA 315 according to the Auditing and Assurance
Standards Council defines the responsibility of the auditor to determine the entitys
environment, which includes the nature of its business and the internal control and to assess
the risks involved in the material misstatement of the financial statements.
Slide 2 & 3:
In order to attain this standard, an auditor must accomplish the following requirements:
RISK ASSESSMENT PROCEDURES: simply put, this process is done because this is the whole
point to auditing a financial statement, if the values are materially correct. The auditors
perform the following to accomplish risk assessment procedures:
1. Inquiries of Management and others within the entity: Conducting interview with
employees ranging from low position up to the management and find out the risks
associated with each particular department that hinders attaining their objective:
E.G. Payroll has the objective of timely processing of paychecks, the risks involved
would be inaccurate payments or missing deadlines.
2. Analytical Procedures: If the financial and non-financial data matches; TREND
ANALYSIS, comparison of financial figures; RATIO ANALYSIS; REASONABLE,
depreciation expense incurred appear to be accurate to the book value of the
equipment
3. Observation and Inspection: Observing the actual operation helps understand the
firms operations which are beyond what is shown in the books and records and gives
the opportunity to see the internal control of the company.
Slide 4:
UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT: this section provides the auditor
information about the specific aspects of the entity as well as the components of internal
control in order to identify the risks of material misstatement. Familiarize with each
department and its procedures to determine the degree of risks that will have in FS
misstatement. The auditors understanding of the entity consists of the following aspects:
1. Industry, regulatory, and other external factors: INDUSTRY CONDITIONS, competency
within the environment, the relationship with suppliers and customers, and
advancement in technology used; REGULATORY, any legal matters within the entity
such as accounting procedures used, environmental and legal requirements which
affects the industry; EXTERNAL, economic condition (inflation effect).
2. Nature of the Entity: NATURE OF ENTITY, the auditor should have the prior knowledge
of how the entitys operations are done, the type of ownership it is, the investments
made before and it will make in the future, organizational structure and how the
business is financed. IT IS IMPORTANT TO KNOW THIS INFORMATION FOR THE
AUDITOR TO UNERSTAND THE TYPES OF TRNSACTIONS, ACCOUNTS, AND BALANCES
HE/SHE WILL EXPECT TO SEE OR TO BE DISCLOSED IN THE FS AND THAT VALUES OR
ACCOUNTS ARE ACCOUNTED PROPERLY.
3. Objectives and strategies and the related business risks: OBJECTIVES, as respond to
the internal and external factors of the company, the management formulates an
objective which are the overall plans for the company; STRATEGIES, strategies are
then formulated by the management as operational means or approach to attain or
to accomplish the companys objective; BUSINESS RISKS, as the auditor understands

the strategies formulated by the company, he/she begins to identify the different and
specific business risks along with it. Business risks may become a result of an event
or a condition which hinders the attainment of the companys objective and hinders
the execution of the strategies. Business risks may come in different situations but
still may result in financial misstatement.
4. Measurement and Review of the Entitys Financial Performance: In order to review the
performance of the company, the management uses different techniques and
approaches such as key performance indicators, budgets, variance analysis and other
internally generated measures. Auditor may also acquire information about the entity
through analysts report and other external partys report. PERFORMANCE MEASURES
MAY CREATE PRESSURE OT THE COMPANY WHICH MAY MOTIVATE THE COMPANY TO
IMPROVE THEIR OPERATION OR TO MISSTATE FS. EXAMPLE: Internal measures may
highlight financial misstatements by the management such as a spike in profitability
compared with other industry may hint bias in the companys FS.
5. Internal Control: Designed to ensure systematic operation, accuracy and reliability in
financial reporting and other company vital information, and to ensure adherence to
the objectives. The auditor understands the internal control of the company to be
able to evaluate the design control of the company and ensure the implementation of
control in every aspect of operation and component of internal control by the
management. The five components of internal control includes: CONTROL
ENVIRONMENT: Attitude of the company regarding internal control; RISK
ASSESSMENT, does the management can identify risks in different areas and can
implement control to minimize errors; CONTROL ACTIVITIES, policies carried out by
the management; INFORMATION AND COMMUNICATION, includes internal controls to
safeguard assets, maintain accounting records, and back up data (Take count of
inventory? System computerized or manual? Accounting data are back-upped
frequently); MONITORING, if the management monitors the controls and changes
them when needed.
Slide 5:
Importance of Obtaining Knowledge of the Business:
Like what Ive said earlier, through interviews and observation, an auditor can acquire data
regarding the entity and its operation. It is important that the auditor must know every
aspect of the business form operation up to the control management to better exercise
professional auditing judgment in order to provide the company as a client a better auditing
service and cover/identify risks and problems to formulate better auditing plan and program