Document ID: chunk:federal_register_of_legislation:F2023C01130:body:0:p30
Version: federal_register_of_legislation:F2023C01130
Segment Type: other
Provision Reference: 
Character Range: 89855–93120

be an essential consideration when obtaining an understanding of the entity and its environment.

Other external factors

A73.         Other external factors affecting the entity that the auditor may consider include the general economic conditions, interest rates and availability of financing, and inflation or currency revaluation.

Measures Used by Management to Assess the Entity's Financial Performance (Ref: Para. 19(a)(iii))

Why the auditor understands measures used by management

A74.         An understanding of the entity's measures assists the auditor in considering whether such measures, whether used externally or internally, create pressures on the entity to achieve performance targets.  These pressures may motivate management to take actions that increase the susceptibility to misstatement due to management bias or fraud (e.g., to improve the business performance or to intentionally misstate the financial report) (see ASA 240 for requirements and guidance in relation to the risks of fraud).

A75.         Measures may also indicate to the auditor the likelihood of risks of material misstatement of related financial report information.  For example, performance measures may indicate that the entity has unusually rapid growth or profitability when compared to that of other entities in the same industry.

Measures used by management

A76.         Management and others ordinarily measure and review those matters they regard as important.  Enquiries of management may reveal that it relies on certain key indicators, whether publicly available or not, for evaluating financial performance and taking action.  In such cases, the auditor may identify relevant performance measures, whether internal or external, by considering the information that the entity uses to manage its business.  If such enquiry indicates an absence of performance measurement or review, there may be an increased risk of misstatements not being detected and corrected.

A77.         Key indicators used for evaluating financial performance may include:

           * Key performance indicators (financial and non-financial) and key ratios, trends and operating statistics.

           * Period-on-period financial performance analyses.

           * Budgets, forecasts, variance analyses, segment information and divisional, departmental or other level performance reports.

           * Employee performance measures and incentive compensation policies.

           * Comparisons of an entity's performance with that of competitors.

Scalability (Ref: Para. 19(a)(iii))

A78.         The procedures undertaken to understand the entity's measures may vary depending on the size or complexity of the entity, as well as the involvement of owners or those charged with governance in the management of the entity.
Examples:

      * For some less complex entities, the terms of the entity's bank borrowings (i.e., bank covenants) may be linked to specific performance measures related to the entity's performance or financial position (e.g., a maximum working capital amount).  The auditor's understanding of the performance measures used by the bank may help identify areas where there is increased susceptibility to the risk of material misstatement.

      * For