Document ID: chunk:federal_register_of_legislation:F2022C01152:reg:4:p17
Version: federal_register_of_legislation:F2022C01152
Segment Type: reg
Provision Reference: reg 4 (pt 17/63)
Character Range: 60780–64020

complex and involve the use of complex models. In addition, the entity may have a more sophisticated information system, and more extensive controls over accounting estimates. In these circumstances, the accounting estimates may be subject to or affected by estimation uncertainty, subjectivity, complexity or other inherent risk factors to a greater degree. If so, the nature or timing of the auditor's risk assessment procedures are likely to be different, or be more extensive, than in the circumstances in paragraph A20.

A22.         The following considerations may be relevant for entities with only simple businesses, which may include many smaller entities:

           * Processes relevant to accounting estimates may be uncomplicated because the business activities are simple or the required estimates may have a lesser degree of estimation uncertainty.

           * Accounting estimates may be generated outside of the general and subsidiary ledgers, controls over their development may be limited, and an owner‑manager may have significant influence over their determination. The owner‑manager's role in making the accounting estimates may need to be taken into account by the auditor both when identifying the risks of material misstatement and when considering the risk of management bias.

The Entity and Its Environment

The entity's transactions and other events or conditions (Ref: Para. 13(a))

A23.         Changes in circumstances that may give rise to the need for, or changes in, accounting estimates may include, for example, whether:

           * The entity has engaged in new types of transactions;

           * Terms of transactions have changed; or

           * New events or conditions have occurred.

The requirements of the applicable financial reporting framework (Ref: Para. 13(b))

A24.         Obtaining an understanding of the requirements of the applicable financial reporting framework provides the auditor with a basis for discussion with management and, where applicable, those charged with governance about how management has applied the requirements of the applicable financial reporting framework relevant to the accounting estimates, and about the auditor's determination of whether they have been applied appropriately. This understanding also may assist the auditor in communicating with those charged with governance when the auditor considers a significant accounting practice that is acceptable under the applicable financial reporting framework not to be the most appropriate in the circumstances of the entity.[34]

A25.         In obtaining this understanding, the auditor may seek to understand whether:

           * The applicable financial reporting framework:

                   + Prescribes certain criteria for the recognition, or methods for the measurement of accounting estimates;

                   + Specifies certain criteria that permit or require measurement at a fair value, for example, by referring to management's intentions to carry out certain courses of action with respect to an asset or liability; or

                   + Specifies required or suggested disclosures, including disclosures concerning judgements, assumptions, or other sources of estimation