Document ID: chunk:federal_register_of_legislation:F2016C00028:reg:26:p18
Version: federal_register_of_legislation:F2016C00028
Segment Type: reg
Provision Reference: reg 26 (pt 18/47)
Character Range: 58874–62074

changes in the industry).

           * New products and services (a potential related business risk might be, for example, that there is increased product liability).

           * Expansion of the business (a potential related business risk might be, for example, that the demand has not been accurately estimated).

           * New accounting requirements (a potential related business risk might be, for example, incomplete or improper implementation, or increased costs).

           * Regulatory requirements (a potential related business risk might be, for example, that there is increased legal exposure).

           * Current and prospective financing requirements (a potential related business risk might be, for example, the loss of financing due to the entity's inability to meet requirements).

           * Use of IT (a potential related business risk might be, for example, that systems and processes are incompatible).

           * The effects of implementing a strategy, particularly any effects that will lead to new accounting requirements (a potential related business risk might be, for example, incomplete or improper implementation).

A41.         A business risk may have an immediate consequence for the risk of material misstatement for classes of transactions, account balances, and disclosures at the assertion level or the financial report level.  For example, the business risk arising from a contracting customer base may increase the risk of material misstatement associated with the valuation of receivables.  However, the same risk, particularly in combination with a contracting economy, may also have a longer‑term consequence, which the auditor considers when assessing the appropriateness of the going concern assumption.  Whether a business risk may result in a risk of material misstatement is, therefore, considered in light of the entity's circumstances.  Examples of conditions and events that may indicate risks of material misstatement are indicated in Appendix 2.

A42.         Usually, management identifies business risks and develops approaches to address them.  Such a risk assessment process is part of internal control and is discussed in paragraph 15 and paragraphs A88-A89.

Considerations Specific to Public Sector Entities

A43.         For the audits of public sector entities, "management objectives" may be influenced by concerns regarding public accountability and may include objectives which have their source in law, regulation, or other authority.

Measurement and Review of the Entity's Financial Performance (Ref: Para. 11(e))

A44.         Management and others will measure and review those things they regard as important.  Performance measures, whether external or internal, create pressures on the entity.  These pressures, in turn, may motivate management to take action to improve the business performance or to misstate the financial report.  Accordingly, an understanding of the entity's performance measures assists the auditor in considering whether pressures to achieve performance targets may result in management actions that increase the risks of material misstatement, including those due to fraud.  See ASA 240 for