Document ID: chunk:federal_register_of_legislation:F2020L00252:body:0:p7
Version: federal_register_of_legislation:F2020L00252
Segment Type: other
Provision Reference: 
Character Range: 19198–22305

of the high estimation uncertainty.

16.               The following paragraph A42 is inserted following the paragraph above:

    External circumstances giving rise to business risks may also influence inherent risk.  For example, technological developments might make a particular product obsolete, thereby causing inventory to be more susceptible to overstatement.  Factors in the entity and its environment that relate to several or all of the classes of transactions, account balances, or disclosures may also influence the inherent risk related to a specific assertion.  Such factors may include, for example, a lack of sufficient working capital to continue operations or a declining industry characterised by a large number of business failures.

17.               As a result of the insertion of the paragraph above, subsequent paragraphs of this Auditing Standard are re-numbered and references to these paragraphs are updated accordingly.

18.               Existing paragraph A41 is amended to read as follows:

    Control risk is a function of the effectiveness of the design, implementation and maintenance of internal controls by management to address identified risks that threaten the achievement of the entity's objectives relevant to preparation of the entity's financial report.  However, internal control, no matter how well designed and operated, can only reduce, but not eliminate, risks of material misstatement in the financial report, because of the inherent limitations of internal controls.  These include, for example, the possibility of human errors or mistakes, or of controls being circumvented by collusion or inappropriate management override.  Accordingly, some control risk will always exist.  The ASAs provide the conditions under which the auditor is required to, or may choose to, test the operating effectiveness of controls in determining the nature, timing and extent of substantive procedures to be performed.18

19.               Existing paragraph A42 is amended to read as follows:

    The assessment of the risks of material misstatement may be expressed in quantitative terms, such as in percentages, or in non-quantitative terms.  In any case, the need for the auditor to make appropriate risk assessments is more important than the different approaches by which they may be made.  The Australian Auditing Standards  typically refer to do not ordinarily refer to inherent risk and control risk separately, but rather to a combined assessment of the "risks of material misstatement." rather than to inherent risk and control risk separately.  However, ASA 540315[19] requires a separate assessment of inherent risk to be assessed separately from and control risk to provide a basis for designing and performing further audit procedures to respond to the assessed risks of material misstatement at the assertion level, including significant risks, for accounting estimates at the assertion level in accordance with ASA 330.20 In identifying and assessing risks of material misstatement for significant classes of transactions, account balances or disclosures