Document ID: chunk:federal_register_of_legislation:F2025C00096:body:0:p41
Version: federal_register_of_legislation:F2025C00096
Segment Type: other
Provision Reference: 
Character Range: 117616–120709

joint venture.  These factors may give rise to increased susceptibility to material misstatements.

 1.          Obtaining an understanding of the degree to which the group's operations or activities are similar may help to identify similar risks of material misstatement across components and design an appropriate response.

 2.          The financial results of entities or business units are ordinarily measured and reviewed by group management.  Enquiries of group management may reveal that group management relies on certain key indicators to evaluate the financial performance of the group's entities and business units and take action.  The understanding of such performance measures may help to identify:

           * Areas where there is increased susceptibility to material misstatements (e.g., due to pressures on component management to meet certain performance measures).

           * Controls over the group's financial reporting process.

The Group's System of Internal Control

The Nature and Extent of Commonality of Controls (Ref: Para. 30(c)(i))

 1.          Group management may design controls that are intended to operate in a common manner across multiple entities or business units (i.e., common controls).  For example, group management may design common controls for inventory management, which operate using the same IT system and that are implemented across all entities or business units in the group.  Common controls may exist in each component of the group's system of internal control, and they may be implemented at different levels within the group (e.g., at the level of the consolidated group as a whole, or for other levels of aggregation within the group).  Common controls may be direct controls or indirect controls.  Direct controls are controls that are precise enough to address risks of material misstatement at the assertion level.  Indirect controls are controls that support direct controls.[73]

 2.          Understanding the components of the group's system of internal control includes understanding the commonality of the controls within those components across the group.  In understanding the commonality of a control across the group, considerations that may be relevant include whether:

           * The control is designed centrally and is required to be implemented as designed (i.e., without modification) at some or all components;

           * The control is implemented and, if applicable, monitored by individuals with similar responsibilities and capabilities at all the components where the control is implemented;

           * If a control uses information from IT applications, the IT applications and other aspects of the IT environment that generate the information are the same across the components or locations; or

           * If the control is automated, it is configured in the same way in each IT application across the components.

 1.          Judgement may often be needed to determine whether a control is a common control.  For example, group management may require that all entities and business units