Document ID: chunk:federal_register_of_legislation:F2023C01130:body:0:p28
Version: federal_register_of_legislation:F2023C01130
Segment Type: other
Provision Reference: 
Character Range: 83753–86969

these entities the business risks arising from a significantly different business model would be substantially different, notwithstanding both entities sell shoes.

Understanding the entity's business model

A62.         Not all aspects of the business model are relevant to the auditor's understanding.  Business risks are broader than the risks of material misstatement of the financial report, although business risks include the latter.  The auditor does not have a responsibility to understand or identify all business risks because not all business risks give rise to risks of material misstatement.

A63.         Business risks increasing the susceptibility to risks of material misstatement may arise from:

           * Inappropriate objectives or strategies, ineffective execution of strategies, or change or complexity.

           * A failure to recognise the need for change may also give rise to business risk, for example, from:

                   + The development of new products or services that may fail;

                   + A market which, even if successfully developed, is inadequate to support a product or service; or

                   + Flaws in a product or service that may result in legal liability and reputational risk.

           * Incentives and pressures on management, which may result in intentional or unintentional management bias, and therefore affect the reasonableness of significant assumptions and the expectations of management or those charged with governance.

A64.         Examples of matters that the auditor may consider when obtaining an understanding of the entity's business model, objectives, strategies and related business risks that may result in a risk of material misstatement of the financial report include:

           * Industry developments, such as the lack of personnel or expertise to deal with the changes in the industry;

           * New products and services that may lead to increased product liability;

           * Expansion of the entity's business, and demand has not been accurately estimated;

           * New accounting requirements where there has been incomplete or improper implementation;

           * Regulatory requirements resulting in increased legal exposure;

           * Current and prospective financing requirements, such as loss of financing due to the entity's inability to meet requirements;

           * Use of IT, such as the implementation of a new IT system that will affect both operations and financial reporting; or

           * The effects of implementing a strategy, particularly any effects that will lead to new accounting requirements.

A65.         Ordinarily, management identifies business risks and develops approaches to address them.  Such a risk assessment process is part of the entity's system of internal control and is discussed in paragraph 22, and paragraphs A109–A113.

Considerations specific to public sector entities

A66.         Entities operating in the public sector may create and deliver value in different ways to those creating wealth for owners but will still have a 'business model' with a specific objective.  Matters public sector auditors may obtain an understanding