Document ID: chunk:federal_register_of_legislation:F2016C00028:reg:26:p17
Version: federal_register_of_legislation:F2016C00028
Segment Type: reg
Provision Reference: reg 26 (pt 17/47)
Character Range: 56051–59148

entity should be considered for consolidation.  The interpretation of the requirements of such frameworks often demands a detailed knowledge of the relevant agreements involving the special‑purpose entity.

The Entity's Selection and Application of Accounting Policies (Ref: Para.11(c))

A36.         An understanding of the entity's selection and application of accounting policies may encompass such matters as:

           * The methods the entity uses to account for significant and unusual transactions.

           * The effect of significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus.

           * Changes in the entity's accounting policies.

           * Financial reporting standards and laws and regulations that are new to the entity and when and how the entity will adopt such requirements.

Objectives and Strategies and Related Business Risks (Ref: Para.11(d))

A37.         The entity conducts its business in the context of industry, regulatory and other internal and external factors.  To respond to these factors, the entity's management or those charged with governance define objectives, which are the overall plans for the entity.  Strategies are the approaches by which management intends to achieve its objectives.  The entity's objectives and strategies may change over time.

A38.         Business risk is broader than the risk of material misstatement of the financial report, though it includes the latter.  Business risk may arise from change or complexity.  A failure to recognise the need for change may also give rise to business risk.  Business risk may arise, 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 liabilities and reputational risk.

A39.         An understanding of the business risks facing the entity increases the likelihood of identifying risks of material misstatement, since most business risks will eventually have financial consequences and, therefore, an effect on the financial report.  However, the auditor does not have a responsibility to identify or assess all business risks because not all business risks give rise to risks of material misstatement.

A40.         Examples of matters that the auditor may consider when obtaining an understanding of the entity's objectives, strategies and related business risks that may result in a risk of material misstatement of the financial report include:

           * Industry developments (a potential related business risk might be, for example, that the entity does not have the personnel or expertise to deal with the 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