Document ID: chunk:federal_register_of_legislation:F2022C01186:reg:14:p19
Version: federal_register_of_legislation:F2022C01186
Segment Type: reg
Provision Reference: reg 14 (pt 19/30)
Character Range: 66073–69170

of the process of identifying and assessing the risks of material misstatement. For example, account balances consisting of amounts derived from accounting estimates that are subject to significant estimation uncertainty may be identified as significant account balances, and the auditor's assessment of inherent risk for the related risks at the assertion level may be higher because of the high estimation uncertainty.

A42.         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.

A43.         Control risk is a function of the effectiveness of the design, implementation and maintenance of controls by management, or where applicable, those charged with governance, 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 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 Australian Auditing Standards 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.[19]

A44.         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 the "risks of material misstatement" rather than to inherent risk and control risk separately.  However, ASA 315[20] requires inherent risk to be assessed separately from 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 in accordance with ASA 330.[21]

A45.         ASA 315 establishes requirements and provides guidance on identifying and assessing the risks of material misstatement at the financial report and assertion levels.

A46.         Risks of material misstatement are assessed at the assertion level in order to determine the nature, timing