Document ID: chunk:federal_register_of_legislation:F2023C01130:body:0:p25
Version: federal_register_of_legislation:F2023C01130
Segment Type: other
Provision Reference: 
Character Range: 75237–78464

in accordance with ASA 700;[28]

           * Determining materiality or performance materiality in accordance with ASA 320;[29] or

           * Considering the appropriateness of the selection and application of accounting policies, and the adequacy of financial report disclosures.

A51.         The auditor's understanding of the entity and its environment, and the applicable financial reporting framework, also informs how the auditor plans and performs further audit procedures, for example, when:

           * Developing expectations for use when performing analytical procedures in accordance with ASA 520;[30]

           * Designing and performing further audit procedures to obtain sufficient appropriate audit evidence in accordance with ASA 330; and

           * Evaluating the sufficiency and appropriateness of audit evidence obtained (e.g., relating to assumptions or management's oral and written representations).

Scalability

A52.         The nature and extent of the required understanding is a matter of the auditor's professional judgement and varies from entity to entity based on the nature and circumstances of the entity, including:

           * The size and complexity of the entity, including its IT environment;

           * The auditor's previous experience with the entity;

           * The nature of the entity's systems and processes, including whether they are formalised or not; and

           * The nature and form of the entity's documentation.

A53.         The auditor's risk assessment procedures to obtain the required understanding may be less extensive in audits of less complex entities and more extensive for entities that are more complex.  The depth of the understanding that is required by the auditor is expected to be less than that possessed by management in managing the entity.

A54.         Some financial reporting frameworks allow smaller entities to provide simpler and less detailed disclosures in the financial report.  However, this does not relieve the auditor of the responsibility to obtain an understanding of the entity and its environment and the applicable financial reporting framework as it applies to the entity.

A55.         The entity's use of IT and the nature and extent of changes in the IT environment may also affect the specialised skills that are needed to assist with obtaining the required understanding.

The Entity and Its Environment (Ref: Para. 19(a))

The Entity's Organisational Structure, Ownership and Governance, and Business Model (Ref: Para. 19(a)(i))

The entity's organisational structure and ownership

A56.         An understanding of the entity's organisational structure and ownership may enable the auditor to understand such matters as:

           * The complexity of the entity's structure.

Example:

The entity may be a single entity or the entity's structure may include subsidiaries, divisions or other components in multiple locations.  Further, the legal structure may be different from the operating structure.  Complex structures often introduce factors that may give rise to increased susceptibility to risks of material misstatement.  Such issues may include whether goodwill, joint ventures, investments,