Document ID: chunk:federal_register_of_legislation:F2020L00252:body:0:p6
Version: federal_register_of_legislation:F2020L00252
Segment Type: other
Provision Reference: 
Character Range: 16358–19514

risk that the financial report is materially misstated prior to audit.  This consists of two components, described as follows at the assertion level: (Ref: Para. A3)

(i)                 Inherent risk – The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.

(ii)               Control risk – The risk that a misstatement that could occur in an assertion about a class of transactions, account balance or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity's internal controls.

    …

11.               Following existing paragraph A2, and before the heading An audit of a financial report the following sub-heading is inserted:

    Risk of Material Misstatement (Ref: Para. 13(n))

12.               Following the sub-heading inserted above, the following paragraph A3 is inserted:

    For the purposes of the ASAs, a risk of material misstatement exists when there is a reasonable possibility of:

(a)                A misstatement occurring (i.e., its likelihood); and

(b)                Being material if it were to occur (i.e., its magnitude).

13.               As a result of the insertion of the paragraph above, subsequent paragraphs of this Auditing Standard are re-numbered and references to these paragraphs are updated accordingly.

14.               Existing footnote 17 in paragraph A30 is amended to read as follows:

See ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, paragraph 916.

15.               Existing paragraph A40 is amended to read as follows:

    Inherent risk is influenced by inherent risk factors. higher for some assertions and related classes of transactions, account balances, and disclosures than for others.  Depending on the degree to which the inherent risk factors affect the susceptibility to misstatement of an assertion, the level of inherent risk varies on a scale that is referred to as the spectrum of inherent risk. The auditor determines significant classes of transactions, account balances and disclosures, and their relevant assertions, as part of the process of identifying and assessing the risks of material misstatement. For example, it may be higher for complex calculations or for accounts 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.

16.               The following paragraph A42 is inserted following the paragraph above:

    External circumstances giving rise to business risks may also influence inherent risk.  For example, technological developments might make a particular product obsolete, thereby causing