Document ID: chunk:federal_register_of_legislation:F2023C01130:body:0:p27
Version: federal_register_of_legislation:F2023C01130
Segment Type: other
Provision Reference: 
Character Range: 80967–84058

the entity of its strategy and objectives prior to it implementing them.  Therefore, matters related to understanding the legal structure of the entity may include applicable laws and regulations, and the classification of the entity (i.e., whether the entity is a ministry, department, agency or other type of entity).

Governance

Why the auditor obtains an understanding of governance

A59.         Understanding the entity's governance may assist the auditor with understanding the entity's ability to provide appropriate oversight of its system of internal control.  However, this understanding may also provide evidence of deficiencies, which may indicate an increase in the susceptibility of the entity's financial report to risks of material misstatement.

Understanding the entity's governance

A60.         Matters that may be relevant for the auditor to consider in obtaining an understanding of the governance of the entity include:

           * Whether any or all of those charged with governance are involved in managing the entity.

           * The existence (and separation) of a non-executive Board, if any, from executive management.

           * Whether those charged with governance hold positions that are an integral part of the entity's legal structure, for example as directors.

           * The existence of sub-groups of those charged with governance, such as an audit committee, and the responsibilities of such a group.

           * The responsibilities of those charged with governance for oversight of financial reporting, including approval of the financial report.

The Entity's Business Model
Appendix 1 sets out additional considerations for obtaining an understanding of the entity and its business model, as well as additional considerations for auditing special purpose entities.

Why the auditor obtains an understanding of the entity's business model

A61.         Understanding the entity's objectives, strategy and business model helps the auditor to understand the entity at a strategic level, and to understand the business risks the entity takes and faces.  An understanding of the business risks that have an effect on the financial report assists the auditor in identifying risks of material misstatement, since most business risks will eventually have financial consequences and, therefore, an effect on the financial report.
Examples:

An entity's business model may rely on the use of IT in different ways:

      * The entity sells shoes from a physical store, and uses an advanced stock and point of sale system to record the selling of shoes; or

      * The entity sells shoes online so that all sales transactions are processed in an IT environment, including initiation of the transactions through a website.

For both of 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.