Document ID: chunk:federal_register_of_legislation:F2023C01130:body:0:p32
Version: federal_register_of_legislation:F2023C01130
Segment Type: other
Provision Reference: 
Character Range: 95893–99250

practices in terms of the applicable financial reporting framework, such as:

                   + Accounting principles and industry-specific practices, including for industry-specific significant classes of transactions, account balances and related disclosures in the financial report (for example, loans and investments for banks, or research and development for pharmaceuticals).

                   + Revenue recognition.

                   + Accounting for financial instruments, including related credit losses.

                   + Foreign currency assets, liabilities and transactions.

                   + Accounting for unusual or complex transactions including those in controversial or emerging areas (for example, accounting for cryptocurrency).

           * An understanding of the entity's selection and application of accounting policies, including any changes thereto as well as the reasons therefore, may encompass such matters as:

                   + The methods the entity uses to recognise, measure, present and disclose 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 environment, such as changes in the applicable financial reporting framework or tax reforms that may necessitate a change 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, or comply with, such requirements.

A83.         Obtaining an understanding of the entity and its environment may assist the auditor in considering where changes in the entity's financial reporting (e.g., from prior periods) may be expected.
Example:

If the entity has had a significant business combination during the period, the auditor would likely expect changes in classes of transactions, account balances and disclosures associated with that business combination.  Alternatively, if there were no significant changes in the financial reporting framework during the period the auditor's understanding may help confirm that the understanding obtained in the prior period remains applicable.

Considerations specific to public sector entities

A84.         The applicable financial reporting framework in a public sector entity is determined by the legislative and regulatory frameworks relevant to each jurisdiction or within each geographical area.  Matters that may be considered in the entity's application of the applicable financial reporting requirements, and how it applies in the context of the nature and circumstances of the entity and its environment, include whether the entity applies a full accrual basis of accounting or a cash basis of accounting in accordance with the International Public Sector Accounting Standards, or a hybrid.

How Inherent Risk Factors Affect Susceptibility of Assertions to Misstatement (Ref: Para. 19(c))
Appendix 2 provides examples of events and conditions that may give rise to the existence of risks of material misstatement, categorised by inherent risk factor.

Why the auditor understands inherent risk factors when understanding the entity and its environment and the applicable financial reporting