Document ID: chunk:federal_register_of_legislation:F2023C01130:body:0:p66
Version: federal_register_of_legislation:F2023C01130
Segment Type: other
Provision Reference: 
Character Range: 192463–195350

report, or significant risks, on which a component auditor is determining the further audit procedures to be performed.[57]

Determining significant risks

A219.      In determining significant risks, the auditor may first identify those assessed risks of material misstatement that have been assessed higher on the spectrum of inherent risk to form the basis for considering which risks may be close to the upper end.  Being close to the upper end of the spectrum of inherent risk will differ from entity to entity, and will not necessarily be the same for an entity period on period.  It may depend on the nature and circumstances of the entity for which the risk is being assessed.

A220.      The determination of which of the assessed risks of material misstatement are close to the upper end of the spectrum of inherent risk, and are therefore significant risks, is a matter of professional judgement, unless the risk is of a type specified to be treated as a significant risk in accordance with the requirements of another ASA.  ASA 240 provides further requirements and guidance in relation to the identification and assessment of the risks of material misstatement due to fraud.[58]
Example:

      * Cash at a supermarket retailer would ordinarily be determined to be a high likelihood of possible misstatement (due to the risk of cash being misappropriated), however the magnitude would typically be very low (due to the low levels of physical cash handled in the stores).  The combination of these two factors on the spectrum of inherent risk would be unlikely to result in the existence of cash being determined to be a significant risk.

      * An entity is in negotiations to sell a business segment.  The auditor considers the effect on goodwill impairment, and may determine there is a higher likelihood of possible misstatement and a higher magnitude due to the impact of inherent risk factors of subjectivity, uncertainty and susceptibility to management bias or other fraud risk factors.  This may result in goodwill impairment being determined to be a significant risk.

A221.      The auditor also takes into the account the relative effects of inherent risk factors when assessing inherent risk.  The lower the effect of inherent risk factors, the lower the assessed risk is likely to be.  Risks of material misstatement that may be assessed as having higher inherent risk and may therefore be determined to be a significant risk, may arise from matters such as the following:

           * Transactions for which there are multiple acceptable accounting treatments such that subjectivity is involved.

           * Accounting estimates that have high estimation uncertainty or complex models.

           * Complexity in data collection and processing to support account balances.

           * Account balances or quantitative disclosures that involve complex