Document ID: chunk:federal_register_of_legislation:F2022C01152:reg:4:p30
Version: federal_register_of_legislation:F2022C01152
Segment Type: reg
Provision Reference: reg 4 (pt 30/63)
Character Range: 98792–101831

is likely to conclude that it is necessary to apply specialised skills or knowledge.

Identifying and Assessing the Risks of Material Misstatement (Ref: Para. 4, 16)

A64.         Identifying and assessing risks of material misstatement at the assertion level relating to accounting estimates is important for all accounting estimates, including not only those that are recognised in the financial report, but also those that are included in the notes to the financial report.

A65.         Paragraph A42 of ASA 200 states that the Auditing Standards typically refer to the "risks of material misstatement" rather than to inherent risk and control risk separately. ASA 315 requires a separate assessment of inherent risk and control risk to provide a basis for designing and performing further audit procedures to respond to the risks of material misstatement at the assertion level,[45] including significant risks, in accordance with ASA 330.[46]

A66.         In identifying the risks of material misstatement and in assessing inherent risk for accounting estimates in accordance with ASA 315,[47] the auditor is required to take into account the inherent risk factors that affect susceptibility to misstatement of assertions, and how they do so. The auditor's consideration of the inherent risk factors may also provide information to be used in:

           * Assessing the likelihood and magnitude of misstatement (i.e., where inherent risk is assessed on the spectrum of inherent risk); and

           * Determining the reasons for the assessment given to the risks of material misstatement at the assertion level, and that the auditor's further audit procedures in accordance with paragraph 18 are responsive to those reasons.

The interrelationships between the inherent risk factors are further explained in Appendix 1.

A67.         The reasons for the auditor's assessment of inherent risk at the assertion level may result from one or more of the inherent risk factors of estimation uncertainty, complexity, subjectivity or other inherent risk factors. For example:

(a)                Accounting estimates of expected credit losses are likely to be complex because the expected credit losses cannot be directly observed and may require the use of a complex model. The model may use a complex set of historical data and assumptions about future developments in a variety of entity specific scenarios that may be difficult to predict. Accounting estimates for expected credit losses are also likely to be subject to high estimation uncertainty and significant subjectivity in making judgements about future events or conditions. Similar considerations apply to insurance contract liabilities.

(b)                An accounting estimate for an obsolescence provision for an entity with a wide range of different inventory types may require complex systems and processes, but may involve little subjectivity and the degree of estimation uncertainty may be low, depending on the nature of the inventory.

(c)                Other