Document ID: chunk:federal_register_of_legislation:F2023C01124:reg:17:p25
Version: federal_register_of_legislation:F2023C01124
Segment Type: reg
Provision Reference: reg 17 (pt 25/41)
Character Range: 81250–84312

end of a reporting period, paragraph 33(a)(ii) requires the auditor to select the journal entries and other adjustments made at that time.  Further, because material misstatements in the financial report due to fraud can occur throughout the period and may involve extensive efforts to conceal how the fraud is accomplished, paragraph 33(a)(iii) requires the auditor to consider whether there is also a need to test journal entries and other adjustments throughout the period.

Accounting Estimates (Ref: Para. 33(b))

A46.         The preparation of the financial report requires management to make a number of judgements or assumptions that affect significant accounting estimates and to monitor the reasonableness of such estimates on an ongoing basis.  Fraudulent financial reporting is often accomplished through intentional misstatement of accounting estimates.  This may be achieved by, for example, understating or overstating all provisions or reserves in the same fashion so as to be designed either to smooth earnings over two or more accounting periods, or to achieve a designated earnings level in order to deceive financial statement users by influencing their perceptions as to the entity's performance and profitability.

A47.         The purpose of performing a retrospective review of management judgements and assumptions related to significant accounting estimates reflected in the financial report of the prior year is to determine whether there is an indication of a possible bias on the part of management.  It is not intended to call into question the auditor's professional judgements made in the prior year that were based on information available at the time.

A48.         A retrospective review is also required by ASA 540.[23]  That review is conducted as a risk assessment procedure to obtain information regarding the effectiveness of management's previous accounting estimates, audit evidence about the outcome, or where applicable, their subsequent re‑estimation  to assist in identifying and assessing the risks of material misstatement in the current period and audit evidence of matters, such as estimation uncertainty, that may be required to be disclosed in the financial report.  As a practical matter, the auditor's review of management judgements and assumptions for biases that could represent a risk of material misstatement due to fraud in accordance with this Auditing Standard may be carried out in conjunction with the review required by ASA 540.

Business Rationale for Significant Transactions (Ref: Para. 33(c))

A49.         Indicators that may suggest that significant transactions that are outside the normal course of business for the entity, or that otherwise appear to be unusual, may have been entered into to engage in fraudulent financial reporting or to conceal misappropriation of assets include:

           * The form of such transactions appears overly complex (for example, the transaction involves multiple entities within a consolidated group or multiple unrelated third parties).

           *