Document ID: chunk:federal_register_of_legislation:F2016C00028:reg:26:p15
Version: federal_register_of_legislation:F2016C00028
Segment Type: reg
Provision Reference: reg 26 (pt 15/47)
Character Range: 49442–52985

the regulatory environment.  The regulatory environment encompasses, among other matters, the applicable financial reporting framework and the legal and political environment.  Examples of matters the auditor may consider include:

           * Accounting principles and industry specific practices.

           * Regulatory framework for a regulated industry, including requirements for disclosures.

           * Legislation and regulation that significantly affect the entity's operations, including direct supervisory activities.

           * Taxation (corporate and other).

           * Government policies currently affecting the conduct of the entity's business, such as monetary, including foreign exchange controls, fiscal, financial incentives (for example, government aid programs), and tariffs or trade restrictions policies.

           * Environmental requirements affecting the industry and the entity's business.

A28.         ASA 250 includes some specific requirements related to the legal and regulatory framework applicable to the entity and the industry or sector in which the entity operates.[10]

Considerations specific to public sector entities

A29.         For the audits of public sector entities, law, regulation or other authority may affect the entity's operations.  Such elements are essential to consider when obtaining an understanding of the entity and its environment.

Other External Factors

A30.         Examples of other external factors affecting the entity that the auditor may consider include the general economic conditions, interest rates and availability of financing, and inflation or currency revaluation.

Nature of the Entity (Ref: Para. 11(b))

A31.         An understanding of the nature of an entity enables the auditor to understand such matters as:

           * Whether the entity has a complex structure, for example with subsidiaries or other components in multiple locations.  Complex structures often introduce issues that may give rise to risks of material misstatement.  Such issues may include whether goodwill, joint ventures, investments, or special‑purpose entities are accounted for appropriately and whether adequate disclosure of such issues in the financial report have been made.

           * The ownership, and relationships between owners and other people or entities.  This understanding assists in determining whether related party transactions have been appropriately identified, accounted for and adequately disclosed in the financial report.  ASA 550[11] establishes requirements and provides guidance on the auditor's considerations relevant to related parties.

A32.         Examples of matters that the auditor may consider when obtaining an understanding of the nature of the entity include:

           * Business operations such as:

                   + Nature of revenue sources, products or services, and markets, including involvement in electronic commerce such as Internet sales and marketing activities.

                   + Conduct of operations (for example, stages and methods of production, or activities exposed to environmental risks).

                   + Alliances, joint ventures, and outsourcing activities.

                   + Geographic dispersion and industry segmentation.

                   + Location of production facilities, warehouses, and offices, and location and quantities of inventories.

                   + Key customers and important suppliers of goods and services, employment arrangements (including the existence