Provide some examples of business risks associated with an entity that an auditor should consider when performing an audit.

Question

Professional auditing standards provide guidance on the auditor’s consideration of an entity’s business environment and associated business risks.

Answer 1

Appendix C of AU-C Section 315 provides examples of business risks that could give rise to material
misstatements. Some examples provided are:
? Operations in regions that are economically unstable, for example, countries with significant
currency devaluation or highly inflationary economies.
? High degree of complex regulation.
? Marginally achieving explicitly stated strategic objectives.
? Constraints on the availability of capital and credit.
? Changes in the industry in which the entity operates.
? Changes in the supply chain.
? Developing or offering new products or services, or moving into new lines of business
? Expanding into new locations.
Similarly AS 2110 provides examples of business risks that could give rise to material misstatements.
Some examples provided are:
? Company does not have the personnel or expertise to deal with the changes in the industry.
? New product or service will not be successful.
? Demand for the company's products or services have not been accurately estimated.
? IT systems and processes are incompatible.
? Loss of financing due to the company's inability to meet financing requirements.
? Incomplete or improper implementation of the business strategy.
? Increased legal exposure.