Question

this is based on Corporate Travel Management Limited (ASX code: CTD).

assume that you have been assigned to the audit of Corporate Travel Management Limited for the year ended 30 June 2018. You have been asked by the audit partner, as preparation for your involvement in the audit, to prepare a report on Corporate Travel Management Limited as part of the
planning process.

The partner wishes you to specifically address the following;1. The preparation of a report, based on publicly available information, on the
entity and its environment under the following headings (as noted in paragraph 11 of ASA315);in The nature of the entity

ASA315, and in particular paragraphs 11 and A25 to A49 will be useful in preparing this part of the report.

Answer 1

The auditor shall perform the following risk assessment procedures to obtain an understanding of the entity and its environment, including its internal control:

(a) enquiries of those charged with governance, management and others within the entity

(b) analytical procedures and

(c) observation and inspection.

A25. Significant changes in the entity from , prior periods may give rise to change, risks of material misstatement.

A26. A special-purpose entity (sometimes referred to as a special-purpose vehicle) is an entity that is generally established for a narrow and well-defined purpose, such as, to effect a lease or a securitization of financial assets, or to carry out research and development activities. It may take the form of a corporation, trust, partnership or unincorporated entity. The entity on behalf of which the specialpurpose entity has been created may often transfer assets to the latter (for example, as part of a derecognition transaction involving financial assets), obtain the right to use the latter’s assets, or perform services for the latter, while other parties may provide the funding to the latter. As ISA 550 indicates, in some circumstances, a special-purpose entity may be a related party of the entity.9

A27. Financial reporting frameworks often specify detailed conditions that are deemed to amount to control, or circumstances, under which the special purpose entity should be considered for consolidation. The interpretation of the requirements of such frameworks often demands a detailed knowledge of the relevant agreements involving the special-purpose entity.

A28. An understanding of the entity’s selection and application of accounting policies may encompass such matters as:

• The methods the entity, uses to account for significant and unusual transactions.

• The effect of significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus.

• Changes in the entity’s accounting policies.

• Financial reporting standards and laws and regulations that are new to the entity and when and how the entity will adopt such requirements. Objectives and Strategies and Related Business Risks (Ref: Para. 11(d))

A29. The entity conducts its business in the context of industry, regulatory and other internal and external factors. To respond to these factors, the entity’s management or those charged with governance define objectives, which are the overall plans for the entity. Strategies are the approaches by which management intends to achieve its objectives. The entity’s objectives and strategies may change over time.

A30. Business risk is broader than the risk of material misstatement of the financial statements, though it includes the latter. Business risk may arise from change or complexity. A failure to recognize the need for change may also give rise to business risk. Business risk may arise, for example, from:

• The development of new products or services that may fail;

• A market which, even if successfully developed, is inadequate to support a product or service; or

• Flaws in a product or service that may result in liabilities and reputational risk.

A31. An understanding of the business risks facing the entity increases the likelihood of identifying risks of material misstatement, since most business risks will eventually have financial consequences and, therefore, an effect on the financial statements. However, the auditor does not have a responsibility to identify or assess all business risks because not all business risks give rise to risks of material misstatement.

A32. Examples of matters that the auditor may consider when obtaining an understanding of the entity’s objectives, strategies and related business risks that may result in a risk of material misstatement of the financial statements include:

• Industry developments (a potential related business risk might be, for example, that the entity does not have the personnel or expertise to deal with the changes in the industry). New products and services (a potential related business risk might be, for example, that there is increased product liability).

• Expansion of the business (a potential related business risk might be, for example, that the demand has not been accurately estimated).

• New accounting requirements (a potential related business risk might be, for example, incomplete or improper implementation, or increased costs).

• Regulatory requirements (a potential related business risk might be, for example, that there is increased legal exposure).

• Current and prospective financing requirements (a potential related business risk might be, for example, the loss of financing due to the entity’s inability to meet requirements).

• Use of IT (a potential related business risk might be, for example, that systems and processes are incompatible).

• The effects of implementing a strategy, particularly any effects that will lead to new accounting requirements (a potential related business risk might be, for example, incomplete or improper implementation).

A33. A business risk may have an immediate consequence for the risk of material misstatement for classes of transactions, account balances, and disclosures at the assertion level or the financial statement level. For example, the business risk arising from a contracting customer base may increase the risk of material misstatement associated with the valuation of receivables. However, the same risk, particularly in combination with a contracting economy, may also have a longer-term consequence, which the auditor considers when assessing the appropriateness of the going concern assumption. Whether a business risk may result in a risk of material misstatement is, therefore, considered in light of the entity’s circumstances. Examples of conditions and events that may indicate risks of material misstatement are indicated in Appendix 2.

A34. Usually, management identifies business risks and develops approaches to address them. Such a risk assessment process is part of internal control and is discussed in paragraph 15 and paragraphs A79–A80. Considerations Specific to Public Sector Entities

A35. For the audits of public sector entities, “management objectives” may be influenced by concerns regarding public accountability and may include objectives which have their source in law, regulation or other authority. Measurement and Review of the Entity’s Financial Performance (Ref: Para.11(e))

A36. Management and others will measure and review those things they regard as important. Performance measures, whether external or internal, create pressures on the entity. These pressures, in turn, may motivate management to take action to improve the business performance or to misstate the financial statements. Accordingly, an understanding of the entity’s performance measures assists the auditor in considering whether pressures to achieve performance targets may result in management actions that increase the risks of material misstatement, including those due to fraud. See ISA 240 for requirements and guidance in relation to the risks of fraud.

A37. The measurement and review of financial performance is not the same as the monitoring of controls (discussed as a component of internal control in paragraphs A98–A104), though their purposes may overlap:

• The measurement and review of performance is directed at whether business performance is meeting the objectives set by management (or third parties).

• Monitoring of controls is specifically concerned with the effective operation of internal control. In some cases, however, performance indicators also provide information that enables management to identify deficiencies in internal control.

A38. Examples of internally-generated information used by management for measuring and reviewing financial performance, and which the auditor may consider, include:

• Key performance indicators (financial and non-financial) and key ratios, trends and operating statistics.

• Period-on-period financial performance analyses.

• Budgets, forecasts, variance analyses, segment information and divisional, departmental or other level performance reports.

• Employee performance measures and incentive compensation policies.

• Comparisons of an entity’s performance with that of competitors.

A39. External parties may also measure and review the entity’s financial performance. For example, external information such as analysts’ reports and credit rating agency reports may represent useful information for the auditor. Such reports can often be obtained from the entity being audited.

A40. Internal measures may highlight unexpected results or trends requiring management to determine their cause and take corrective action (including, in some cases, the detection and correction of misstatements on a timely basis). Performance measures may also indicate to the auditor that risks of misstatement of related financial statement information do exist. For example, performance measures may indicate that the entity has unusually rapid growth or profitability when compared to that of other entities in the same industry. Such information, particularly if combined with other factors such as performance-based bonus or incentive remuneration, may indicate the potential risk of management bias in the preparation of the financial statements. Considerations Specific to Smaller Entities

A41. Smaller entities often do not have processes to measure and review financial performance. Inquiry of management may reveal that it relies on certain key indicators for evaluating financial performance and taking appropriate action. If such inquiry indicates an absence of performance measurement or review, there may be an increased risk of misstatements not being detected and corrected. The Entity’s Internal Control (Ref: Para. 12)

A42. An understanding of internal control assists the auditor in identifying types of potential misstatements and factors that affect the risks of material misstatement, and in designing the nature, timing and extent of further audit procedures.

A43. The following application material on internal control is presented in four sections, as follows:

• General Nature and Characteristics of Internal Control.

• Controls Relevant to the Audit.

• Nature and Extent of the Understanding of Relevant Controls.

• Components of Internal Control. General Nature and Characteristics of Internal Control Purpose of Internal Control

A44. Internal control is designed, implemented and maintained to address identified business risks that threaten the achievement of any of the entity’s objectives that concern:

• The reliability of the entity’s financial reporting

• The effectiveness and efficiency of its operations; and

• Its compliance with applicable laws and regulations. The way in which internal control is designed, implemented and maintained varies with an entity’s size and complexity. Considerations specific to smaller entities

A45. Smaller entities may use less structured means and simpler processes and procedures to achieve their objectives.