Microsoft Word Audit Quality-Framework Final vs 20140214
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| Contextual Factors 80. The environment in which financial reporting and audit takes place varies between countries. In some countries, business practices may be relatively informal and commercial law relatively less well developed. In such countries, external financial reporting may be limited, and user expectations related to it, low. As a country develops and, in particular, as businesses grows in size and need to obtain finance from capital markets, the environment becomes more complex. Financial reporting becomes more important and user expectations of its speed and reliability continuously grow. In response, law, financial reporting requirements and corporate governance processes evolve. 81. Collectively, these environmental factors – or contextual factors – have the potential to impact the nature and quality of financial reporting and, directly or indirectly, audit quality. Where appropriate, auditors respond to these factors when determining how best to obtain sufficient appropriate audit evidence. 82. Contextual factors include: 27 5.1 Business Practices and Commercial Law 83. The formality of the way business is undertaken will be influenced by national customs and commercial law. In some national environments, for example, it may be customary for entities to enter into transactions with other parties on an informal basis, relying on relationships of trust. Environments exist where trading parties primarily involve related parties, such as entities owned by family members of management or entities that are government controlled. 84. Commercial law will affect the formality with which businesses undertake transactions. In particular, contract law determines when rights are established and obligations created as transactions are completed. Where commercial laws are less developed, it can be challenging for management to assert ownership claims and assess the adequacy of provisions for liabilities. 85. In some circumstances, the terms and conditions of transactions may be vague or unrecorded and agreements may be subject to oral amendment. In such circumstances it will be difficult to segregate responsibilities and the effectiveness of internal control systems will be reduced, creating opportunities for fraud and corruption. The lack of adequate documentation in these circumstances will present significant challenges for those charged with governance in understanding the economic substance of the transactions and determining whether they have been fully and appropriately accounted for. 86. Attitudes to tax compliance also vary. In some environments, management may seek to minimize tax liabilities through such measures as deferring issuing invoices even when performance obligations have been met. In other environments; more than one set of accounting records may be retained—one showing the “economic” position and one the “tax” position—which may create some confusion. Such circumstances are likely to create complexity and necessitate reserving for a contingent tax liability, which is usually subject to considerable measurement uncertainty. 5.2 Download 1.81 Mb. Share with your friends:
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