Wednesday, January 13, 2010

Objectives, strategies, and related business risks that may result in material misstatements

Objectives, strategies, and business risks may be defined as follows :

An entitiy's objectives are the overall plans for the entity as defined by those charge with governance and management.
Strategies are the operational approaches by which management intends to achieve its objectives.
Business risks result from significant conditions, events, circumstances, or actions, that could adversely affect the entitiy's ability to achieve its objectives and execute its strategies.

Understanding for entitiy's objectives, strategies and strategies and business risks are important because the risks of material misstatement is often associated with an entitiy's business risks. Following are several examples of how an entity's business risks may be associated with the risk of material misstatement in the financial statements.

- If an entity is unable to accomplish a strategy associated with obtaining a significant percent of revenues from new products (such as obtaining FDA approval for new drugs developed by research and development), there may be an increased risk associated with revenue recognition (the exictence and occurance assertion) or with the impairement of development costs that may have been capitalized (valuation and allocation assertion)

- If an entity is planning to o private and to repurchase a significant portion of equity from existing owners, management may have an incentive to understate earnings. In this case the auditor might be concerned that all sales are recorded expenses are appropriate (the occurrence of expenses)

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