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This Financial Reporting Alert is intended to be used by members of an entity's financial management and audit committee to identify and understand current accounting and regulatory developments affecting the entity's financial reporting. This alert is intended to help you achieve a more robust understanding of the economic and business environment in which your entity operates and is also an important tool in helping you identify the significant risks that may result in the material misstatement of your entity's financial statements.
Specifically, in this alert you will find information on recently issued accounting issues such as:
You will also find information on emerging issues such as:
This document has not been approved, disapproved, or otherwise acted on by a senior technical committee of the AICPA.
0292009
Understanding the Current Economic Environment to Assess Risks for Your Entity
Your entity's financial statements will be subject to specific risks of material misstatement arising from the current economic crisis. The nature of your entity, the degree of regulation, or other external forces affecting the entity will vary, but this alert is designed to help you better assess these risks in order to develop appropriate controls.
It is important for members of an entity's financial management or audit committee to have a sufficient understanding of the entity and the current environment in which it operates. This understanding will help you perform not only adequate risk assessment, but also opportunity assessment. A proper risk assessment will assist you in understanding the risk that your entity's financial statements may be misstated. Understanding how the following things affect your entity will provide a basis for your risk and opportunity assessments:
| • | Current economic conditions |
| • | Nature of the industry in which your entity operates and how it is changing (including effects on your supply chain and competitors) |
| • | Industry, regulatory, and other external factors |
| • | Business objectives and strategies and related risks |
| • | Current, past, and projected financial performance of the entity |
| • | Competitors' financial performance |
| • | Internal control within your entity, which includes the selection and application of accounting policies |
Your entity's financial statements are subject to specific risks of material misstatement arising from the nature of the entity, the degree of regulation, or other external forces affecting the entity (for example, political, economic, social, technical, and competitive forces). Just as the external environment changes, the conduct of your entity's business is also dynamic: business strategies and objectives change in response to external developments. Business risks result from (a) significant conditions, events, circumstances, actions, or inactions that could adversely affect your entity's ability to achieve its objectives and execute its strategies or (b) the setting of inappropriate objectives and strategies. An understanding of business risks increases the likelihood of identifying, correcting, and preventing risks of material misstatement in your financial statements. Most business risks will eventually have financial consequences and, therefore, an effect on the financial statements. However, not all business risks give rise to risks of material misstatement.
Understanding and properly addressing, as necessary, the matters presented in this alert will help you better assess risks of material misstatement of the entity's financial statements and implement appropriate controls that will strengthen the integrity of your financial management and reporting.
0292009
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