ACCA AAA ^UK Syllabus D. Audit of Historical Financial Information - Business Risk - Notes ^{2 / 10}

The objective is normally profit maximisation

So we are looking for problems which may impact on the business

To look for Risks..

You could use PESTEL

Business risk identification is literally putting yourself in the shoes of the management..

• Political risks

  e.g. The current government may be unstable and if there is a change of government, the new government may impose restrictions. 

  The Company will need to assess the likelihood of such restrictions.

• Economic risks

• Social and taste changes

• Technological changes

• Environmental issues

• Legal issues

Simply the risk that the FS are materially misstated (before any audit procedures)

The risk comes from potential errors or deliberate misstatements

Business v Financial Risk

• Business risks will affect the FS if not addressed by management

• Business risks can lead to errors on specific areas of the FS (eg. Technological change leading to obsolete stock)

• Business risk can have a more general effect on FS (eg. Poor controls leading to errors)

• Business risks can lead to going concern problems. This too would be a FS risk (wrong basis of accounting)