Page 176 - COSO Guidance

Exhibit 1-1: Factors to consider when obtaining an understanding of the entity
and its environment (continued)

 Financial reporting
– Accounting principles and industry-specific practices
– Revenue recognition practices
– Inventories (locations, quantities, and so on)
– Accounting for fair values
– Foreign currency assets, liabilities, and transactions
– Industry-specific significant categories
– Financial statement presentation and disclosure
– Accounting for unusual or complex transactions including those in controversial or
emerging areas (for example, accounting for stock-based compensation)
Objectives and strategies and related business risks

 Existence of objectives relating to the following:
– Industry developments (that is, entity does not have personnel or expertise to deal
with changes in the industry)
– New products and services (that is, a potential business risk might be an increase in
product liability)
– Business expansion (that is, demand might not have been accurately estimated)
– New accounting requirements (incomplete or improper implementation)
– Regulatory requirements (possible increased legal exposure)
– Current and prospective financing requirements (loss of financing due to the entity’s
inability to meet requirements)
– Use of IT (systems and processes might not be compatible)
– Risk characteristics of managers and stakeholders (risk-seeking or risk-adverse)
 Effects of implementing a strategy, particularly any effects that will lead to new
accounting requirements
Measurement and review of the entity’s financial performance

 Key ratios and operating statistics
 Key performance indicators
 Employee performance measures and incentive compensation policies
 Trends
 Use of forecasts, budgets, and variance analysis
 Analyst reports and credit rating reports
 Competitor analysis
 Period-on-period financial performance (that is, revenue growth, profitability, and
leverage)

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