| A23. | An understanding of the nature of an entity enables the auditor to understand such matters as: |
| Whether the entity has a complex structure, for example with subsidiaries or other components in multiple locations. Complex structures often introduce issues that may give rise to risks of material misstatement. Such issues may include whether goodwill, joint ventures, investments, or special-purpose entities are accounted for appropriately. |
| The ownership, and relations between owners and other people or entities. This understanding assists in determining whether related party transactions have been identified and accounted for appropriately. ISA (UK and Ireland) 5508 establishes requirements and provides guidance on the auditor's considerations relevant to related parties. |
| A24. | Examples of matters that the auditor may consider when obtaining an understanding of the nature of the entity include: |
| Business operations – such as: |
 | Nature of revenue sources, products or services, and markets, including involvement in electronic commerce such as Internet sales and marketing activities. |
| Conduct of operations (for example, stages and methods of production, or activities exposed to environmental risks). |
| Alliances, joint ventures, and outsourcing activities. |
| Geographic dispersion and industry segmentation. |
| Location of production facilities, warehouses, and offices, and location and quantities of inventories. |
| Key customers and important suppliers of goods and services, employment arrangements (including the existence of union contracts, pension and other post employment benefits, stock option or incentive bonus arrangements, and government regulation related to employment matters). |
| Research and development activities and expenditures. |
| Transactions with related parties. |
| Investments and investment activities – such as: |
| Planned or recently executed acquisitions or divestitures. |
| Investments and dispositions of securities and loans. |
| Capital investment activities. |
| Investments in non-consolidated entities, including partnerships, joint ventures and special-purpose entities. |
| Financing and financing activities – such as: |
| Major subsidiaries and associated entities, including consolidated and non-consolidated structures. |
| Debt structure and related terms, including off-balance-sheet financing arrangements and leasing arrangements. |
| Beneficial owners (local, foreign, business reputation and experience) and related parties. |
| Use of derivative financial instruments. |
| Financial reporting – such as: |
| Accounting principles and industry specific practices, including industry-specific significant categories (for example, loans and investments for banks, or research and development for pharmaceuticals). |
| Revenue recognition practices. |
| Accounting for fair values. |
| Foreign currency assets, liabilities and transactions. |
| Accounting for unusual or complex transactions including those in controversial or emerging areas (for example, accounting for stock-based compensation). |
| A25. | Significant changes in the entity from prior periods may give rise to, or change, risks of material misstatement. |
| 8 ISA (UK and Ireland) 550, "Related Parties." |
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