Understanding an Entity: Governance Structure – CPA Exam Definitions

Understanding an Entity Governance Structure CPA Exam

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Understanding an Entity: Governance Structure

An entity’s governance structure defines the nature of the entity by outlining the roles, responsibilities, and relationships among its board of directors, management, and other stakeholders. Governance structure helps determine how an entity makes decisions, manages risks, and oversees its operations, financial reporting, and internal controls. The governance structure can impact the risk of material misstatement in an entity’s financial statements in several ways:

When assessing the inherent risk of material misstatement during the planning and execution of an audit, auditors should consider the impact of an entity’s governance structure on its operations and financial reporting. Understanding the implications of the governance structure can help auditors design appropriate audit procedures to address the risks associated with the entity’s governance and provide reasonable assurance that the financial statements are free from material misstatement.

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