Auditing Standard No. 12

Identifying and Assessing Risks of Material Misstatement

Appendix ADefinitions

A1.      For purposes of this standard, the terms listed below are defined as follows:

A2.      Business risksRisks that result from significant conditions, events, circumstances, actions, or inactions that could adversely affect a company's ability to achieve its objectives and execute its strategies. Business risks also might result from setting inappropriate objectives and strategies or from changes or complexity in the company's operations or management.

A3.      Company's objectives and strategiesThe overall plans for the company as established by management or the board of directors. Strategies are the approaches by which management intends to achieve its objectives.

[The following paragraph is effective for audits of fiscal years beginning on or after December 15, 2014. See PCAOB Release No. 2014-002.]

A3A.   Executive officerFor issuers, the president; any vice president of a company in charge of a principal business unit, division, or function (such as sales, administration or finance); any other officer who performs a policy-making function; or any other person who performs similar policy-making functions for a company. Executive officers of subsidiaries may be deemed executive officers of a company if they perform such policy-making functions for the company. (See Rule 3b-7 under the Exchange Act.) For brokers and dealers, the term "executive officer" includes a broker's or dealer's chief executive officer, chief financial officer, chief operations officer, chief legal officer, chief compliance officer, director, and individuals with similar status or functions. (See Schedule A of Form BD.)

A4.      Risk assessment proceduresThe procedures performed by the auditor to obtain information for identifying and assessing the risks of material misstatement in the financial statements whether due to error or fraud.

Note:  Risk assessment procedures by themselves do not provide sufficient appropriate evidence on which to base an audit opinion.

A5.      Significant riskA risk of material misstatement that requires special audit consideration.