Why deos the auditor obtain an understanding of the clients business, enviroment and related risk of the organization? 1. Determine audit opinion that will be issued 2. determine the appropriate understanding of internal controls 3. determine the detection of audit procedures in the period under audit. 4. determine weather the auditor has sufficient knowledge to perform audit.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Why deos the auditor obtain an understanding of the clients business, enviroment and related risk of the organization?

1. Determine audit opinion that will be issued

2. determine the appropriate understanding of internal controls

3. determine the detection of audit procedures in the period under audit.

4. determine weather the auditor has sufficient knowledge to perform audit.

Expert Solution
Step 1

Obtaining an understanding of the client’s business is key to an effective and efficient audit. Auditor's knowledge of the client’s business also helps us to develop and maintain a positive professional relationship with the client.

International Standards on Auditing (ISA) 315 states that the auditor should obtain an understanding of the entity and its environment, including its internal control, sufficient to identify and assess the risks of material misstatement of the financial statements whether due to fraud or error, and sufficient to design and perform further audit procedures.

Understanding the entity is an iterative process, continuing throughout the entire duration of the audit. Understanding of the clients business, environment and related risk of the organization will help the auditor in following ways:-

  • Identify the areas of high risk where we should concentrate our audit effort
  • Maximize efficiency in other areas of audit significance
  • Assess the potential for use of analytical procedures, by enabling us to identify the information which we can use to make predictions and comparisons
  • Obtain an understanding of the internal control structure
  • Assess the inherent and control risks in the key areas of audit significance
  • Develop an audit strategy enabling us to obtain the necessary audit evidence in the most effective and efficient manner possible.

 

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