Why is it important for auditors to understand their clients business risks?
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Obtaining an understanding of the client’s business is key to an effective and efficient audit. It enables us not only to tailor our work to meet the individual facts and circumstances of each client, but also to carry out that work and to evaluate our findings in an informed manner. Our 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. Prior the accepting an audit engagement, we should obtain a preliminary knowledge of the industry and of the ownership, management and operations of the entity to be audited. Detailed information is required at the planning stage of our audit to enable us to plan our work adequately. We need to understand the nature of client’s business, its organization, its method of operation and the industry in which it is involved. This understanding enables us to appreciate which events and transactions are likely to have a significant effect on the financial statements. Specifically, such an understanding helps us to :
Knowing the client’s business helps us in a number of ways both during the conduct of the audit, and when we come to complete our work. This includes, for example, helping us in :
Knowledge of the client’s business and the industry in which it operates is essential also to the development of a positive relationship and it helps us as follows :
ISA 315 states that :
Each year, the auditor's understanding of the entity should be updated and details of significant changes documented (Hrd) *** Why the auditor needs to identify those business risks?The objective of the auditor is to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels, through understanding the entity and its environment, including the entity's internal control, thereby providing a basis for designing and ...
Why auditors need an understanding of the client's business and industry?Auditors need an understanding of the client's business and industry because the nature of the business and industry affect business risk and the risk of material misstatements in the financial statements. Auditors use the knowledge of these risks to determine the appropriate extent of further audit procedures.
Why is understanding the business important in audit?Business understanding enables an auditor to, Assess risk brought by business operations, products, services, marketing, distribution etc. Design audit procedures based on identified risk of material misstatement. Perform audit procedures and collect sufficient and appropriate audit evidence.
Why is it important for auditors to assess their clients going concern status during audit?The discussion with management about going concern issues helps the auditor to determine whether the use of the going concern assumption is likely to result in a significant risk of material misstatement and to plan audit procedures in response to such a risk.
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