A detailed knowledge of the client's business is required in all audit stages except the client acceptance/retention stage (where a preliminary knowledge is often sufficient). Auditors acquire most of this detailed knowledge in the audit planning stage when determining the audit approach. The knowledge should be 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 (ISA315.2).
This knowledge includes an understanding of the entity's objectives and strategies (both operational and financial), its products, marketing plans and employment arrangements, audit trails, internal control , internal audit functions, the entity's risk of materially misstating the financial statements, including its business risks and how the entity's management is addressing those risks and most importantly, an understanding of the accounting information system [fn] and related internal control [fn].
For existing clients, auditors update and re-evaluate the information previously gathered and perform procedures that will identify significant changes that have taken place since the last audit. When the auditor intends to use information about the entity and its environment obtained in prior periods, the auditor determines whether changes have occurred that may affect the relevance of such information in the current audit (ISA315.12).
For new clients, or to update previous information, the auditor performs activities such as inspecting client records, including minutes of meetings, internal financial reports, management reports, sales plans, organization charts, and accounting information system manuals; making inquiries of client personnel; reperforming internal control procedures, using manual procedures as well as Computer Assisted Audit Techniques (CAATs) where appropriate, to evaluate the effectiveness of their design; observing client operations; performing analytical procedures to identify possible problem areas; and reviewing prior years' working papers.
Obtaining a good understanding and knowledge of the client's business is most important in order to properly evaluate risks, to develop an audit plan and to perform an effective audit. Refer to the appendices to ISA315 for more information.
Copyright, Australian Educational Research Pty Ltd. Any person accessing this site agrees to the Terms of Use.