AFM202 Lecture 4: Class 4 part 2
4 Jun 2018
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1. The auditor’s understanding of the client and its environment
is helpful when performing what audit tasks?
Obtaining an understanding of the entity and its environment, including the entity's
internal control (referred to hereafter as an "understanding of the entity"), is a continuous,
dynamic process of gathering, updating and analyzing information throughout the audit.
The understanding establishes a frame of reference within which the auditor plans the
audit and exercises professional judgment throughout the audit, for example, when:
• Assessing risks of material misstatement of the financial statements;
• Determining materiality in accordance with CAS 320; 3
• Considering the appropriateness of the selection and application of accounting
policies, and the adequacy of financial statement disclosures;
• Identifying areas where special audit consideration may be necessary, for example,
related party transactions, the appropriateness of management's use of the going concern
assumption, or considering the business purpose of transactions;
• Developing expectations for use when performing analytical procedures;
• Responding to the assessed risks of material misstatement, including designing and
performing further audit procedures to obtain sufficient appropriate audit evidence; and
• Evaluating the sufficiency and appropriateness of audit evidence obtained, such as
the appropriateness of assumptions and of management's oral and written representations.
3. Besides talking to management and those responsible for
financial reporting, who else should the auditor talk to, to
enhance their understanding of the client?
• Much of the information obtained by the auditor's inquiries is obtained from management
and those responsible for financial reporting. Information may also be obtained by the auditor
through inquiries with the internal audit function, if the entity has such a function, and others
within the entity.
• The auditor may also obtain information, or a different perspective in identifying risks of
material misstatement, through inquiries of others within the entity and other employees with
different levels of authority. For example:
• Inquiries directed towards those charged with governance may help the auditor
understand the environment in which the financial statements are prepared. CAS 260 5
identifies the importance of effective two-way communication in assisting the auditor to
obtain information from those charged with governance in this regard.
5. CAS 260, Communication with Those Charged with Governance, paragraph 4(b)
• Inquiries of employees involved in initiating, processing or recording complex or unusual
transactions may help the auditor to evaluate the appropriateness of the selection and
application of certain accounting policies.
• Inquiries directed toward in-house legal counsel may provide information about such
matters as litigation, compliance with laws and regulations, knowledge of fraud or suspected
fraud affecting the entity, warranties, post-sales obligations, arrangements (such as joint
ventures) with business partners and the meaning of contract terms.
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