Introduction
This report will focus on ISA 315 and in particular looking at why it is important for an auditor to understand the clients business and industry. The report will then focus on the sources the auditor can use to understand the clients business.
Importance of understanding the clients business and industry
Auditors are required to have sufficient knowledge of the client’s entity to be able to understand and identify practices and transactions, which can have a significant impact on the financial statements or on audit reports (Abbott et al, 2003). This can consist of knowledge an auditor can use to assess inherent and control risks, and also in planning the nature and extent of audit procedures. Carey and Simnett (2006) suggest …show more content…
Abbot et al (2003) suggests that it is vital for an auditor to understand the clients business and industry in order to carry out a successful audit. Understanding the business and industry is required by an auditor to do at the second phase of the audit which is the planning stage. ISA 315 requires auditors to familiarise themselves with the clients business and the clients accounting system. The auditor must understand what exactly the company does, the type of customers and suppliers they operate with, the competitors of the business, the debtors as well as knowing if they are doing well or not (Bazeman et al, 2002). This will allow the auditor to absorb the conditions the business is working under, and will give them a realistic approach to pick out areas where there are most likely to be, if any, material errors or frauds. If an auditor is not fully aware of what the business does, it will be difficult for them to identify areas to focus the audit on and can lead to wrong audit opinions. Auditors by the Companies Act 2006 are required to carry out the audit in the most effective way in order to find any material misstatements, and to gather enough audit evidence to support their audit opinion (Carey and Simnett,
This report will focus on ISA 315 and in particular looking at why it is important for an auditor to understand the clients business and industry. The report will then focus on the sources the auditor can use to understand the clients business.
Importance of understanding the clients business and industry
Auditors are required to have sufficient knowledge of the client’s entity to be able to understand and identify practices and transactions, which can have a significant impact on the financial statements or on audit reports (Abbott et al, 2003). This can consist of knowledge an auditor can use to assess inherent and control risks, and also in planning the nature and extent of audit procedures. Carey and Simnett (2006) suggest …show more content…
Abbot et al (2003) suggests that it is vital for an auditor to understand the clients business and industry in order to carry out a successful audit. Understanding the business and industry is required by an auditor to do at the second phase of the audit which is the planning stage. ISA 315 requires auditors to familiarise themselves with the clients business and the clients accounting system. The auditor must understand what exactly the company does, the type of customers and suppliers they operate with, the competitors of the business, the debtors as well as knowing if they are doing well or not (Bazeman et al, 2002). This will allow the auditor to absorb the conditions the business is working under, and will give them a realistic approach to pick out areas where there are most likely to be, if any, material errors or frauds. If an auditor is not fully aware of what the business does, it will be difficult for them to identify areas to focus the audit on and can lead to wrong audit opinions. Auditors by the Companies Act 2006 are required to carry out the audit in the most effective way in order to find any material misstatements, and to gather enough audit evidence to support their audit opinion (Carey and Simnett,